Can a Lower Paid Employee Save Enough for Retirement? Here is One Example

FedSmith spoke to a man who makes less than most federal employees but follows a plan that should work for anyone wanting a secure retirement. has run several articles recently about saving for retirement and the amount of money needed for retirement. The articles generated considerable discussion from readers about their confidence in having enough money to retire when they were eligible. (See, for example, “Living HIgh or Just Getting By After Retirement“)

“Getting By or Living High after Retirement” cited a few hypothetical scenarios of how much money one would need to live on after retirement based on some figures taken from Kiplinger’s Personal Finance Magazine. There were 3 hypothetical scenarios in all – one was “getting by,” one was “living well,”, and the last was “living high.” Several readers wrote that the scenarios were unrealistic and that a person with a lower income could not save as much as indicated by the article.

“Workers Have Retirement Overconfidence” discussed how a large number of workers in the U.S. have “retirement overconfidence.” The article cited figures which stated that 68% of workers feel they have adequate funds saved for retirement, but at the same time, more than half of all workers said they have saved less than $25,000 for retirement. It doesn’t take a CPA to see that this is probably not enough money to live on for 20 or more years after one stops working.

With these articles in mind, recently spoke with somebody who is well on the road to saving for retirement. For the benefit of those readers who contend that lower-graded federal employees cannot have a successful retirement, here is some hope. This person makes considerably less than the average federal employee but has started implementing a successful retirement plan. (The average federal employee now makes about $66,000 per year–not counting benefits).

We spoke with “Alan,” a young man in his late twenties who has managed to build a six-figure portfolio and is well on the way to retirement. We asked Alan some questions about his strategy and experiences to share with our readers.

FedSmith: The obvious first question is how have you saved as much as you have to this point?

Alan: Well, I’ve always been pretty conservative when it comes to money. I can remember saving money as early as the third grade. At that time, I didn’t invest in the stock market, but I had a savings account that my parents helped me set up at a local bank. I earned an allowance each week doing small chores around the house. I can’t remember how much it was, but not a lot – probably $5 a week or so. Instead of taking the money and spending it on things like toys or candy, I would put it into the savings account and let it accumulate. I just didn’t feel like there was anything I really wanted to buy at the time so I would save it for a rainy day.

FedSmith: So you never bought anything with this money you were saving?

Alan: Oh sure, I would buy things from time to time, I just didn’t blow every cent I had and I would always analyze purchases I did make, regardless of how small they seemed. I recall buying video games for instance and I would plan ahead to save enough money to buy those so I would feel like I could afford them and still have money left over.

FedSmith: Do you still operate in this same manner, where you tend to forego buying things to save your money?

Alan: Absolutely. I think that is critical in being able to amass savings. I think it’s unnecessary to always wear the nicest suit, live in the biggest house, or drive the nicest car. Not only are these things a drain on your personal finances, but it’s just contrary to how I was raised and I don’t want to feel pretentious. Does this mean I never go out and have fun or buy things for myself just because I want them? Of course not, I buy things from time to time for entertainment, but I am cautious in making sure that if I buy something fairly large that I can afford it without having to tap into long term savings and can pay it off right away. It just doesn’t make sense to me to buy a big TV or an expensive car that makes me rack up debt or blow long terms savings if I don’t even need it to survive to begin with.

FedSmith: Presumably you got into investing in the stock market at a fairly young age to be able to save what you have. Tell us about that.

Alan: That’s correct. I think I first started investing in the stock market when I was about 15. I have my father to thank for getting me into that. He has been investing in stocks and bonds for quite some time, and he observed that I was diligently saving money, but it was all in my lone savings account in the bank. He explained to me that if I put my money into some mutual funds, even conservative ones, I would earn a much greater return on it than I would just leaving it in savings. Ever since then I have kept money in stocks and mutual funds and that has, predictably, increased my returns.

FedSmith: What funds did you put your money into when you first ventured into the stock market?

Alan: I started out with some Janus and Vanguard funds. I don’t think I got into both mutual fund companies simultaneously, but started with maybe one or two funds and gradually added more money and branched into more funds as I was able to save more. I remember I had the Janus Mercury and Janus Global Life Sciences Funds pretty early on.

FedSmith: Did you change any of your investments when the stock market started to go down several years ago?

Alan: Honestly no, at least not right off. I did finally sell my Janus holdings, but unfortunately I waited until they had gone down quite a bit. I think I still came out ahead with the Global Life Sciences Fund, but I recall losing money in most other funds I had. I have made the common investor mistake on more than one occasion of panicking and I end up buying high and selling low. It’s basic human psychology to be optimistic when the market is way up and panic when your shares are losing value. For the most part though, I’m pretty good about leaving my money in place and not worrying about the inevitable peaks and dips. I knew that the funds and stocks I had would eventually rebound after the bear market ran its course and we’re starting to see that now so far in 2006. I will, of course, still sell a stock if I think the company is in big trouble or the sector is just generally out of favor, or if it’s made a big run and I want to lock in a gain.

FedSmith: Most people who are successful investors have a plan they follow to save money. What’s yours?

Alan: It’s true – you’ve got to always have a plan! I already mentioned that I avoid blowing money on things I feel are extravagant that I don’t really need. Lately when I’ve spent money, I’ve put it into things that give me pleasure but that are also tied in to my overall financial goals, such as making improvements to my home. I’ll sell my house someday I’m sure, so by putting money into the improvements, I make the house more appealing to buyers, not to mention you can deduct some improvements from the capital gain, another money saver. That’s one tip – always look for ways to cut taxes or save money where you can. A good financial planner can help with that if you need ideas.

I also contribute the max to my 401k at work. It’s hard sometimes to do the max amount if you get hit with an unexpected expense, but I work hard to be sure I can put the max in as often as possible. A 401k is free money since most companies will match some of what you contribute; you’d be crazy not to take advantage of this benefit with an employer.

On top of this, I try to invest regularly in some fashion. Sometimes I will invest money in stocks or mutual funds when I have some to spare. The way I see it, the new TV or furniture can wait – if I can save more now, I’ll have more to spend later.

FedSmith: There are numerous jobs opportunities coming up in the federal government as the baby boomers retire. Have you ever considered going to work for the federal government?

Alan: Absolutely. I’ve tried before to get different jobs with the government but was never able to. I applied to several but never got any response. I don’t know if it was because I wasn’t qualified or there was just too much competition for the positions or what. I certainly like the idea of working for the government though – the TSP is great for saving for retirement, I’d get a lot more time off than I do now, the benefits look better than what I’ve had in various private sector jobs, and the pay would be better too, both in terms of the base pay and then the additional locality pay on top of that. There are also a wide variety of jobs available and probably a lot of opportunities to learn new skills from what I can tell.

FedSmith: So why are you saving money? What are your long term financial goals?

Alan: I am saving for retirement more than anything. I want to be able to retire at a young age. I’ve set 50 as my goal. I think it is quite attainable also. My parents, who as you can tell have been role models for me in managing my finances, were able to retire at a relatively young age. I don’t know if I actually would retire at that age even if I am able to financially, but I would like to have the option.

Besides retirement, I want to be able to pay off the mortgage on my house as early as possible also. I’m fortunate enough to be able to own my own home, but I know that if I can eliminate the mortgage payment I’ll be able to invest that much more each month for the long haul.

FedSmith: So what do you plan to do after you retire?

Alan: Ha; no idea at this point honestly. I figure I have plenty of time to figure that one out. I just thought I should be saving money now so I can retire later. That’s the hard part; figuring out what to do after you’re retired is supposed to be the fun part!

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47