Expert Interview with Jacob About Starting Young With Your Retirement Planning

Retirement planningJacob and Vanessa Lumby might be young, but they’ve already figured out some pretty wise methods for saving for retirement:

  • Being frugal.
  • Saving first and being a consumer second.
  • Evaluating each purchase in light of financial freedom and other long-term goals.

Two years ago, the pair started their blog, Cash Cow Couple, which focused on navigating debt, money management and investing as recent college graduates.

Jacob recently checked in with us to share his insight on frugal living and building your nest egg. Here’s what he had to say:

Tell us about Cash Cow Couple. When and why did you start your site?

We started the site at the beginning of 2013, and it has seen continual growth since. It began as a fun project where we talked about our own situation of being recent college graduates, having debt, and attempting to navigate the “real world.” It grew into something more intricate as I have progressed in my Ph.D. in financial planning.

Why is frugal living so important to you?

We view frugality both as a lifestyle and as the means to an end. Frugality is a great way to stay grounded and focused on those things that actually matter in life. Instead of worrying about buying the latest fad or the newest car, frugality allows us to focus on achieving financial freedom with less stress and more free time.

It’s a fairly simple concept. Every dollar earned can either be spent or saved and invested. If you want to spend it, you have to first pay Uncle Sam his share and then spend what’s left. In doing so, you are forced to keep working indefinitely. This is the unfortunate route that most Americans take.

If instead, you choose to save your earned income, you can begin investing and building wealth. You’ll even get tax breaks that let you partially avoid the far-reaching hand of old Uncle Sam. Over time, your financial worries disappear; and you’re left with a large bank account that can even support your normal every day expenses. That’s called financial freedom, and it’s why we embrace a frugal lifestyle.

What type of retirement planning have you done?

Being 25, my only retirement planning involves saving 75 percent or more of our annual income. All that money is set aside and invested in low-cost index ETFs to grow until we need it.

For us and the majority of America, Monte Carlo analysis and capital needs projections really aren’t necessary. All that is needed is a much higher savings rate and a basic understanding of the importance of diversified, low-cost investment vehicles.

What do you think are the biggest mistakes or oversights that young adults make when managing their financial future?

Getting out of universities and becoming typical consumers. After securing that first job that pays a modest but livable wage, most young adults immediately begin buying a bunch of crap they don’t need, like new clothes, new gadgets, new cars, big houses. It takes a decade or longer for many to recover. Many never do.

What do you think are the smartest investments for 20-somethings just starting out?

For those willing to learn, Vanguard is the cheapest way to build a great investment portfolio. Vanguard offers free ETFs with very low expense ratios. A great portfolio can be built with just three to four ETFs, such as total stock market, total international stock, total bond and an REIT.

For those unfamiliar with anything finance related, there are excellent online wealth management firms (robo-advisors) that will build excellent portfolios for a very modest fee. Wealthfront and Betterment are the industry leaders that I would recommend.

What about for those who are nearing retirement?

My recommendations stay the same for older people. Just allocate a larger percentage of your portfolio to bonds to ease the volatility that accompanies common stock ownership, and keep a small cash reserve in case of emergencies.

What are some tax basics we should all understand as it relates to planning our retirement?

First and foremost, the importance of saving and investing. Investment earnings are taxed at a preferential rates when compared with normal earned income from our daily jobs.

Second, the importance of holding passive ETFs over a long investment time horizon. Active portfolio management often results in very unfavorable tax consequences.

Why do you think Americans have struggled so much saving for retirement?

They don’t save any money. You can’t get wealthy or build a nest egg when you spend 110 percent of each paycheck.

Connect with Jacob on Google+, Twitter, Facebook and Pinterest.

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