Reader Stories: Why, at 25, I made retirement my first priority

Get Rich Slowly - Personal Finance That Makes Sense.

Reader Stories: Why, at 25, I made retirement my first priority

This reader story is from Adam M. Shearer, whose story was prompted by comments from another post.

Some reader stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks with all levels of financial maturity and income. Want to submit your own reader story? Here’s how.

After I was challenged in the comments on a recent article, I was drawn into reassessing my personal theories on retirement savings, debt payoff and fun. And I’d like to tell you why I think I have struck the right balance for me.

Currently, I list my priorities as follows:

1. Retirement

2. Debt

3. Savings

4. Fun

In pursuit of these priorities, I have made the decision to max out my Roth IRA ($5,500 annually) and my HSA, which I use mostly as a retirement vehicle ($3,250 annually). To that end, I have more than $20,500 in the Roth, which is invested in index funds. I also have $812.50 in the HSA — it’s a new account. I don’t presently have the option of a 401(k), but when it does become available, I will put in enough to meet my employer’s match. I also have more than $3,500 in a brokerage account my grandmother set up when I was young. All the stocks held in it are large, stable companies that pay good dividends. I’m content with not touching that, and, in the future, may decide to start adding to it.

All of my debt is from student loans, totaling about $26,500 as of this writing, approximately $8,800 of which is federally subsidized. My minimum monthly payment is right at $220, and the average interest rate of the unsubsidized loans is 5.45 percent, with the highest being 6.55 percent.

As for savings, I am close to finishing a $3,000 emergency fund, and will move on to a rainy-day fund with a goal of three months’ income; I’d eventually like for that to be 12 months.

Sharing opinions

I thought I was being quite responsible; I feel years ahead of many of my peers, and I’m setting myself up for a life (mostly) free of financial stress. After watching my parents struggle for years, I knew I had to educate myself early and often in order to avoid a similar fate. But those challenging comments I mentioned earlier led me to reconsider if what I am doing is the right choice.

First, commenter Ross Williams contested that, at my age, retirement planning should be far from my first priority. Mr. Williams is of the opinion that I should use the money I earn to enjoy life while I’m young, to travel to new places, experience new things and invest in myself. He added that I may not even make it to retirement or may be too feeble in retirement, so I could be saving all that money for no reason other than to pass it on to my beneficiary.

Then, commenter Mom of Five brought up the question of why I was prioritizing retirement over debt when it seems conventional wisdom is to get out of debt as soon as possible — even if it means sometimes taking extreme measures to do so. She brought up the uncertainty of retirement investments, including the possibilities of stock market fluctuations and rule changes made by the government. She also pointed out that I already live frugally, so a huge retirement fund is probably not a necessity.

Both of these challenges were thought-provoking, and, despite my quick responses to them in the comments, I took a few days to really think about them and reassess my goals and the assumptions I had made in defining them. After that session of introspection, I’ve come away feeling that the goals I have set are the right goals for me, and I will be changing little.

Why it works for me

Despite putting so much into my retirement planning, I am blessed to earn enough that I can still have fun. I live with two friends, which is fun in and of itself, while also having the added benefit of lowering my cost of living. I go out with my friends often, I buy treats for myself here and there, and I save for bigger things. For example, I recently saved for and went on a volunteer trip to Cape Town, South Africa, working with dirt-poor children both during and after school. I loved it so much that I’ve already started saving to do it again. I’ve also learned to appreciate the small things in life. A bat, baseball and glove don’t cost much in the grand scheme of things, but I spend many evenings tossing or hitting fly balls with my housemates or playing tennis at a local park.

For me, it’s about quality over quantity. And finally, if I do make it to retirement, I don’t want to be forced into living on very little or being a leech on society that lives off of the government and/or my children. I’d rather be the early retiree who gave his children a leg up, spoils his grandchildren and travels the world with his wife. If I’m unable to do the latter, I’ll be more than content with the first two.

As for debt, the reason it is second on my list of priorities is simply mathematics. At my age, the value of compounding in a retirement fund is much greater than any extra interest I will pay on my loans.

Focusing on the $5,500 I put into my Roth per year, if I retire at 65, that $5,500 will turn into $119,000, at the historical return of 8 percent. Even if I retire at 55, as I plan to do, the balance would be around $55,000. This growth trumps the paltry amount (by comparison) of interest I will pay on my loans. And since I’ve gotten myself into the habit of maxing out the account, that should lead to a retirement balance of well more than $1 million if I can do it year after year. I should also add that I do pay more than the minimum on my student loans, currently about $600 per month — nearly three times what is required.

I also want to add that Mr. Williams’s advice about investing in myself is spot-on, and I will be doing that soon when I go back to school to get my MBA, which should substantially increase my earning ability, and allow me to pay off my debt that much quicker while keeping the same level of retirement funding.

Reminder: This is a story from one of your fellow readers. Please be nice. It can be scary to put your story out in public for the first time. Remember that this guest author isn’t a professional writer, and is just learning about money like you are. Unduly nasty comments on readers stories will be removed.

Reader Story: I bought a foreclosure house on the courthouse steps

Get Rich Slowly - Personal Finance That Makes Sense.

Reader Story: I bought a foreclosure house on the courthouse steps

This guest post is from Naomi Mannino. Naomi is a freelance consumer personal finance and health journalist who reports on health, medical and personal finance news and how it will affect your life today. You can follow Naomi on Twitter @naomimannino.

Some reader stories contain general advice; others are examples of how a GRS reader achieved financial success or failure. These stories feature folks with all levels of financial maturity and income. Want to submit your own reader story? Here’s how.

Can you really buy a house at auction on the courthouse steps for $100? Do you have to spend hundreds of thousands of dollars as the house-flipping guys do on TV?

My husband and I have just recently achieved our long-time goal of buying a foreclosed house, turning it into a rental property and creating a steady stream of income from the monthly rent we collect (at 17 percent profit on the initial cash investment every year). It’s neither quick nor easy, but it is a viable investment solution if you meet the five requirements below.

1. You need cash.

I came into a small inheritance and thought hard about what to do with the money. I don’t know enough about the stock market, so I stayed away from that. Then there’s the low interest yet tried-and-true 5-year CD ladder I opened. But my husband and I have always wanted to buy a foreclosure on the courthouse steps and now we finally had the chance. Every county is a little different, but one thing is a constant in all foreclosure auctions: Cash is king, as certified funds are required usually within 24 hours of winning the bid and making any initial deposits required.

2. You need experience.

We are not newcomers to buying houses at a low price, renovating them over a number of years and then selling at a higher price. My husband is a carpentry contractor, skilled in all the building trades, so we do all the work ourselves. That means we can look at a property and calculate in our heads time and expenses necessary to make the house desirable and rentable. We only want houses with good bones on a nice family street. They are not large and upscale and do not require granite counter tops and stainless-steel appliances (in fact, the best place to get the best appliances for less is to buy used through Craigslist.org). We don’t need to pay for inspections, surveys or other contractors unless it is for HVAC (air conditioning/heating) or septic system repair or replacement. We have learned this through small mistakes and overspending on the past five houses. Now we have a formula for choosing tile, vanities, cabinets, roof shingles, paint colors, and carpet because we have done this all before and know what works. If you have to hire contractors, you will pay twice as much or more for the entire renovation. (Foreclosure homes are usually severely neglected, if not destroyed, and need a lot of renovation.)

In terms of the foreclosure auction itself, we had no experience, so we agreed we should attend many auctions and just watch how it works, learn what the rules are and who the major players are in our small county. Every county has seasoned investors who know exactly what they are doing, and it pays to watch and learn from them. I have learned to stay away from the big city auctions with deep-pocketed investor groups who buy up tons of houses, because you really can’t win a bid against them. In my small county, where you can pick up a 1,000-square-foot 2- or 3-bedroom house for $20,000 to $40,000 to flip or to hold and rent, there are just five regular investors plus us, all with different interests and focus areas.

3. You need to research, research, research.

Our county publishes a twice-weekly list of the properties to be sold at the foreclosure auction held each Tuesday and Thursday at 11 a.m. A large portion of our time each week is spent physically viewing the properties and researching them online or in the courthouse books. We never skip these steps.

After you identify a few houses in your chosen location or size range, research each offered property’s sales and tax history, as well as its current assessed value on the County Property Appraiser’s website, which are all public record. Note these details for the properties in which  you are interested.

Next, research each property owner (also listed on the County Appraiser’s property record page) online via the County Clerk of Courts Public Record Search because whatever that the owner owes regarding that property outside of the loans (liens, back taxes, etc.), you will owe when you purchase a foreclosure home.

Finally, physically go and see each home you might be interested in (we never buy a property sight-unseen.) We’ve made the decision to stick to houses in our city proper so we are intimately familiar with the neighborhoods, not traveling more than a seven-mile radius from our home. We create a  map of five or so houses that suit our specific purposes, and then we use our smartphone navigation to get us from house to house. From the outside, you can see the state of the roof, house structure, land, doors and windows and can look inside through any clear windows. Many times houses are so distressed they are open, in which case we can identify pros and cons regarding the inside: kitchens, bathrooms, flooring, lighting, air handler, walls and ceilings (but you didn’t hear that from me!). Bring a flashlight.

4. You need to know the opening bid.

People get the idea they can buy a house at auction for $100 because they have heard that someone “bid on behalf of the plaintiff (the bank) for $100.” But auction buyers cannot counter the bank bid at $150 dollars. Instead, you need to start the bidding at the acceptable opening bid amount for each property, which is the lowest amount the bank is willing to accept for a property at the auction that day. And you can get this number by simply asking the bank reps, who are all at the sale. Getting to know these guys and gals on a first-name basis makes things even easier. Once you hear this number you will need to evaluate on the spot whether purchasing the property is financially feasible given your cash budget, current market conditions, the research you did on the property and your personal criteria and plan for the investment.

Just because the property is offered for sale at public auction doesn’t always mean it’s a good deal. Often, the opening bid equals the judgment amount (the money the bank is trying to recover) or more and includes the original purchase price or mortgage plus a second mortgage, other home equity loans, interest and legal fees. The opening bid is ridiculously high compared with its current assessed value. These high-priced properties revert back to the bank because nobody bids on them. What you are looking for is an opening bid way below the current assessed value, and these are few and far between.

We can afford to bid a couple of thousand higher than a flipper — an investor who plans to renovate and sell quickly, who needs every bit of profit he can muster out of each house now. I was told that’s how we won our first bid later by the flipper bidding against us.

5. How to bid.

Make sure you arrive early enough on auction day to go to the correct county courthouse office to register as a bidder and receive your bidder’s number card. Leave time to approach each bank rep for the opening bid necessary for properties you might want.

When the auctioneer (the county courthouse employee whose job it is to administer the weekly foreclosure sale) arrives at the sale site, he or she will announce some specific rules about deposits for a winning bid. Then things move quickly. When the auctioneer announces a property (by case number, not by address) you want to bid on, hold up your bidder’s card and announce your opening bid. The auctioneer will repeat it and then open it to other bidders to counter. I learned from a very seasoned investor to only raise the bid by $50 each time. He says, “There’s no sense in bidding it up for myself or the other guy by going hundreds or thousands at a time. I work too hard for my money.” Always have a ceiling in mind, and stick to it. If it goes higher, drop out.

After lurking on the edge of the auctions for about two months, we were finally ready to jump in with both feet. We got a bidder’s card, talked to the bank reps and found out that one house we saw and researched had an opening bid within our budget and  under the assessed value of the home — so we bid on it! Two other investors counter-bid a few times, but we won the bid and got our first house at the foreclosure auction.

But I must warn you: The fast pace of the auction and hopeful thoughts of steady, slow investment income can be addicting despite all the work involved! Any questions? Have you ever participated in a property auction?

Reminder: This is a story from one of your fellow readers. Please be nice. It can be scary to put your story out in public for the first time. Remember that this guest author isn’t a professional writer, and is just learning about money like you are. Unduly nasty comments on readers stories will be removed.