Retirement Planning and College Funding were the topics of this session. Ramsey spent 60% of the time walking through the basics of different types of tax-favored retirement plan options such as IRAs, 401(k)s, Roth IRAs, etc. True to his style, Ramsey is a teacher first and foremost and he covered the basics. I liked his approach at explaining retirement plans. I believe the illustrations helped my wife, which brings us both closer together in our financial planning language and communication. Essentially all retirement funding tools act as coats that wrap around long-term investments such as mutual funds. They get their names from their specific location in IRS tax code. For example, a 401k comes from section 401, subsection k. A Roth IRA is actually in the same rule section as a traditional IRA but with a few twists - that came from a US Senator with the last name of Roth. I love history. The other 40% of the sessions covered the same types of basics for college funding vehicles.
Retirement and College Planning are Baby Steps 4 and 5 respectively. Ramsey proposes that 15% of your income should be going toward retirement investments and then after that, whatever it takes, and whatever you have left over should go toward college planning. But first, this is key, baby steps 1, 2, and 3 must be completed in full. This one, at first, is hard to swallow - none of your household income is to be invested for retirement or college until after steps 1-3 are fully funded. This is not too hard for me to accept because I have not been funding retirement nor college. It's a tad harder to swallow if perhaps you are funding a 401(k) at work and your employer is contributing matching funds up to a certain percentage. Setting aside the current tax benefits of investing pre-tax money, the match is the most attractive element of the 401k - its a 100% return, it's free money. Nevertheless, Ramsey, with his Gazelle intensity mantra, advises to stop all funding to retirement so as to attack the emergency fund and debt snowball.
I am not compelled to argue against Ramsey's idea on simple mathematics - frankly, I believe depending on the right mix of assumptions, one could make a very strong mathematical case for either approach. What is most difficult for people to accept I think is related to the "feels like factor." It just feels wrong to not take advantage of an employer match which produces a 100% return. It seems contrary to common sense. Is Ramsey's no-holds-barred approach foolish? I don't think so. Given the fact that most people are so scattered financially and many statistics speak to the disarray, Ramsey's approach brings on intense focus. How badly do you want to get out of debt first?
I am not funding retirement. I want to. I should be. I also have four children and I should be setting something aside for their future education. But I am not. I could be splitting up the amount I am over funding my debt snowball and applying some toward retirement. Should I be? I just talked to a co-worker the other day who hinted at my foolishness. No matter what, I should be saving some for retirement - hands down, not saving is not an option. Here's the bottom line for me: If I were not committed to attacking my debt and I didn't have a plan to be debt free in less than two years, I would be investing more toward retirement. What it comes down to is how committed you are to getting out of debt. Ramsey doesn't suggest taking your sweet time. He says run away from debt with gazelle intensity. Three years from now I'll then switch to running with gazelle intensity by investing heavily toward retirement and college. I'll be 41 years old and by 65 there will be enough money, and I will be in a position to help all my children as they work themselves through college.
What Ramsey didn't cover is what's the purpose of retirement. Why retire? What does it look like? How does your purpose in life change once you are retired? This is what I think about today and my definition or retirement is not "So I don't ever have to work again.", or "I'll be financially independent." Here are some great thoughts. Retirement is another phase of life where I'll be serving God, loving others, and glorifying Him. I am not sure of the exact details but God's sovereign watch will make everything clear over time.
Another bottom line for me: I have closed an open loop - I am directly investing in my retirement and my children's education funding by getting debt free in the next two years. It used to be, in my mind, that these goals were either mutually exclusive or all equally important.