It's not too late! In this episode of Motley Fool Answers, Motley Fool contributor Brian Feroldi joins us to lay out the steps you can take to supercharge your savings. Also, host Alison Southwick explains why the environmental impact of Bitcoin isn't just a bunch of hot air.
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This video was recorded on May 18, 2021.
Alison Southwick: This is Motley Fool Answers, I'm Alison Southwick and I am joined as always by Robert Brokamp, Personal Finance Expert here at The Motley Fool. Hey Bro, how are you doing?
Robert Brokamp: Just fine, Alison, how are you? [laughs]
Southwick: When did you suddenly become my aunt from upstate New York? Fine, how are you?
Brokamp: [laughs] I had this long conversation with my wife this morning about how the to-do list just gets longer. I'm understanding that framework, but anyways.
Southwick: The to-do list just keeps getting longer when you're not actually doing things on the list.
Brokamp: That's the problem. I should just start doing them.
Southwick: The problem is you.
Southwick: In this week's episode, Brian Feroldi joins us to talk about eight ways to rescue your retirement. All that and more, on this week's episode of Motley Fool Answers.
Brokamp: Alison, what's up?
Southwick: Well, Bro, how can something that only exists in the mind of computers, destroy the planet? We are talking about all the times that you've tried to scare us about workplace automation, displacing humans and robots eventually becoming self-aware. If you're like me, you've read a number of articles about cryptocurrency. Usually, somewhere in the article, the reporter stuffs in a sentence like, "Also, mining Bitcoin is destroying the planet, because of how much energy it consumes," and you just move on because that sounds like a real bummer. Look, there is a cryptocurrency named after a dog. But then this last week, Elon Musk announced that Tesla would no longer accept Bitcoin because it is so bad for the environment. Never mind that Tesla, the company, made waves when it invested more than $1.5 billion of its balance sheet in Bitcoin. Why the about-face? As Matt Levine over at Bloomberg speculated, I assume that what actually happened is pretty much what Musk said, he got into cryptocurrency on a whim because it fits with his image of being fun and futuristic and annoying, and then someone explained to him that it doesn't fit with his image of being good for the environment.
On a whim, he decided to cool it on the Bitcoin stuff for a while. If you're not reading Matt Levine's daily email, Money Stuff, it's a fun read, I highly recommended it. Whatever Elon Musk's reasoning, it's probably a good thing that he's brought environmental concerns about mining Bitcoin to the forefront. Hey, here is a fun stat. According to the website Digiconomist, a single Bitcoin transaction uses the same amount of power that the average American household consumes in a month. There are roughly 400,000 Bitcoin transactions in a day by the way.
Brokamp: Holy shaving cream. Wow.
Southwick: Back when I talked about NFTs on the show, one of the articles I didn't mention was the guilt that an artist felt when he realized that selling his art via an NFT on Ethereum essentially burned down the last remaining rainforest in the world. I kid, but only by a little. Why is mining Bitcoin so bad for the environment? Well, it's the result of a probably unintended consequence of how Bitcoin was designed. As you know, we have no idea who to blame or thank, depending on your point of view. Here's a sentence about how mining cryptocurrency works from The New Yorker. That is probably a very well written sentence, but it makes my brain hurty. "Miners compete to register the latest block of transactions by solving cryptographic puzzles. The first one to the solution is rewarded with freshly minted Bitcoin." Let's try again, but not worry about the details for now or maybe ever. Essentially as a Bitcoin miner, you point a computer at a very complex math problem and if your little computer buddy solves it, you get a cookie. The cookie is 6.25 Bitcoins, which at $50,000 a piece is more than $300,000 total. Of course, the more computers you have working on it, the more likely you are to solve the problem and get a cookie.
As the price of Bitcoin rose, it essentially became an arms race with people creating massive farms of computer processors to mine; yes, we're mixing metaphors here, Bitcoin. Meanwhile, back at the farm, mairzy doats and dozy doats and little lambsy divey, but computers prefer electricity for breakfast, second breakfast, lunch, [...] and dinner. That electricity comes from places like natural gas or coal-burning plants, among other sources. Not only do computers need electricity to power themselves, but they also need electricity to power any fans or other cooling equipment to keep them from bursting into flames.
Flaming electricity, how bad is that really? CBS News visited a mining operation in Washington state. They said that they use the same amount of power as 600 homes. That's just one operation. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin mining operations worldwide now use energy at the rate of nearly 120 terawatt hours per year. For context, that's about the annual domestic electricity consumption of the entire nation of Sweden. The context arguably it's not super helpful, but Bitcoin produces 36.95 megatons of carbon dioxide annually. Also, not super helpful without context. How about this? It's estimated that in 30 years Bitcoin alone could increase global temperatures two degree Celsius. Some of you might be thinking, what's two degrees Celsius between friends? Well, for additional context, according to an article by NASA, a two Celsius degree change means that tropical corals are virtually wiped out by the year 2100. I really love snorkeling, so thankfully I'll be dead by 2100, I hope. But wait. You and me are both saying, isn't there a better way to control the creation of a cryptocurrency than harnessing an army of computers to solve computational puzzles, thus, consuming an insane amount of power? Probably.
Crypto supporters say that in the future, crypto mining will be powered entirely by green energy like solar, wind, hydro. But considering roughly 70% of Bitcoin mining today takes place in China compared to 7% in the U.S., I don't find this argument particularly compelling. Ether, the cryptocurrency running on the Ethereum blockchain, is going to move to a "proof of stake system," which experts say could use 1/1,000 the amount of energy, and you can Google it if you want to know more. But it still involves computers solving math problems for cookies. At this point, it was time for me to put the kids to bed and I stopped reading articles about how Bitcoin was destroying the Earth. That's where we end it. Before we go though, closest without going over, how many cryptocurrencies are there right now? Bro, Rick?
Brokamp: I want to say 400.
Rick Engdahl: Closest without going over?
Engdahl: $1. [laughs]
Southwick: The truth is, honestly, who knows? One crypto expert commenting on the Elon Musk news told Business Insider there are over 9,500. Point market cap says 7,800. Investopedia says there are over 4,000. Regardless of the true number, for context, that's a heck of a lot. That, Bro, is what's up.
Brokamp: The median amount of money saved in 401(k)s and IRAs by households in the 55-64 age group was approximately $150,000 as of a little over a year ago. Given how well the stock market has done recently, we could assume that figure has probably gone up a bit. But it's still not very much money for a group of people who are very close to retirement age. In fact, if you apply the yield 4% rule to that amount, these folks could expect their nest eggs to produce around like $6,000 in annual income. That's hardly enough to make anyone's years golden. The bottom line here is that many Americans are behind in their retirement savings. However, if that's you, take heart, it's not too late to optimize your finances and accelerate your savings. Here to talk about the ways to do that is our favorite Fool contributor who lives in Rhode Island, Brian Feroldi. Welcome, Brian.
Brian Feroldi: Thanks, Bro, for having me back. I take that as a serious complement because there are a few Fool contributors that live in Rhode Island. So I'm happy to know that I'm No. 1.
Brokamp: I have to say I only knew of two and the other one is Selena and she's moving to Denver.
Feroldi: It's a massive compliment either way.
Brokamp: I have asked Brian to join us, because he and I did a presentation on the FIRE Movement last summer. FIRE stands for, of course, financial independence retire early. While many people think of the FIRE Movement as a bunch of young folks trying to retire before age 40, the principles that they're following actually have a lot to teach those who are behind in their retirement savings. Let me start by asking you this, Brian, do you consider yourself a member of the FIRE Movement?
Feroldi: Yes. Definitely. I love everything about the FIRE Movement. I love the principles, although myself, I am not really after FIRE because of the last two letters, retire early. I actually have no interest in that myself. When I started, I thought I did, but it turns out, if you really love what you do and you like the people you work with, I'm very content to do that for the rest of my life, the same way that Warren Buffett still tap dances to work today. The FI, the financial independence part, I am definitely after.
Brokamp: Got it. You're someone who is not only knowledgeable of the FIRE Movement, you're putting these principles into practice. Let's jump into some of those principles. Here are eight ways to rescue your retirement. No. 1, pay attention.
Feroldi: This is probably the most important of any of them. I have worked with friends and family. They know that I'm in the finance world and they asked me to help them get their financial life in order. The very first question I ask everybody is, do you track your spending? Almost universally across the board, the answer is no. That is really the very first step that everybody should do. Everybody should track their spending. Once you track your spending and you actually see where your money is going, behavior change is automatic. Once you realize how much you're spending on categories that really bring no value to your life, it's very easy to cut back on them. It's also not that big of a challenge to say, "How much are we paying for our cellphone bill? Do we really need five different streaming services? Do we need to eat out 20 times a month?" If you see that you are behind on your retirement savings, it really gives you a target to aim for, to cut back on spending with having a minimal impact on your lifestyle. But you won't know that information and you can't really act unless you know where your money is going. The first stop is always the same: pay attention.
Brokamp: For listeners who didn't hear our March 16th episode, we talked about a lot of ways to do that, whether it's just spreadsheets or services like Mint and Personal Capital. We have a Financial Health Day, which is now Financial Health Week every year at The Motley Fool. I could tell you that one of the most popular things that people do is sign up for service like that. Then, what you figure out is how much money you're wasting. Once you see it, it's actually quite astounding.
Feroldi: Yes. Then once you see where all this money is being just wasted in your life, it's not that hard to make small changes and then recapture that money and then plow it back into your investments. That's another key part, is to make sure that once you generate savings, you capture them and put them somewhere. Just let them pile up for you to spend down the road, but absolutely, it always starts with the same thing. Watch where your money's going.
Brokamp: Yes. Which brings us to No. 2, play catch-up with your 401(k) and IRA, and as Brian just said, "Not only do you look and see where you're wasting money, but you got to get that money in some place that's going to grow for you." Many of the people who are realizing that they're behind in their retirement savings are older, they're 50 and older. Fortunately, workers who are behind in their savings can contribute more as long as they are 50 or older by the end of this year, because there are higher contribution limits for retirement accounts. For 2021, the limits for 401(k)s, 403(b)s, 457s, the Federal Thrift Savings Plan, that limit is $19,500, but it moves up to $26,000, if you're 50 or older. Then for IRAs at $6,000, but you can contribute an additional $1,000 if you're 50 or older. You actually can save more.
There is something that is now called the Mega Backdoor Roth. But only if your employer allows what's called after-tax contributions. Those aren't Roth contributions. There's something called the after-tax contribution. I'm not going to get too much into the details here, but just ask your employer if you can do an after-tax contribution so you could actually save over $60,000 if you are 50 or older, but of course, you don't need a retirement account to save. You can contribute to just a regular brokerage account. They're not as tax efficient. You'd use your regular brokerage account for stocks that maybe don't pay dividends and that you plan to hold on to several years. But definitely the great thing is that all these situations can allow you to save even more money. Moving on to No. 3, focus on the big stuff.
Feroldi: When you hear the typical money-saving advice, it's always things like cutting Starbucks coffee out of your life or taking those little expenses and really focusing on optimizing them. I'm a fan of those things. Obviously, if you're wasting gobs of money on things that don't matter, yes, focus on it. But if you want to get serious about saving money, it always comes back to the three biggest categories that people spend money on. Housing, transportation, and food. I suggest that people that want to get serious about those pick one of those categories and really focus hard and optimize it. Thankfully today, if you get serious about any of them, there are so many strategies that you can deploy to save some serious money in any of them. Now, it would be great if you could focus on all three and do it, but that's not realistic for most people. If you are in a home, you like your school district, you don't want to move, the idea of downsizing or buying a different house is just unpalatable for a lot of people. In that case, really focus on transportation.
Transportation is a major spot where people can save money. If you are driving a brand new car or a lease car because you are a "car person", then ask yourself, do you really get a lot of pleasure? Do you really get a lot of pleasure out of driving your car? Or could you trade that in and buy an older car, paid off completely and then drive that thing for years and years and years? That's actually the category that my wife and I really crushed in ourselves. We were always OK at housing and OK at food, but we rocked at transportation. We drove two old cars, basically into the ground and we spent next to nothing on transportation. That allowed us to really turbo-charge our savings rate. No matter what category you're interested in, it doesn't matter but pick one of the three big ones and really focus on it.
Brokamp: Now, I think it was Consumer Reports that estimated if you get your car at 200,000 miles, you'll save $30,000. I imagine, given how much car prices have gone up, that number is even higher. For those who are willing to downsize a great resource is bestplaces.net, which basically compares to cost of living from different cities, often use myself as an example. I grew up in Clearwater, Florida. I now live in Burke, Virginia, which is a suburb of DC, pricey. If I move just an hour South of Fredericksburg, Virginia, my cost of living expenses will drop 28%, and if I retire and move back to Clearwater, Florida, my expenses will drop 34%. Because housing is the No. 1 item in most people's budgets, if you could find a way to cut that bill, you could find a great way to lower your expenses and supercharge your savings.
Feroldi: Food is another one that's worth diving into too, because if a lot of people just eat out naturally, that's just the thing they do because they don't want to meal plan or they don't want to think ahead about food. There are some serious savings that you can get in there. Even if you are a foodie and you really like to eat out, even simple things like saying, ''We're not going to go out to eat dinner, but we will go out to eat breakfast.'' That can lead to some serious savings on the road. Again, pick a category and really focus on it.
Brokamp: Let's move on to No. 4. Cut off the kids. A study by the Employee Benefits Research Institute found that 12.3% of retirees had at least one child living with them. While there are plenty of benefits to intergenerational living, there does come a point when parents and grandparents need to make themselves their financial priorities, and that includes kids' educations. We should make sure your retirement is adequately funded before you pay for college or take out loans on your kids' or grandkids' behalf and it does include grandparents. The Consumer Financial Protection Bureau found that the number of American consumers ages 60 and older with student loan debt quadrupled between 2005 and 2015, jumping from 700,000 to 2.8 million. The majority of that debt is to help their grandchildren fund their education.
Also, I think it's important to note that the point when children become adults presents an enormous opportunity for workers to make up for the best retirement savings. Your expenses are going to drop significantly, especially if mom and dad were footing the bill for education. Plus, an empty nest means you could benefit from a smaller or cheaper nest. It's a great time to downsize. It's crucial to take advantage of the lower expenses by boosting your portfolio once the kids have flown the coop. Let's move onto No. 5, save all future raises.
Feroldi: A lot of times people struggle to save, they just say, even if they optimize their budget, that they just can't get anymore money. One trick that I really like is just telling yourself that you will save all of your future raises. It's really easy to spend money that you haven't made yet. If you're going to do that anyway, do it productively. Just tell yourself whenever you get your annual raise or whenever you get a bonus or whenever you get a windfall of any kind, whenever something, anything good happens to your income, take 100% of that money and put it into your retirement accounts. That is an effortless way to really boost your savings rate.
Brokamp: There's other ways that money falls into your lap. There's tax refunds, maybe reimbursements from flexible spending, maybe an inheritance. Basically commit to any point where money just shows up, that you put that immediately in your investment accounts and save it for the future.
Feroldi: Yes, just don't earmark that for, "Once I get more money, I'm going to spend it on ABC big things." If you are behind in your retirement planning, get serious about it and make sure that all that money goes toward that.
Brokamp: No. 6, exchange stuff for stocks. A formula for homeowners insurance is that a policy will cover your personal possessions for up to 40% of the value of your home. If that is actually a reasonably accurate estimate of the value of all the items under your roof, then you own $40,000 worth of merchandise for every $100,000 of your home's value. The questions then are do you need all that stuff? If not, how much would someone be willing to pay for it? Of course it depends on the stuff you own. A lot of our stuff is frankly not worth much, but you may have some pretty valuable items in or near your home like from collectibles, antiques, maybe even boats or vehicles you're not driving. [laughs] Especially nowadays, there are some things that are in high demand. I sold some bikes on Craigslist and Facebook marketplace a few months ago, and it was like a feeding frenzy. I have no doubt that the typical American could raise literally thousands of dollars by cleaning out their closets and garage. Then of course, it's important to immediately send that money to your retirement brokerage accounts and use it to buy shares in solid companies. Coming on the last two, No. 7, develop a side hustle.
Feroldi: It's amazing what making an extra $500 or $1,000 a month can do to really fill the gaps in your retirement planning. The great news about that is, it's never been easier to make money or develop a side hustle at home. There are so many side hustles to choose from nowadays that you can really find something that you would enjoy doing. If you like pets, for example, there are so many ways that you can create money by also hanging out with pets. There's an app called Wag Walking, where you can get paid to take other people's pets for walks. That's getting exercise, getting to pet a friendly dog, and getting paid to do so. You could also use your car for food delivery. You can deliver pizza, you can deliver for DoorDash, you can deliver for Uber Eats. Fiverr and Upwork are two platforms that if you have freelance skills, you can go and sell your skills on there. You can also create crafts on Etsy. You can go on Craigslist, you can tutor. There are literally hundreds of side hustles that you can develop. Again, even if you just make a few $100 a month doing those things and bank that, that can really help to fill the income hole.
Brokamp: I think you had pointed out to me previously that budgetsaresexy.com has a side hustle series. Budgetsaresexy was started by J. Money who was a guest on our show, I think a couple of months ago and is now under The Motley Fool umbrella of properties. But it's a great site also, by the way. It has some great templates for budgeting spreadsheets. So, if you just want a simple spreadsheet to help figure out your budget, go visit budgetsaresexy as well.
Here we are, the last one. Step No. 8 in rescuing your retirement, work just a little bit longer, even part time. So I know it's a consistent refrain on our show. But if you are behind in your retirement savings, one of the most powerful moves you can make is work a little longer. Many studies prove this, including one from the Stanford Center on Longevity and The Society of Actuaries, a fun group I'm sure. So here's the scenario; let's say you're a married couple with a pre-retirement income of $100,000 and you save 10% a year. You reach age 62 with a nest take of $350,000. Here's how much annual retirement income you could receive based on five scenarios. You just work to age 62 and then you retire full-time. Your income would just be $38,000. But what if instead, in our second scenario, you begin working part time at 62% and you retire fully at 66.5, which is the full retirement age for Social Security purposes for these folks. The income jumps from $38,000 to $51,500. Scenario 3 is if you work full-time to age 66.5, then your income jumps to $53,000. Scenario 4, you begin working part time at age 62 and you work part time until you reach age 70, your income jumps to $68,000. Or last scenario, you work full-time all the way to age 70, your income is $71,000. Basically your income jumps from $38,000-$71,000 at various points along the way just by working, even part time, a few years more. That's what I think is the real value of this illustration. Because I know a lot of people, once they reach their 60s, they're tired of full-time work. But what this shows is you could even work part time and boost your retirement. Essentially if you're working part time, you're retired part-time. So you get the benefits of both. Those are eight tips for rescuing your retirement. Brian, do you have any concluding thoughts?
Feroldi: Yeah. I Just want to give a shout out to the FIRE movement. Even if you have no interest in going to the extreme lengths that some of the people in the FIRE movement do, you can learn so much just by following the movement and listening to some of the people's stories. I have met dozens of people that are FIRE walking, that are on their journey to financial independence. They come from a huge range of backgrounds and circumstances and starting points and income levels. All of them have something to teach where they have optimized some part of their life to really make their finances a priority. So again, even if that doesn't interest you, just learn about that. You would just learn so much.
Brokamp: Well said, Sir. By the way, if you want to learn more from Brian, check out his Twitter account, in my opinion an underappreciated gem. Thanks for joining us again, Brian.
Feroldi: Thanks for having me, Bro and Alison.
Southwick: All right. That's the show. It's edited doggedly by Rick Engdahl. Our email is firstname.lastname@example.org. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!
Alison Southwick has no position in any of the stocks mentioned. Brian Feroldi owns shares of Etsy, Fiverr International, and Tesla. Robert Brokamp, CFP owns shares of Tesla. The Motley Fool owns shares of and recommends Bitcoin, Etsy, Fiverr International, and Tesla. The Motley Fool recommends Upwork. The Motley Fool has a disclosure policy.