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Retirement Savings vs. Income Growth

Over time, I’ve learned that you folks are a sharp bunch. So I thought I’d pick your respective brains on a not-so-hypothetical question I’ve been struggling with:

How do you balance investing for retirement against investing to increase your current income?

For me, such income-increasing investments would be business-related: advertising, outsourcing articles, or faster hosting, for example.

If you’re not an entrepreneur, such investments would likely be career-related: picking up an important certification or attending conferences where you could make valuable contacts, perhaps.

Go for Higher Returns?

The reason I struggle with the question is that, in my experience so far, the money I’ve invested in my business has earned returns significantly greater than what one could expect from the stock market. Of course, many investments don’t pan out as hoped, but if I try enough things, one of them usually pays off nicely.

And from what I’ve seen, that seems typical of many career-related investments as well. A few hundred dollars here or a couple thousand dollars there can sometimes lead to a raise of that much per year — for the rest of your career.

Factoring in the Risk

Yet, most people don’t put all of their money into business or career-related ventures. (And I have no intention of doing so either.)

The reason, of course, is that such things are relatively high-risk. The greater the portion of your total net worth that’s tied up in one asset (whether a business or a career), the more exposed you are to an event that impairs the income from that asset.

Also, eventually, retirement isn’t optional. There comes a point where your body just isn’t willing to work (or work as much). Saving for that day is important, regardless of how much you enjoy your work and regardless of what return you can get by investing in your business or career.

What’s Your Method?

Between two Roth IRAs, a solo 401(k), and my wife’s plan at work, we’d be eligible to invest more than $50,000 per year in retirement accounts. Suffice to say, we don’t have that much money to play with. So, with regard to the money in question, we could:

  • Put all of it into my business,
  • Put all of it into retirement accounts, or
  • Split it up somehow.

So I’m very curious to hear your sagely input: How do you allocate between retirement savings and investments that you hope will provide increased income?

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Comments

  1. For the last four years retirement and investing for now have been the same thing. We don’t separate. At this point, unless we can put money into a ROTH- there is not any reason for an IRA. I don’t want to be forced into taking money out when we may not need it at age 70

  2. More income (when self-employed) also equates to being able to save more fore retirement. If opportunities are out there that you feel can increase your income without undue risk, then invest in those.

    I also find it easier to think about saving for retirement when not stressed about current income levels. So increasing current income can provide a psychological advantage as well.

  3. “I’ve never lost money investing in myself and my primary source of income.”

    Same here. But I can’t say with 100% certainty that it will always be the case.

    “NEVER shirk on education or things that may help your existing job.”

    Indeed, but what exactly constitutes shirking? Is $1,000 per year shirking? Is $10,000 per year shirking? Or, more likely, is it a percentage of current income? And if so, what’s a proper percentage?

  4. “I also find it easier to think about saving for retirement when not stressed about current income levels.”

    Absolutely agreed. 🙂

  5. Mike, There is no easy answer. It’s kind of like…. if I knew when I was going to die, I would know how much to save for retirement. There are always uncertainties. Divide up your extra money for business, retirement, and other goals. Your decision is not etched in stone, readjust as time goes on.

  6. Couple points to touch on what you said above:

    1. Your income comes from a relatively low effort job (writing books/blog). Because you are a talented writer, you don’t have to work as hard as someone who works in an office day after day, and can rely on book/ad sales for your income. This kind of job you could do until death. You’ll never really retire.

    2. Since retirement accounts have limits on when you can withdraw, but since you will continue the same standard of output even when you reach retirement age, it probably makes sense to invest more in your career. That will mean writing more, hiring writers etc.

    Those are my random thoughts after eating an Indian buffet, so they may be rambling. 🙂

  7. Interesting. I know the owner of an investment management firm who preaches diversification all day long and yet has his entire net worth/retirement wrapped up in his company. He believes his company is worth $3 million but the best offer he has gotten so far (which happens to coincide with well known metric of valuing an investment management company) has been $2 million and so he is frustrated and can’t retire. He is vulnerable to losing some big clients as well as key employees. Sort of reminds me of the doctor who smokes a pack and a half a day.

  8. “Your decision is not etched in stone, readjust as time goes on.”

    A good point. It’s easy to shift back and forth from year to year if it seems to make sense. Thanks for the reminder. 🙂

  9. Yikes. That’s a situation I’d like to avoid! 🙂

  10. You’re right, it’s certainly important to consider the nature of the work/business in question. Good points. Thank you.

  11. Mike,

    I would try budgeting a fixed percentage of the business’s profits toward improving the business. If you track the return on investment you should be able to figure out the right % for your business. I would start small say 5 or 10% then increase until you start getting diminishing returns.

    As for the specific ideas you mentioned:
    >advertising, outsourcing articles, or faster hosting, for example.
    Personally, I’m never noticed slow response from your site. Unless people are complaining I would be surprised if that would be a worthwhile use of your $.

    Outsourcing articles would be hard- your blog is popular because of your writing. It would be hard to outsource and get good articles for your site. You might want to look at out sourcing other aspects of the business that don’t benefit from your personal touch.

    Advertising… certainly could help. Although I suspect writing more guest posts or commenting on other popular blogs will be the best advertising you can get. Still, you might want try some some Google advertising and see how well it works. It would be easy to track the effectiveness if it does work out you could go with more.

    -Rick Francis

  12. “I would try budgeting a fixed percentage of the business’s profits toward improving the business.”

    Not a bad idea. I suppose it’s just a mental accounting gimmick, but those can be helpful sometimes. 🙂

    And, I do track ROI on various business expenditures, but it’s made a bit tricky in that they typically include a time investment as well.

    Thank you for your input, Rick.

  13. Difficult to say.

    Diversifying sounds good, but if you are at a point in the business where a large investment will take it to the next level, then that might be a prudent move.

    I haven’t had a lot of luck with investing money in my business. I haven’t found one freelance writer (not counting Mr Cheap) who has really been worthwhile – they all need too much editing/handholding etc. I already have good hosting, I couldn’t care less about the theme design so I don’t even know where I would spend any money. I thought about buying other websites, but decided against that as well.

    My investment decisions mainly involve my time – ie how much of my time to spend on writing/promotion/accounting/research etc etc.

    Mike

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