It started with a Boeing VIP
My primary investment vehicle started with Boeing’s 401K plan, which they call their ‘Voluntary Investment Plan’ or ‘VIP’. Like any 401K, this involves ‘before tax deductions’ from my paycheck. Simply put, it reduces the amount of your income that is reported to the IRS for taxation purposes. ‘Paying yourself first’ doesn’t get any more basic than this.
Boeing further sweetens the pot by contributing fifty cents on the dollar up to your first 8% of contributions (now seventy-five cents on the dollar with the new contract!). If you’re a young employee of Boeing and trying to figure out how to balance out student loan repayments, saving for your first house, and beginning to think about saving for retirement, I strongly encourage you to keep your eyes on that Boeing contribution. It is absolutely the closest thing to ‘free money’ anybody will ever offer you. You would be foolish to leave it on the table.
The other piece of advice I’ll offer to my young co-workers is the ‘split your raise’ method. Once you’ve established your basic contribution (again, 8% is a natural if money is tight), every time Boeing raises your pay, put half of it back into your VIP. If they give you a 4% raise, bump your VIP up 2% and ‘enhance your lifestyle’ with the other 2%. It’s a pretty painless discipline, and it starts you down the path to contributing to your retirement early. Early is better, due to the miracle of compounding. Eight years of following this discipline will put you at 25%, the max contribution at Boeing; this is a good place to be. If you can *start* your contributions at 25%, more power to you. Continue to live like you did as a college student and get your financial priorities in order.
Another word about compounding, for the mathematically inclined: You need to understand the ‘rule of 72’, which stated simply says that your investments or debt will double in a ‘rate times time’ ratio that equals 72. If you’re earning eight percent (not at all unheard of in a diversified portfolio) a year, in nine years you will have doubled your money. This is rooted in the old ‘natural log’ equation of ce^^rt, where ‘c’ is the initial population, ‘e’ is the natural log 2.718…, ‘r’ is the rate of growth, and ‘t’ is time. The rule of 72 refers to the ‘rt’ product (0.72). This is the root of why starting your savings for retirement early is key.
All of this browbeating seems almost pointless as you stare at your VIP account balance at the end of your first year and you have under $5,000. Rest assured that you are ahead of most of your peers, and that head start is what is needed to really jumpstart your retirement portfolio. When your VIP account exceeds a year’s wages, you really start to respect what it can do for you in the long run. It gets better from there on out, as compounding seems to ‘avalanche’ if you keep your investments smart.
So how do you choose your investments? Next page…..
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