Atlanta Braves first baseman Freddie Freeman will earn a $12 million salary this year. With any degree of planning, Freddie is set financially for the rest of his life – and now we hope he can deliver on the field and propel the Braves into the playoffs.
While a small percentage of major leaguers earn such a lofty paycheck, these athletes have the same goal as the rest of us: financial independence. Unlike most of us, Major League Baseball players have a short window – usually 5-10 years – to amass enough wealth to last them a lifetime.
But here is where there is an unusual similarity. For many executives, business owners and senior-level managers, the last 5-10 years are the most important period when it comes to saving for retirement. While you may not bat cleanup for the Braves, putting yourself in their financial frame of mind may be useful. If you only have 5-10 years left to play, what should you be doing today to save and invest for the future?
Here are some recommendations:
First Base – Work your craft. As any baseball player knows, being a single step faster often makes the difference between a hit and an out. So maximize every opportunity: If you own a business, even moderate increases in annual revenues can yield a sales price increase of hundreds of thousands of dollars.
For salaried executives, your compensation package is likely incentive based, so maximizing these incentives is paramount. If those incentives involve stock options, consider them a part of your retirement savings. Any exercises should be a part of your retirement planning strategy instead of meeting current expenses.
Second Base – Rejuvenate your Savings Plan. A runner rounding first needs to pick up speed to make it to second base. Likewise, this is the time in your career for your savings plan to move into a higher gear.
For starters, contribute the maximum amount to your 401(k) or other tax deferred savings plans. In addition, continue placing as much of your after-tax money as possible into your investment portfolio. A good place to start is by saving an additional 10 percent of your salary through a combination of your after-tax account and/or the after-tax portion of your 401(k) plan if the plan allows these contributions.
Third Base – Cut the Fat. No matter where the ball is hit, few hitters will reach third base if they aren't lean. Likewise, few things can ruin a good retirement faster than out-of-control spending.
Hopefully, you’ve already paid off your credit card and auto debt; if not, this should be a top priority. Next, eliminating your mortgage can significantly reduce expenses in retirement. Finally, prepare a summary of your annual expenses, including a separate column for core living expenses – those items needed in everyday life. Make certain that when you get ready to retire, your investment portfolio supports your core expenses.
The Slide Home – Don't forget to touch the plate. To cross home plate, know how much money you will need to retire. Here is a good rule of thumb: First, determine your core expenses, including taxes. Next reduce this amount by income you will receive from pensions and Social Security. Third, multiply this amount by 25.
For example, let’s say you need $120,000 per year in retirement. If you will receive $40,000 annually from pensions and Social Security, your investment portfolio needs to generate $80,000 each year. By multiplying $80,000 by 25, you will need to have $2 million in investments to retire.
Finally, when you reach your target amount, begin diversifying any investment concentrated in a single company or industry. Diversification helps to defend your portfolio against catastrophic events.
Nathan Corbitt is a wealth advisor for Brightworth, an Atlanta-based wealth management firm with $1.2 billion of assets under management.
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