Updated on 07.13.09

The Total Money Makeover: Maximize Retirement Investing

Trent Hamm

This is the eighth of twelve parts of a “book club” reading and discussion of Dave Ramsey’s The Total Money Makeover, where this book on debt reduction is teased apart and looked at in detail. This entry covers the ninth chapter, finishing on page 167. The next entry, covering the tenth chapter, will appear on Wednesday.

ttmmA few weeks ago, I took my three year old son to the theater to see Up. It was his first time in the theater and he loved the movie, particularly the friendly dog character, Dug.

I was much more entranced by the central character, Carl Fredricksen. Much like me, he married an adventurous girl he’d know since he was a child – I couldn’t help but see myself in Carl right off the bat.

Watching him progress forward to retirement – and finally realizing that this is his opportunity to do something he had dreamed about with his wife for their whole lives – really hit me with the idea that retirement isn’t just about stopping your work. It’s about continuing your life’s work, except without the constraints of having to beat the pavement each day.

The Total Money Makeover touches on this theme right off the bat.

Retirement Isn’t the End; It’s Security
On page 152, Ramsey makes the point that retirement means security, not just freedom from work:

When I speak of retirement, I think of security. Security means choices. (That’s why I think retirement means that work is an option.)

I agree wholeheartedly with this perspective, to the point that I no longer think of 401(k) savings or Roth IRA savings as retirement savings. In fact, I often have to change things I write about both accounts for simplification.

If I don’t think of them as retirement accounts, what are they? I think of them as “crossover point accounts” with some very nice tax benefits.

Here’s why I think of them this way. I have two young children. Realistically, I know that, unless a major windfall comes my way, I won’t be reaching my own “crossover point” (the point at which I can survive on my own investments) until after they’re out on their own for at least a few years. This puts me at an age that begins to approach the minimum ages for non-penalized withdrawals from my Roth IRA and my 401(k).

Do I intend to “retire” at 59 1/2? Not at all. I have a lot of plans for my life after the point where I am financially self-sufficient that don’t involve golf and fishing. They involve large volunteer projects and activities that simply wouldn’t be feasible without a large financial cushion. The last thing I want to do is waste away.

The Job You Hate
I really like this bit, from page 152:

If you hate your career path, change it. You should do something with your life that lights your fire and lets you use your gifts. Retirement in America has come to mean “save enough money so I can quite the job I hate.” That is a bad life plan.

This idea really hit home for me at a time when I was becoming unhappy with my career in many ways. Over the course of several years, I went from being very passionate and involved and pushing forward a fascinating project to being a system administrator charged with also maintaining a very large code base, something I absolutely didn’t want to do.

To me, the idea of simply switching careers was anathema. I had invested so much effort into my career at this point that I didn’t want to lose it. I was also trapped financially – I needed that income to keep coming in.

I knew what I wanted to do – creative-oriented work that really got people to think about their lives – but that seemed light years from what I was doing. But the investment I had already made and the financial state I was in kept me mentally locked into the idea of keeping on with it.

Don’t let your life be controlled by the need for a few more dollars. It’s not worth it.

15 Percent?
On page 155, Dave encourages people to invest big in their retirement plans:

The rule is simple: Invest 15 percent of before-tax gross income annually toward retirement.

In other words, your 401(k) contributions plus your Roth IRA contributions should add up to 15% of what you earn before taxes in a year, not what you bring home.

I think that 15% number is a bit loaded in a way that Dave doesn’t discuss. I think he makes an enormous assumption in this book, that people reading it are at the very least over the age of 30. The thought process behind this is simple: if you’ve dug yourself into an enormous debt hole, figured out that this is a problem, and dug yourself out, you’ve likely got quite a few years under your belt already.

The catch is that it’s those under the age of thirty that can really make a killing with retirement savings. If you save 15% a year from age 22 to age 30 for retirement in an account that returns 8%, you’ll make more just from those early years than you would if you started at age 30 and saved until age 65. Thus is the power of compound interest.

I think Dave’s absolutely right – if you’re over 30 and have peanuts saved for retirement, 15% is a requirement. If you’re just getting out of college, 15% would be sweet, but you can have a healthy retirement for less if you’re committed to contributions throughout your entire adult life.

What About Employer Matching?
Dave offers up his thoughts on how to consider employer matching on your 401(k) on page 155:

When calculating your 15 percent, don’t include company matches in your plan. Invest 15 percent of your gross income. If your company matches some or part of your contribution, you can consider it gravy. […] By the same token, do not use your potential Social Security benefits in your calculations.

Why not include these things in your calculations? We all know about the lack of stability in Social Security – I, for one, have little interest betting my long term stability on it. But why not the matching?

Dave really doesn’t give an argument for why he believes you shouldn’t include it beyond “consider it gravy.” I tend to think the reason that ignoring matching is a good rule of thumb is that quite often employee matching money has special investing rules tied to it.

Another good reason – perhaps even more important – is that it’s better to save more than you need than less than you need. If you wind up at age 60 and have more money than you expect, that’s a good thing (provided, of course, that you’re not negatively affecting your life along the way).

Another interesting question: is investing in your own business worth considering for retirement savings? I don’t think it is. For one, a small business is notoriously unstable. For another, I think a small business functions more as a giant emergency fund than as a retirement account, since it can be tapped regardless of where you are in life. I wouldn’t include any sort of business as part of one’s retirement plan.

At Age Sixty Five…
An interesting fact worth thinking about, from page 164:

The investing you do systematically and consistently over time will make you wealthy. If you play with this by jumping in and out, always finding something more important than investing, you are doomed to be one of those fifty four out of one hundred sixty-five-year-olds still working because you have to work.

When I read that quote, I immediately began thinking of all of the people I know that are close to sixty five years of age and whether they still need to work. According to my math, seven still have to work and six do not. From my little bubble, it looks like that 54% figure is pretty spot-on.

One interesting difference between the two groups is that the working group tends to spend money more easily than the non-working group. The people I know in the working group tend to go on a lot of vacations and have shiny new cars, but their days are still filled with their jobs. The people I know that are not working for an income at age sixty-five are not doing as many expensive things, but instead are involved in things like volunteer work and actually working at their own small business that doesn’t turn a big profit but is a lot of fun for them. They don’t have shiny new cars and they don’t fly to Europe regularly, but they’re doing things they value.

I’d like to be able to go on some trips when I’m that age, but overall, I’d rather be in the group that doesn’t work for a living income then.

The Rose
On page 165, there’s a short parable about a rose growing from a plain seed into a beautiful bloom. The comment on this parable is interesting:

The story of the rose is about human potential and about not being defined by what you do, but rather by who you are. […] Push with gazelle intensity [on your savings] to bloom, but know that as long as you take the progressive steps, you are winning.

For me, this all comes back to the idea of spending less than you earn – it’s the engine that drives everything that I truly value in life. Spending more than I earn means lots of little trifling goodies right now, but it means pain in the future – something I learned the hard way.

Spending less than I earn, though, is much like planting a seed and watching it grow. At first, it seems painfully slow, as a seedling barely peeks through the soil and seems to grow at a snail’s pace. But if I keep fertilizing it and working with it, it grows.

Before I know it, it’s a large blooming bush and the fragrance of freedom is in the air.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Wednesday, we’ll tackle the tenth chapter – College Funding.

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  1. Mark L says:

    There’s a good reason to budget the 15% and consider a match gravy – there’s no guarantee you will always have that match. Companies are cutting or suspending matches due to their own financial problems, so if you do have that 15% going, and the company has to cut your match – you still get your goal.

  2. You know… I have always thought I had a good grip on my finances. I have read many,many finance books… but never anything by Dave Ramsey. Maybe I need to. I guess I do not know it all…

  3. chessiq says:

    It was nice revisiting the crossover point.

    I think that if spending less than what one brings home is a life long habit, then even when one is living on investment income alone, (s)he will try to spend less than that [so, inc > exp]. I don’t see why or how one would suddenly stop budgeting later in life, or give up on life-long good habits that have been effective, for example, making sure expenses are less than income.

  4. Good point on framing retirement as a life transition into something else, rather than as a drop off/out point Trent!

    When you read financial magazines you learn all about “if you save x percent of your income, starting at age 25, you’ll have X millions of dollars for a worry free retirement at 65”. That may be true in a perfect world scenario, but real life often looks different.

    I think there are three components to preparing for retirement:

    1) Saving, as outlined by the experts
    2) Living beneath your means, and
    3) Finding rewarding work that you could do past retirement age.

    2 & 3 will help tremendously in the event #1 doesn’t go as well for you as it does in the financial magazines, or if you start saving late in the game.

    If you can accomplish all three (and keep your health!) you’ll likely enjoy the “golden retirement” we all hope for.

  5. Laurie says:


    I have to disagree with your idea that it isn’t as important to save the whole 15% when you are young since it grows so much. To me it is MORE important to save then – before kids, before your expenses go up. We managed to save 15% (each) not including match as well as fully investing in Roth IRAs until our youngest son was 1 (I was 29). Our income dropped in half, but I’m able to stay home until the kids are at least in high school or most likely college without worrying about whether or not the fact that I’m not working is going to impact retirement. (We now contribute 15% between Roth and 403b (hubby is a prof). We don’t count the match – mainly b/c the fees inside 403b and 401k’s hit you enough that it really is just gravy!

    Even it you aren’t going to have kids, why not live the more “college style” life for an extra 10 years? Then even if you are disabled or anything else happens you know you are covered no matter what happens in the future.

    The generation of kids of baby boomers are also going to need more retirement to help their parents! Part of our retirement plan includes having home space for parents so that we don’t have to put them in a nursing home (and we’ve convinced them to purchase their own LTC insurance to cover aids, nurses etc – we may have to help hubby’s parents cover their premiums at some point but it will definitely be worth it and we’ve worked that into our budget). My mom is going through all this with my grandmother right now and it is a nightmare w/o LTC.

  6. Angie says:

    I don’t really understand why employer matched 491k accou ts do not count towards your percentage. Once you are eligible for the match it is there. I save 6% and my employer matches 8% of my salary. Why should I save more. I could understand if the match was a much lower percentage but cmon. As long as you make it through the vestments period your money isthere.

  7. Erin says:

    Angie says – “Once you are eligible for the match it is there.”

    Not true. I work for a large fortune 200 technology company. They are not doing too badly all things considered, still highly profitable, but sales are down significantly compared to last year so one of the cost-cutting measures they implemented is suspending the 401k match for 4 quarters. I’m sure that’s one of the things Dave Ramsey had in mind when he said not to count company matches. The programs can change or stop at any time. Also, if you get laid off or get a new job and are not fully vested then you might lose some or all of the match.

    Also, at my last company the match was entirely in that company’s stock, which is nice unless that company doesn’t do well.

    So I can see why he says not to include it, but you can always include it and then re-calculate if the situation changes.

  8. Paul says:

    What I don’t like about this, what irks me about this whole way of thought, is that it sort-of assumes that everyone has dreams, goals, and values that fit into a class. That is, that everyone enjoys being productive, active, social, beneficial to others, appreciated. Maybe I’m an abberation, but I’ve done that, and I’ve done base conspicuous consumption, and I’ve always found more real enjoyment in the consumption.

    Look, my ideal would be to get everything I want for nothing, but that’s sadly not available. But I certainly don’t want to earn–work for–more than I spend over the course of my entire life. And retirement for me is the ultimate goal, where I stop earning and stop working. Indeed, I hope to consider my retirement income not as the result of hard saving on the part of the pre-retirement me, but as my due on the basis that I want to have it. Oh, I’ll work, and I’ll save, but only as a means to an end, not as goals in themselves.

  9. RG says:

    The chapter in the book definitely puts into perspective your retirement savings, but wouldn’t it be fun to live comfortably from the returns only without touching the principal.
    OR as a famous person said “I dont cut my esxpenses but simply find the ways to earn more”….and I agree.

  10. ChrisD says:

    Whenever people say that they want to keep working after retirement I always want to add the proviso, that it’s great if you WANT to work, but it’s important to have enough money in case you CAN’T work.
    My mother is 60 and while she still enjoys her full time job she is getting older, and has to take quite a bit of sick leave in winter as she just can’t recover quickly from seasonal bugs. My father is quite a bit older and he wouldn’t be able to cope with a formal 40h/week job, while my grandmother is 90 and certainly can’t work at all. Of course there are plenty of people who ‘retire’ at 60 and then freelance the fun work for another 30 years, but you can’t know how long your health will hold out for.
    Thus at some (later) point continuing to work won’t be an option. Saving for retirement is not just about having fun when you are older, but also about SURVIVING when you are older.

  11. Erin says:

    Flying to Europe may be of value to some people. It’s judgements like this that make your writing…full of yourself. Because what you consider value in volunteering does not negate one’s trip to Europe as non-value. Perhaps they go to Europe because they have a passion in history or architecture or being closer to their roots or just plain enjoy traveling.

    And 15% before an employee’s contribution is good.

  12. zinco says:

    I agree 100%, save save save and cherish by taking a bag full of cash to your grave.

  13. Amateur says:

    ChrisD has got it right, not everyone will or could have the option of being able to work well beyond their employable years. It seems really pessimistic to think that things won’t work out perfectly, but having family, friends, and seeing everyone close to us and their lives, all the possible outcomes exist whether it is good or bad.

    It would serve most folks best to save as though there is no one else to rely on in the future. If there is someone(s) to rely on, even better, the extra savings can go a long way to make life more enjoyable. However, the scope of the savings should really be more narrow, save for self sufficiency whether or it pans out that way.

    The company match is usually not a guarantee and varies across companies, since most of us are unable to hold on to jobs at companies for decades on end these days. It can take years before the company will provide a match when starting a new job not knowing if the job is stable or not. There are too many pitfalls in relying and saving based on how much the company is willing to match.

  14. Leslie says:

    What about required contributions to a state retirement plan? I am required to contribute 6.5% to that plan. Does that count towards the 15%?

  15. rchristian says:

    The formula for physical wealth is really quite simple-spend less money than the amount taken home. But how many people do this? Another analogy is weight loss. Again, it’s very simple. To lose weight, you must burn more calories than those consumed. Abiding by what is known as a “10-10-80” formula for living, can produce amazing life-changing results. The formula can be summarized as-10% off the top for giving to your favorite church or charity; the next 10% to YOUR savings or investment account before any creditors are paid; and the final 80% is used to pay for basic living needs and wants. Commit to this plan for 90 days and then witness the results.

  16. kate h says:

    I work for a university, and they put in an unbelievable 14.2% into my 403b without the need for a match. I’m putting in 5% now, which means that I have the equivalent of 19.2% of my salary going into my retirement account. I really don’t think I need to be putting more than about another 1% in in the near future (because 20.2% is such a nice roundish number). I’m putting about 10% of my salary towards finally building an emergency account. I don’t think one size fits all works for any financial rule. If the amount that the university contributes to my retirement changes, so will my savings strategy.

  17. steve weaver says:

    Our company is rather small so until recently, only management got any matching funds for their 401(k). Due to the economy, now no one gets matching funds. THAT is a good reason to consider your employers part “gravy”.

  18. John Peppard says:

    Dear SD: My son’s Gf starts grad school in fall. She will borrow $ for tuition. She has 6 months emergency $ put aside. Should she use that for tuition?


  19. I’m a big supporter of dumping as much as you can into retirement accounts when your young and have few responsibilities. If you can save and invest a big chunk of change before you hit 30 it’ll give you options to scale back your savings for other expenses down the line. Of course you can always just keep saving at the same rate and retire early or buy a beach house or donate a lot to charities :-)

    -Gen Y Investor

  20. kitty says:

    Regarding match – I can see why you don’t want to count it in future plans since the match may be suspended or you may lose a job. But, once the money is there and it’s vested it’s yours. So it is perfectly fine to count money that are arleady on your account.

    What I would consider, though, is adjusting the value of 401K as well as any tax deferred account for taxes. After all, not all of this money is yours, a large part belongs to Uncle Sam and your state.

    #2 – Lisa, if you have a good grip on your finances you don’t need Dave Ramsey. He is really good for people who are in debt – even if his method results in lost money, but he is NOT an investment expert, so his opinions on investment are just as good as yours and mine. In fact he was claiming just a year ago how one can get 12% average return in the market; he was even advising a 60-year old to put all of his money in the market and find some mutual funds (not necessarily index) that give you 12% a year. This is just my humble opinion, but I am yet to meet a single Dave Ramsey fun who has never had a debt problem.

    BTW – I don’t consider 401K and Roth (if you are eligible) the only option to save for retirement. Granted Roth is great, but the amount of money you can save there is limited and if your income is high you may not be eligible. 401K is great if you have a good company match and/or your 401K gives you good choices. Mine happen to have both, plus I really need to take this money off my taxable income; until last couple of years it was the only thing that allowed me to contribute to Roth as well.

    But if your 401K doesn’t have a company match and if it doesn’t have good choices, why not just invest money after taxes? Same if you don’t have Roth option on 401K and if you think you’ll be in higher bracket in retirement. After tax investments even if they aren’t marked specifically “for retirement” are still money you can use in retirement. Half of my money is outside 401K and Roth. Just because I have unrestricted access to this money doesn’t mean I planning to spend it all on a new Ferrari (or most or part – I have no idea how much a new Ferrari costs).

    “You should do something with your life that lights your fire and lets you use your gifts. ”
    One problem for most people is what lights your fire is not necessarily what you are gifted in. I am gifted in math. I love opera. No amount of money will enable me to sing at the Met and yes, I did have lessons, but my tiny soprano is just not good enough or strong enough. So I do computer science instead and I am very good at it too… Nope, it doesn’t light my fire, but this is what I am gifted at and this is what pays my bills.

  21. Hi Guys – I really challenge you guys to change the way you think about retirement. 65 is not the end all be standard.

    Ever notice how when you are given a shorter deadline, you do more and often reach the goal?

    Being financially independent is my goal by 40, what about yours?



    Rich By 30 Retire By 40

  22. kitty says:

    RB — what are you going to do in retirement? Aren’t you going to be bored? I sure will be.

    Also, there is an issue of balance. Being financially independent early is great, but how much will you have to sacrifice for it now? I have a friend who died at the age of 38 from Lymphoma. None of us knows how much time we’ll have. IMHO – we need to consider both possibilities: living a long life or dying young and try to save/spend in a way that we have no regrets in either case i.e. not running out of money too soon and not thinking “I wish I’d done that” if we are find out tomorrow we have a terminal illness. Think about it as diversification only instead of diversifying money across different classes of investment you are diversifying between how much you save and how much you spend based on different possibilities.

    BTW – I am 50. Could I retire tomorrow? Maybe – depends on what kind of retirement I want. If I move to a cheaper state, probably, but then I need to consider possible high inflation or high medical costs. Do I consider myself financially independent – nope, but I’d imagine there are people that have less and consider themselves independent. But… I am perfectly happy with the idea of working for another 10 years or so, and I have no regrets for having traveled and having done things I like. I’ve never bought anything I couldn’t afford, actually I routinely spent less than I could afford, I’ve never had debt problem,I’ve never carried balances on my credit cards and I’ve always saved money. But I’ve never went overboard with savings…

    BTW – I have a question for women out there. Do you really want to tell people you meet “I am retired”? Don’t you think it’ll make you sound old?

  23. the good doctor says:

    I have the audio version of this book, and I don’t recall the “rose” concept; although I understand it. I too have made numerous financial mistakes in the past, i.e. cc’s, living beyond my means, all that..

    However, one of the smartest things I’ve done is regularly put money away in a dividend re-investment program. I’ve had it for 8 years and have not liquidated it. At first, seeing my first dividend check for $9.50 seemed like nothing, but I realized that it was money coming to me.. without having to work for it. My money WAS working for me instead of me for it, however small the amount was. I then imagined how much I would have if I had more invested over time… I was hooked. I have consistently invested over the 8 years or so, gradually increasing my contributions from $50 a month to $750 a month. I now make close to $800 every quarter!

    My income increased during that time span, and it came to a point that I don’t even miss the $750 per month. I do have more bills compared to 8 years ago, but I’ve learned to live on less. I can choose to have a check made out to me instead of having the dividends re-invested, but it is such a joy to see my statements with the dividends buying more shares, which will in turn by more shares. It’s like planting a seed and watching it grow.. sometimes painfully slowly; and then one day it won’t need nourishment anymore because it is self sufficient, and will reward you by bearing fruit or providing nice shade.

  24. Kitty (15)–Oustanding! When ever the topic is retirement, out come the calculators for a dissertation in math! We should really start with the question “What’s my vision for my life”.

    Retirement planning should be somewhere in the mix but to reduce it to a math equation can make life appear more scientific than it is.

    I’m old enough that I’ve seen people who lived there entire lives worrying and planning for retirement, and you know what? They reach their goals and retire with a bundle, but they can’t turn off the money worry, so they take it to their graves.

    In all things, balance!

  25. Susan says:

    This is the part of Dave’s advice that I really question. My understanding since I joined the workforce at 21 has been that 10% is an appropriate amount to save towards retirement. Within the last few years I have seen recommended amounts ranging from 10% to 15%.

    Just from watching the behavior of my own social circle, it seems to me that those who are heavily in debt are the same people who either 1) haven’t saved much toward retirement and/or 2)tend to cash out their 401k as they leave jobs.

    These friends of mine are in their late 30s/approaching 40. They haven’t yet had their epiphany and decided to get out of debt, or seen any reason to contribute meaningfully to retirement savings. Once they do finally come to their senses and possibly spend years digging themselves out of debt, it seems to me that they will have to put away a whole lot more than 15% in order to make up for all the years they have lost.

  26. lurker carl says:

    I have never worked in a job were the work remained exciting for years on end. The work would be very captivating and suddenly changed to something very boring or demotivating. The neither of these times never lasted forever, they just ebbed and flowed over time.

    Best of luck to anyone looking for such exciting work to last for many decades. Few folks ever find it.

  27. Kevin says:

    “If you save 15% a year from age 22 to age 30 for retirement in an account that returns 8%, you’ll make more just from those early years than you would if you started at age 30 and saved until age 65.”

    No you wouldn’t.

    Check your math. This time, remember that your salary increases with inflation.

    Of course, you can tweak the rate of return to get the result you want. If you’d used 12% instead of 8%, then you’d have been correct. But at 8%, the 35 years of saving 15% of a salary that increases with inflation will easily overcome 8 years of saving 15% of the lower salary.

  28. Aaron says:

    Employer matching was the first on the chopping block when I started at my new job. I like to look at the matching as two things:

    A: Free Money!
    B: Immediate ROI

    With that said, it is gravy and always will be.

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