Conventional wisdom says that many New Year's resolutions don't make it past the end
of January. But that never means it's too late to aim higher anyway. Midway through
February, we still have the opportunity to shed old practices, improve our diet, and resolve to build good
financial habits. These exercises will contribute to your long-term well-being, regardless of whether they
began on New Year's Day or later.
In the November 2018 White Paper, I laid out a sobering picture of Americans' savings behaviors. Simply
stated, we aren't prepared for short-term financial setbacks, and we're saving too little to ensure comfortable
To further illustrate how little we are saving, the February 4-8, 2019 issue of Investment News contained
a column insert entitled, "How Much Is Enough to Have Saved at Each Age", which revealed, for accounts
administered by Fidelity, the 401(k) savings levels of six different age groups (see chart below).
For reference, the retirement savings levels recommended by Fidelity (measured in multiples of annual salary)
for each age range were:
While pensions, including defined benefit and defined contribution plans, were once a reliable source of
retirement income, the burden of funding retirement has shifted to the individual. However you choose to
fund your retirement, you need to take a more active role.
In hopes of helping you build good financial habits that become permanent, I will share sound savings
strategies, explore the concept of how much savings is "enough," and look deeper into how much you'll need
Saving styles come in many forms. At one extreme, there is a recent savings strategy movement focused
on aggressive saving and retiring early – Financial Independence Retire Early (FIRE). The basic idea is that
financial independence is attainable once you've saved 25 times your annual expenses. At that point, you can
live off a 4% withdrawal rate. For example:
$60,000 of annual expenses x 25 = $1,500,000 at 4% = $60,000.
Furthermore, to accumulate these savings, you're expected to save anywhere from 40 to 60 percent of annual
Your first impression is probably, "that's way too much to save annually", especially if you are still young,
paying down student loans, starting a family, investing in a home, and living your life. Your next thought might
logically be that's an impossible amount to save over time, and out of most people's reach. In both cases,
you're probably right.
Instead of such an extreme approach, I recommend this simple three-step plan.
Spend less than you earn. To do that successfully, you'll need to create a personal budget and track
your income and expenses. Seeing on paper where your money is going can be enlightening (free, online
expense tracking websites include Mint.com
). Simple habits become grossly expensive
when annualized; the cost of buying versus bagging your own lunch, daily gourmet coffee shop stops, or quick
runs into the "C" store while your car is gassing up. Frightening.
Build up an emergency fund. Here, there is no "right" dollar figure to shoot for. I suggest you save 3 to
6 months or more of living expenses. Now that Step 1 has provided a personal budget to guide you, that's an
easier figure to calculate than it was before.
Pay down debt. When you do, your net worth (Assets – Liabilities) goes up. Liabilities are just another
word for debt after all. Also be cautious about taking on new debt.
After achieving this financial foundation, it's time to save for retirement.
HOW MUCH SAVINGS IS "ENOUGH"?
While there's still some debate over the "right" savings rate to target, most experts, including Dave Ramsey
(How to Save 15% for Retirement Without Cramping Your Style), believe it's 15% of your income, and that
sounds right to me. That's not the 40 to 60 percent the FIRE movement shoots for, but it is still a challenge if
you've never even saved 1% of your income before! To make this manageable, I recommend you start saving as
little as 1%, but commit to building toward that 15% figure over time. The earlier you start, the more powerfully
time works in your favor.
Keep it simple. For example, get in the habit of taking your annual raise and applying it toward that 15% goal;
maybe 1% at a time. Also, be sure to max out any employer contributions you are entitled to. That's free money,
and it will count towards your 15%.
HOW MUCH SAVINGS WILL YOU "NEED"?
The amount of money you need in retirement is based on what you think your annual expenses will be when
you retire, and how long a retirement you will enjoy. In other words, you are projecting how much money you
will need in the future, to live the lifestyle you'll desire. But actually, it's really hard to predict how much you'll
be spending in retirement. There are so many unknowns when calculating "how much you need." Let's start
with the most obvious: how long you and your spouse will live? Impossible to know. Then there is the challenge
of accurately accounting for inflation (that we discussed in our Dec 2018 White Paper), and its effect on your
expense calculations. Also, consider that equity market conditions when you retire really matter. A retiree in
2000, with the Standard & Poor's index around 1400, received no return on their stock investments for close
to 13 years, but a retiree in 2009 almost tripled their money in just over half that time.
Today's market conditions could prove challenging for near-term retirees, with stock valuations at all-time
highs and interest rates still relatively low.
Most financial experts suggest you plan to retire on 70% of your current income. I disagree. 70% is an absolute
minimum; the true figure will approach 100%. Sure, by retirement your kids are gone, and ideally the house
is paid off. But what about those fabulous plans you have such as traveling, new hobbies, and indulging your
grandkids? And the biggest expense you have to plan for? Healthcare, which is increasing well beyond the
general rate of inflation. The Motley Fool (December 18, 2017) writes that the average healthy 65-year-old
couple will need at least $400,000 for medical costs in retirement PLUS even more savings for long-term care!
If your plan is to "figure it out as you get there", then you are most likely to fail. At the very least, start following
the three-step savings approach above. Even better, please contact your financial advisor to review how
you are doing on retirement preparations. They can help you imagine your future. Whatever you do, start
practicing good savings habits today before it's too late. If not, those mistakes become permanent and your
retirement will be less than fulfilling.
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