The Fullers needed about $1.5 million of life insurance coverage – triple the amount they had been carrying. They were able to buy that increased level of coverage along with some additional needed disability insurance by raising their deductibles on some other insurance policies and by switching to lower-cost (but still high-quality) providers.
So what were these changes worth to the Fullers? As they themselves said, they had much more peace of mind and comfort with their new financial situation. In the remaining part of this section, we briefly examine the true financial value to them over the decades following the changes.
If the Fullers had continued saving as they had been (saving just 4 percent of their incomes yearly and keeping that money in a bank account), in 10 years (when they reached their late-50s), they would have accumulated $188,000. This would have put them in a relatively poor situation for their future retirements given their annual income of $150,000.
On the other hand, the changes (saving 15 percent annually and instead earning an average investment return of 8 percent yearly) would lead the Fullers to have more than $541,000 in 10 years – nearly triple what they would have had if they hadn’t made changes. The differences are even more dramatic looking 20 years out. Check out Table 1-1 to see the calculations.
Table 1-1 The Long-Term Value of Saving and Earning More
By making sensible changes, the Fullers are well positioned to retire with a hefty nest egg. (In fact, they could consider retirement sooner.) In the absence of those changes, however, they would have a small amount and be unable to even come close to maintaining their lifestyle during retirement.
Although you may like to consider other factors – such as your health, relationships with friends and family, and interests and activities – as more important than money, the bottom line is that money and personal financial health are extra-important factors to your retirement lifestyle.
Saving drives wealth
You may think a high income is key to having a prosperous retirement, but research shows that the best way to retirement bliss is to save. Research demonstrates that wealth accumulation is driven more by the choice to save (rather than spend) than it is by a person’s income.
For example, professors Steven Venti and David Wise examined nearly 4,000 households across an array of income levels that challenges the notion that many households lacking high incomes don’t earn enough money to both pay their bills and save at the same time.
Venti and Wise examined these households’ current financial statuses and histories to explain the differences in their accumulations of assets. Their findings showed that the bulk of the differences among households, “ … must be attributed to differences in the amount that households choose to save. The differences in saving choices among households with similar lifetime earnings lead to vastly different levels of asset accumulation by the time retirement age approaches.”
Keeping your balance
Most people we know have more than one goal when it comes to their money and personal situations. For example, suppose Ray, age 50, wants to scale back work to a part-time basis and spend more time traveling. He reasons, “I don’t want to wait until my 60s or 70s, because what if my health isn’t great or I don’t make it!” But Ray also wants to help his adult children with some of the costs of graduate school and possibly with buying their first homes.
Ray’s situation – of having multiple goals competing for limited dollars – is often the norm. Thus, a theme we discuss throughout this book is how to trade off competing goals, which requires personal considerations and balance in one’s life.
Understanding that planning is a process
The Aircraft Owners and Pilots Association has a slogan: “A good pilot is always learning.” Likewise, to have a good retirement you almost always need to be planning. Financial planning is a process. Too many people develop financial plans and then think they’re finished. Taking this route is a good way to run into unpleasant surprises in the future.
A plan is based on assumptions and forecasts. However, no plan – no matter how carefully it’s developed – gets all the assumptions and forecasts correct. Even your best, most careful guesses may miss the mark. So every few years, you need to review your plan.
As you’re reviewing, assess how much reality differed from your assumptions. Sometimes, you’ll be pleasantly surprised. Your portfolio may earn more than you expected, or you may spend less than you estimated.
Other times the review won’t be as pleasant. The markets may have dragged down your portfolio returns. Or your spending may have exceeded your estimates. In either case, you aren’t reaching your goals.
Even if you do meet the mark in most instances, you still are never really done planning and revising. You’re bound to experience changes in your life, the economy, the markets, tax law, and other areas. You may come across new opportunities that weren’t available a few years ago or that weren’t right for you then but make sense now. You need to continually adapt your plan to these changes. You may need to adjust your spending or change your investment portfolio.
Chapter 2
Protecting Your Employment Income and Your Health
In This Chapter
During your working years, especially your earlier working years, your future income earning ability is probably your most valuable asset. Consider that the typical person in his 20s and 30s has many years (decades, in fact) ahead of him to earn money to feed and clothe himself and make other expenditures (for example, transportation, taxes, medical bills, and vacations) and save for the future. Unless you’re independently wealthy (or have a deep-pocketed relative ready to provide long-term care for you if you hit hard times), you should carry the proper types and amounts of insurance to protect yourself and your family if something occurs to you that would affect your ability