1-1 The Long-Term Value of Saving More and Earning Higher Investment Returns
| Number of Years | Status Quo (Save 4% per year, earn 2% per year) | With Changes (Save 15% per year, earn 8% per year) |
|---|---|---|
| 10 | $188,000 | $541,000 |
| 20 | $295,000 | $1,494,000 |
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.
Eyeing Keys to Successful Retirement Planning
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 your personal financial fitness are extra-important factors in 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 to challenge 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 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 should view planning as an ongoing activity, not a one-time endeavor. 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 should review and update 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 financial 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 or her 20s and 30s has many years (decades, in fact) ahead to earn enough money to pay for current expenses such as food and clothing, 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 to earn a living. In this chapter, our focus is on protecting income you’re earning while employed.