Improve your Retirement Savings

How can you improve your chance for a succesful retirement?

Retirement Calculator

“one of the best things you can do to improve your chances at a successful retirement is to use a free online retirement calculator”

via:  http://www.fool.com/retirement/general/2013/05/18/1-simple-step-to-dramatically-improve-your-retirem.aspx

Save 20%

Wade Pfau, professor of retirement income at the American College, which trains financial planners, has crunched the numbers to find a safe level of saving that would have worked in every historical market stretch going back to periods beginning in the 19th century.

He found that setting aside 16.6% of income and putting it in a diversified portfolio of [60%] stocks and [40%] bonds did the trick every time. (Good news: Employer matches count toward that savings rate.) That’s if you’re consistent about saving over 30 years.

A slow starter must ramp up higher — a 45-year-old with two times salary saved would have to go for 20%.

Savings Table
Let’s just say for a 40 year old who has no savings.
As I look at this chart, If this 40 year old wants 70% of his or her Final Salary,  this person would have 30 more years to work & save (accumulation phase) (retire at 70), and expect to live 30 more years in retirement (retirement phase) (die at 100), then this 40 year old must save:  23.27% consistently for the next 30 years (this savings rate includes any employer matches).  They would then invest this savings 60% in stocks & 40% in bonds.  When they retire, this person would then be able to take 70% of the final salary out of their savings every year.
The key to retirement savings: in your best Dory voice:  just keep saving, just keep saving, just keep saving, save at least 20%!

Save only $125,000 and become a millionaire.

Financial Fool. I am.  Are you?

Without sounding like an all out advertising for Motley Fool, I’m a big fan. Somehow, I stumbled across them back in 1999. maybe even earlier, 1996.  I don’t remember exactly.  Then, I read a couple of their books which are both great learning tools and entertaining.  I wanted to highlight one of their older Articles that is buried in their archives and not even viewable in my browser.

Retire on $125,000

Basically, the premise is this.

Your money will double every seven years if it compounds at the stock market’s average return of nearly 11% annualized over its lifetime.

Now, I know during these bear markets and the worst recession since the great depression, 11% return is unheard of.  The key here is over its lifetime.  Long Term. Not now.

The idea is if you can save $125,000 by the time you are 40, then you can theoretically stop saving, although I wouldn’t recommend it.

Why?  The power of compound interest.  The more money you save, the more money is compounded over a longer period of time which then allows you to get a good return.  Now, How do you get a 11% return?  Well, the stock market averages that return, then you add in if you save 10% of your income every year.  You’ll easily be able to get an 11% return.

Let’s look at a table for this double your money every 7 years.

Age Money Saved
19 $15,625
26 $31,250
33 $62,500
40 $125,000
47 $250,000
54 $500,000
61 $1,000,000

Now, if you are like me, and you look at this and see age 19, $15,000 saved? Are you kidding me? I’m a college student and I have student loan debt bigger than that.  I totally understand you.  I think its very difficult for someone who is 19 to have that much saved.  However, I think it is very reasonable to think that by the time you are 40, you can save $125,000.  Think about it.  That’s 21 years, or roughly $6,000/year.  Now, you might think that is still unreachable.  Let’s calculate it.  If you started at $30,000/year income at age 22, and receive average 5% increases (some years will be less than that, some years will be more) in salary for 18 years, here’s how your savings could look:

Age Salary with 5% increases Savings rate at 14% year
22 $30,000 $4,200
23 $31,500 $4,410
24 $33,075 $4,631
25 $34,729 $4,862
26 $36,465 $5,105
27 $38,288 $5,360
28 $40,203 $5,628
29 $42,213 $5,910
30 $44,324 $6,205
31 $46,540 $6,516
32 $48,867 $6,841
33 $51,310 $7,183
34 $53,876 $7,543
35 $56,569 $7,920
36 $59,398 $8,316
37 $62,368 $8,731
38 $65,486 $9,168
39 $68,761 $9,626
40 $72,199 $10,108
Total Saved $128,26

Now that looks feasible.  I know 14% is aggressive.  I am not including in this calculation any compound interest gains from the stock market.  So, if you were to save only 10% a year and invest it.  You’d get more money.  Still, then we theoretically could stop saving for retirement, because if we left our money in the stock market from age 40 to age 61, we’d be millionaires.

Can I do that?  I think I can.  Can you do that?  I think you can.

Time to get saving. All it takes is discipline, desire, and time.

Government Budget Catch 22

Catch 22: describing a set of rules, regulations or procedures, or situation which presents the illusion of choice while preventing any real choice. source: wikipedia.org

Before we get to the Government Budget Catch 22, let’s talk Aesop.

Photo By Cindy47452 http://www.flickr.com/photos/cindy47452/
Photo By Cindy47452 http://www.flickr.com/photos/cindy47452/

One of Aesop’s fables: The Ant and the Grasshopper teaches the moral of hardwork and saving our food during the summer feast-time to support ourselves during the winter famine time.

Now let’s apply this moral to our Personal Finances.  Personal Finance experts everywhere all recommend to pay yourself 10% first at the very least.  In other words, if you make $1000 for that week, you should save $100 into an account for either emergency purposes or wealth creation.  So, during the economic boom-time (Summer growth), you’ll grow your savings.  When the inevitable recession cycle hits the economy (Winter famine) and your income slows or worse you lose your income, you can use your emergency fund to live comfortably while you wait for the next summer growing season or economic recovery.

It’s great, but many Americans have not practiced this fable, and consequently, have instead of saving during the feast of the recent economic bubbles, been spending even more money than they had.

How does this apply to government budgets?

Continue reading Government Budget Catch 22