It’s good to know what your family goals are for the next 10 or 20 years: Buy a home, send children to college, accumulate enough for retirement and many other worthy aims. But good intentions don’t necessarily make good outcomes. To be successful, you need to do some simple arithmetic, and then — and this is the hard part — live according to the calculations.
Many people save too little. Sometimes they have unrealistic expectations of what they will earn on investments or what their house will ultimately be worth. Sometimes they let current consumption dominate their concerns and even borrow to consume. But every person has a finite capacity in them for work. It can turn out to be too late to achieve all those goals.
Luckily there are some simple rules of thumb that you can use to frame your saving and investment program. In this article, I will focus on people who live on income from a job — from their human capital rather than from owning a company.
Typically, spending needs (family, education, home) rise into your early 50s. Peak earning years tend to run from your 40s through your 50s. You will need to do a significant part, perhaps the bulk, of the saving for retirement in a short window from your late 40s to your early 60s.
Houses rise in value little more than the rate of inflation. A house is a consumer durable, not an investment. You will always have to live somewhere, so at most you can capture the gap from downsizing. It will be less than you think.
So, financial savings are going to be the primary vehicle for meeting your family goals. How much, then, should you save? The best quick answer is to assume that you can reasonably and safely earn an after-tax return equivalent to a seven- to 10-year municipal security, which is in the 2.75 percent to 3.75 percent range now, depending on the issuer. Take, say, 3.25 percent as the mean and you see that to add $32,500 annually to your ability to consume, you would need to have $1 million in financial assets. That’s a lot, and that is the point.
Of course, that leaves the principal intact. You can choose to invade the principal as you age or you can view it as the cushion for serious illness or other needs. And remember, if you purchase an annuity, you can get more income but there is no estate left.
The moral is simple: Identify a realistic savings goal early, and make yourself stick to it. Do the numbers. Don’t just save “what feels right.”
In Part Two, we will discuss how to approach retirement planning as a business owner.
George Feiger is chief executive officer of Contango Capital Advisors, the wealth management arm of Zions Bancorporation.
Contango Capital Advisors, Inc. (www.contangoadvisors.com), focuses on individuals’ real-life goals and uses sophisticated analytical techniques and risk-management tools to design clients’ investment portfolios. In Utah and Idaho, Contango operates under the name Zions Investment Services Group. E-mail Contango Capital Advisors at contact@contangoadvisors.com.
IMPORTANT NOTE:
Investment products and services offered through Contango Capital Advisors, Inc., a registered investment adviser and a nonbank subsidiary of Zions Bancorporation, are NOT insured by the FDIC or any federal or state governmental agency, are NOT deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates and MAY be subject to investment risks, including the possible loss of principal value of amount invested.
Featured in the September/October 2009 issue of Zions Bank’s Community magazine.
CCA #0509-0070
I agree with everything in the article. However the problem remains on how / where to save. Maybe that will be addressed in part two. I once read an article titled: “The Federal Reserve has Destroyed the Meaning of Saving.”
By holding the rate of interest way below the rate of inflation they have created a culture of speculation in place of savings. People think that putting money in mutual funds is savings. It’s not. It’s investing and investing comes with risk.
On top of that we’ve had these speculative bubbles that eventually would bust.
The best place to save is to invest in yourself with an education, perhaps a good cash flow business and not even think about the stock market during these long term secular bear markets.
Personally I’d pay off a mortgage long before I’d bother with an IRA. Savings should be the problem of people that are out of debt. If you’re still in debt then you have other problems that need to be taken care of first.
I agree also but I see a bigger problem. There are lots of investment opportunites from savings accounts, money market accounts, stocks, mutual funds, IRA’s, bonds, treasuries etc and this can be too daunting for a beginner let along starting off with under $500.
While I will have my house paid for, I believe it’s more important to save vs paying off a mortgage early and for me this gets into tax issues, returns etc.
Many people also don’t take into account inflation or the power of compounding. IF inflation runs 3% and your ‘safe’ investment is earning 3% you have ONLY kept up with inflation which means that your original investment still has the same purchasing power, not more because you now have more then you started with. IF your savings, money market etc earn anything less the the rate of inflation, you are lossing money. While your balance may grow slowly, the purchasing power is declining.
Bubbles come and go. When bubbles burst many people get hurt but many people also take advantage of the opportunity. While this is the worst financial crisis in memory, we also had one in the early 2000′s, the late 1980′s and other times and each time people lost money while others were able to make money. Same with the housing market.
The other problem is what is an investment vs what is an asset. Simply put, an asset earns you money while an investment doesn’t. Many see a home as an asset based on the way bankers etc determin your worth. But a mortgage takes money out of your pocket, i.e. a bill. A home doesn’t become an asset until you sell and hopefully realize a gain.
While I could go on and on I’ll stop here so that I don’t muddy the waters too much.