Wednesday, April 6th, 2011
I recently came across an old article from the New York Times that offers us a view of retirement planning that we don’t often hear…are we saving too much?
According to them, the financial industry, with its ostensibly objective online calculators, overstates how much money someone will need in retirement. Some, in fact, contend that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.
The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions.
For a middle-income couple, that could mean trading $400,000 in retirement money for about $3,000 a year more during prime working years to spend on education or home improvement. For a middle-class household, that’s a lot of money, said Laurence J. Kotlikoff, a Boston University economics professor, who is on the forefront of this research into spending and savings, and is selling his own retirement calculator.
Andrew Behla is a case in point of someone who is not saving enough. Mr. Behla, a Los Angeles graphic designer and consultant, is at age 38 just starting to think about retirement. He and his wife, Michele Krolik, a payroll manager, together have just $70,000 squirreled away for their old age.
I think we will have to save a lot more, he said, a point on which the economists and the financial planning industry would agree. Even so, the couple recently bought a house and put extra money they had into improving it, figuring that over their lifetimes it will add handily to their net worth.
But other people like Beverly Alexander, 49, an energy consultant in Marin County, Calif., might be able to slow down. Her financial planner has her retirement finances mapped out to age 105 (her parents are still alive in their 90s), a plan that gives Ms. Alexander, a former utility executive, the freedom to quit her corporate job and live on her consulting income.
One reason I could retire, she said, was that I saved and I always lived below my means.
The findings of the economists are being met as most challenges to orthodoxy are: with stony silence or extreme umbrage.
I count myself as deeply skeptical, said Christopher Jones, the chief investment officer at Financial Engines, a financial planning software company.
The big financial services companies refused to comment on the research but they did say that their use of simple rules of thumb keeps the process of retirement planning less complicated, and thus, less daunting.
After the recent events in the market, we might be hard pressed to find anyone who thinks they have saved too much for retirement.
Nevertheless, I think the key factor in the entire article was the quote from M. Alexander who simply stated the most basic tenet of financial success… “I saved and always lived below my means” .
I don’t think that we need a “professor” to tell us that!
Posted in Saving Money | 8 Comments »
Saturday, June 7th, 2008
Lately I have been reviewing my investment portfolio in light of the new addition to may family and have discovered a few minor things that needed tweaking.
I mentioned in an earlier post that my wife and I have purchased additional life insurance through my employer’s group plan. This plan offers a heckuva great deal on life insurance if you are a younger, non-smoking employee or spouse.
The Cost of Life Insurance
My wife’s additional life insurance of $200,000 costs us $4.10/month.
My additional life insurance of $200,000 costs us $7.90/month.
For those of you unfamiliar with Life Insurance, females are proven to be less of an insurance risk with their typically longer life spans and lower frequency of accidental death. Therefore, it is usually very inexpensive to purchase term life insurance for a female in her twenties.
I really couldn’t believe how cheap a good life insurance policy can be. If you’d like to check it out for yourself you can click here to get a free life insurance quote.
Employer Sponsored Life Insurance Benefits
Like many employers, both my wife’s employer and mine offer life insurance as part of a paid employee benefit package. Our employer paid plans are quite different and it is fairly typical that not all plans are created equal.
My wife’s employer sponsored life insurance plan offers her a flat benefit (as of her union’s last contract) of $177,000. This equates to approximately 3X her annual gross salary at this time. However, her life insurance benefit is not indexed to inflation (except when a new bargaining agreement is reached) and is not derived as a function of her salary. As such, when her salary increases as it does annually, her life insurance benefit remains at $177,000.
My employer sponsored life insurance plan, on the other hand, is derived as a function of my salary. It is in fact 3X my gross earnings (not including commissions and bonuses). My employer sponsored life insurance is now $186,000.
How Much Life Insurance Should I Have?
There are many, many schools of thought on life insurance and I am certainly not an expert in the field. However, I do feel that my wife and I are adequately insured.
Because our only debt is our mortgage at about $175,000, my $386,000 in coverage will more than cover that debt allowing my wife to focus her income solely on the day to day living expenses of the household which would obviously decrease if I am not around to eat 90% of the groceries, take long hot showers, and leave the TV on all night!
This would also leave my wife with $211,000 tax free dollars to invest for my daughter’s future and take care of any unexpected expenditures that may arise in the future.
If the life insurance proceeds invested in a basket of dividend growing common stocks, this lump sum should provide her with approximately $8,000/year in additional income that is likely to grow at a higher rate than inflation over time.
Do I Really Have Enough?
As mentioned earlier, there are many different schools of thought on the calculations that should be used to determine the “proper” amount of life insurance. Some people would say that I need at least 10X my income; I think that is over-insuring.
I don’t want my wife and daughter to struggle financially, but at the same time I don’t want to spend a lot of money banking on my own demise that I could invest in other assets with current cash flow- like stocks (which would be left to my wife as well) !
There has to be a happy medium and I believe that I am very close to that with my current insurance situation.
Your Take on Life Insurance
Am I missing anything?
How do you calculate your life insurance needs? There are several calculators out there, most online insurance companies have them on their websites. Click here and go to InsureMe.com to use their calculator for your life insurance needs.
I’d love to hear your thoughts in the comments.
Posted in Investment News | 6 Comments »
Wednesday, March 19th, 2008
There is but one constant in building wealth and that is to spend less than you earn. If we boil it right down to the simplest of forms, you can never be rich if you spend more than you make.
How Much To Save?
Every financial book out there will throw out a number or percentage of your pay that you should save and invest for retirement etc. but there is no magic number that works for everyone.
Some have said that saving or investing 20% of your income is a great amount and this is attainable by most folks if they make the correct lifestyle choices.
Some have loftier goals, such as Trent over at the Simple Dollar, who recently advises newly graduated workers to save 50% of their take home pay! While that may seem unattainable, let’s look a little closer at the idea.
Buying Freedom
If you are reading this blog, then you are looking to make more money, save more money, or find a way to retire earlier. Now that we have agreed on that point, let’s examine another point.
When I recently wrote about automatic savings accounts like ING Direct and why I believe they are essential, I also mentioned that they are useless unless there is a goal attached to it. The reason that they are useless without a goal is that there is really nothing stopping you from spending that money unless the reason that you are saving it is stronger than your desire to fulfill your “need” for immediate gratification.
For most of us, saving 50% of our income seems unrealistic. I’ll admit that it seems daunting to me at the moment as I am expecting my first child in a few weeks (kids are expensive pregnant wives are expensive).
Making Choices
The amount that we save really just depends on our choices. This is no secret, but it has been the basis for many successful personal finance books, from the Automatic Millionaire to the Wealthy Barber, it’s really all about choices.
I made the choice to save more than 50% of my income for nearly two years as I saved in order to write that big cheque that paid off my $40,000 in student loans less than a year after leaving college.
What was the trick?
I lived like I was still in school (I was still in school for one of those years, but working full-time too).
Back to the conversation at hand.
We must have a certain level of income to provide us with shelter, food, water, and clothing; everything else is optional.
The Options Make The Difference
The optional items that we choose to purchase with our disposable income are what make the difference in our wealth. Again, a simple concept that has sold many millions of books.
The optional items that we choose in order to increase our comfort cost us money. That is the surface of the conversation. However, when we look deeper into what it is really costing us is time/freedom.
The argument for saving 50% of your income translates into buying one year of freedom for each year worked. In addition to this, the effects of compounding also come into play.
For each year that we save and invest 50% of our income, we are earning more and more freedom – assuming we keep our expenses at the same level relative to inflation (annual salary raise).
Going Overboard
This example is very extreme and may be viewed by some as going overboard. However, it does prove the point that it was intended to make.
At some point in your quest to save more money, you will reach a crossover point where you begin sacrificing your basic lifestyle for savings. This is not healthy either because you can never tell what tomorrow will bring.
I believe that each person or family must find that delicate balance between a comfortable and enjoyable lifestyle and the emotional and psychological benefits of a secure financial future. I am sure you will agree that this is much easier said than done.
How To Start Saving
The way I started automatically saving money was to set up a separate high interest savings account to which I began having automatic transfers made on each pay day. I have since kept increasing that amount as I find new way to make more money or spend less. Some months I am able to increase the transfer by just a few dollars, while other months I find ways to make a significant increase in the automatic transfers.
Try it out for yourself and see how far you can push yourself and just how much you can save when you are consciously thinking about it.
If you don’t already have a high interest savings account, you can sign up here at ING. They even offer sub-accounts so that you can compartmentalize your savings. I have a sub account strictly for the new baby and another for funding my brokerage account. I find that sub-accounts make it easier for me to organize my saving goals.
There is no “one size fits all” solution, but I hope that this example will help you to find yours!
Posted in Saving Money | 2 Comments »
