Instant Gratification vs. A Sound Financial Plan

Although this blog concentrates on properly planning for retirement (not taking shortcuts), there will always be those who want some instant gratification when determining how much they should be saving. While there is no substitute for a well thought out financial plan, the following is a general guideline for how much you might want to save using age milestones:

Age 35 - 2x your annual income
Age 40 - 3x your annual income
Age 45 - 4x your annual income
Age 55 - 7x your annual income
Age 60 - 8x your annual income
Age 67 - 10x your annual income

Now that I have acquiesced, I have to ask - Does this make you feel better? Did you learn anything? Are these good goals for you? Will you act on this information? Generic benchmarks are like candy - they make you feel good at the moment, but they really do nothing good for you, and if you pay too much attention to them they may do more harm than good. There's nothing wrong with a tasty treat, in moderation, but when you need real financial nutrition, put the candy aside.

While general guidelines offer quick information, they're frequently inaccurate when individual circumstances are considered. Don't rely on a quick fix to solve a long term, complex problem. Ideally, you should retire based on your assets and needs, not a particular age. Even if you use generic suggestions as a goal, you still need to have a plan for how to achieve that goal. Knowing how much you want/need to save, doesn't help you to actually achieve the goal. It's a step in the right direction, but make sure that you follow up with specific actions that will help you to get where you want to go.

No doubt, creating a comprehensive financial plan is the most beneficial next step. Yet, so many hesitate to do this until they are on the verge of retiring. Creating a financial plan is not like packing a suitcase before a trip - you don't do it right before you need it, you do it far in advance so that you know what you will really need, and have the time to properly prepare. You won't need much time to create the plan itself, but you likely will need considerable time for your savings to generate the necessary earnings to reach your goals. While those savings are growing, a financial plan can help to assess the current health of your finances much like it helps to navigate your future finances. After all, your future is heavily influenced by your current state of affairs.

For example, your future budget is just an extension of your current budget. It will change over time as your needs change, but you can't know what might change, and by how much, if you don't know what it is now. This is why itemizing expenses is the foundation of your finances. Seeing exactly how your money is being spent - every penny - and each category's % to the total, shows you the importance of each category and what amount of your income is discretionary. This, in turn, determines how much you are able to save. You can compare that amount to how much you need to save to determine if you will be able to meet your goals.

Everything with regard to your finances is interrelated and your future financial security depends on the actions that you take now. Only 33% of households have a written budget, and only 18% have a written financial plan. You can easily take care of both of these issues at the same time and not leave everything to chance.

There are other, less tangible, reasons for knowing the details of your finances that point to financial discipline, fiscal responsibility, and generally being financially well informed. There's no need to guess about how to financially prepare for retirement, or to rely on common, often misguided, advice. Ask yourself:

Do you need to replace 85% of your income in retirement?
Do you need to abide by the "4% rule" (now updated to the "4.5-5% rule")?
Do you need to save 25x your annual expenses before retirement?
Do you need to save 10x your income before retirement?
Do you need to claim/wait to claim Social Security by a certain age?
Do you need to have an income stream in retirement that is as much as, or more than, your expenses?
Do you need to do anything that generic benchmarks and rules of thumb advise?

The answer to all of these questions is very likely a resounding, "no". You are unique, your finances are unique, and your needs are unique. There is nothing generic about that, so don't bother with generic assumptions or comparing yourself to anyone else. Take an hour or two, write down the details of your finances, and get the answers you need to make you feel comfortable with what your future looks like. If it makes it easier to hire a financial adviser to help you, do that. If you like to figure things out for yourself, while saving some money in the process, use a financial planning tool capable of accounting for as many variables as your situation warrants.

Whatever you do, don't delay, don't look for a quick fix, don't guess, and don't just hope that things will turn out okay.
If you can see the train coming, you can take steps to get out of the way and protect yourself. But if it blindsides you, there's little chance for recovery. Always be as prepared, and as well informed, as possible.

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