As we approach the end of another year, and another election cycle, it is a good time to separate out all of the information swirling around us (good and bad), and strive to see the forest for the trees. How can we be sure to have only the most accurate information, disregard all of the other the "noise", and use that information to its best advantage to help us to learn, grow, and ensure that we are aware of all of our options for reaching our goals?
In terms of financial planning (what did you think I was writing about? ☺) this seems to be an especially popular time for reporters to write about retirement planning, and the financial steps that you should be taking to prepare yourself. The problem is that all the advice that they are offering is exactly the same generic advice they were offering last year. And the year before, and all the years before that. Worse yet, it is not based on anything that has to do with you in particular or the specifics of your circumstances. Do they know if you would like to leave anything to heirs? Or expire simultaneously with spending your last dollar? Are they aware of your expenses, or tax situation? Have they factored in the cost of living where you are, or that you plan to move to another state in the future? How are they in any position to offer benchmarks for you to hit? They are not, and while well-intentioned, offering this guidance is misleading at best to anyone who pays attention to it.
While it may be true that the basic principles of financial planning do not change in any significant way from one year to the next, suggesting/presenting goals for how much to have saved at a given age, or what percent of their salary they will need to replace in retirement, or suggesting any other generic benchmark, does not actually help them. Everyone's needs and circumstances are unique, and their financial goals need to be tailored to those needs. If you make $150,000/year, but only have $36,000/year in expenses (first of all, good for you!), you don't need to replace 80% of your salary in retirement (a common recommendation). You also don't need to withdraw only 4% from savings each year (even inflation adjusted) to have your money last through retirement. The "4% rule" was developed as a concept, is full of inflexible assumptions, and was meant as nothing more than a rudimentary guide. Will you always (ever?) have a 60/40 stock/bond portfolio? Will you always spend exactly the same amount every year for decades? What if a 4% withdrawal doesn't pay your bills? Will you automatically run out of money if you withdraw more than 4%/year (inflation adjusted?) No, you won't. Why is this still touted as a reliable guide to follow for anyone who might read the article? Even telling people to magically "create a financial plan", without telling them just how to do that, is a little rude. If it were that easy for anyone to create, 80% of households wouldn't be without one.
A better use of your time would be to figure out how much you are able to save on a regular basis, how much that will add up to by the time you retire, and then compare that to how much you may actually need (yes, this is exactly what The Complete Retirement Planner was designed for!). This could also be done in reverse order, but the point is to compare what you may realistically need to what you may realistically have. Then you will be in a position to make informed decisions about what it will take to accomplish your specific goals. Ideally, this process should be started at the earliest age possible to gain the greatest benefit from compounding interest.
Here's an example you've probably seen many times before, but it's worth repeating:
Start saving $300/month ($3,600/year) at age 30, earning 5%/year (reasonable), and you will have ~$365,000 at age 65 (with compound interest accounting for $230,000 of that total). Start saving the same amount starting at age 40, and you will end up with ~$185,000. Roughly 1/2 as much even though you're saving for 2/3 as long. Start at age 50, and you'll only have ~$85,000 (with compound interest accounting for almost $30,000 of that total).
The impact of starting late(r), and utilizing the benefit of compound interest in particular, is clear.
The moral of the story - tailor your approach to retirement planning to what you need, and what you are capable of accomplishing, and pay no attention to what people who don’t know anything about you are suggesting that you do. Planning for retirement is a personal, fluid adventure with plenty of unknowns, but having a Plan A, and a Plan B, that are designed to meet your particular needs and goals should help you to safely navigate through decades of variables. Plan early, plan well.