Growing up, I was always intrigued by money. I liked earning it, and I really liked saving it. In May 1997, about a month shy of my 14th birthday, I biked from our family’s home in Eden Prairie over to the Chanhassen McDonald’s – a grueling one-mile ride (uphill both ways).
When it comes to saving for retirement, is it good enough to be maxing out your 401(k) – but saving nothing above that? As with most areas of personal finance, the answer depends on your situation.
Life expectancy in 1900 was 47. In 1935 (when the Social Security program became an active policy), life expectancy had increased to 61. The Social Security full retirement age (FRA) at that time was 65, meaning that over 50% of Americans were never intended to receive any sort of retirement benefit from the Social Security program. Life expectancy is up to 78.7 as of 2017. (source: U.S. Census Bureau).
My wife and I generally agree about money. We both want to give generously to our church and other charities, we both want to save at least 15% of our income toward retirement, and we both want to have our mortgage paid off in less than 9 years (which will have been less than 15 years from when we bought our home together).
One of our primary goals at The Wealth Group is to help our clients achieve financial independence at a younger age than most Americans. Financial independence doesn’t necessarily mean you retire and quit working; it just means you no longer need to keep working or saving money for the rest of your life. But for our clients in their 50s and early 60s that begin to contemplate retirement, one of their biggest concerns is healthcare costs. Before going on Medicare, buying private health insurance is certainly expensive.
It’s silly to quote long-term spending figures as a lump sum. When you take a significant annual household expense and turn it into a 30-year cumulative lump sum dollar amount, of course it’s going to be a large number. The same could be said of food, transportation, housing, etc.
The Wealth Group exists to help our clients make better decisions with their money. Our clients' financial behaviors should look different from their neighbors. Making better decisions around money leads to greater success with money; ergo, wealth is built. Building wealth is not magic; it's not the result of cosmic forces. It's a known formula, consistently followed over a long period of time. Every year since 2000, Vanguard releases a report called How America Saves. The 2016 report was released last summer; it is 110 pages and chock-full of fascinating data. Well, fascinating to nerds like us.
Some blog posts are more important than others. If I could shout through the screen to you, I would say: “This post is really important!” It’s not important in the sense that “Mike and Austin think this is important”; it’s important because the math shows us it’s crucial. The second-largest annual expenditure for Americans is transportation (second to housing). If it’s the second-largest annual expenditure, it’s appropriate to say this category of spending should be a big deal in the world of financial planning.
On any given day, you can turn on your television and see a variety of commercials that ultimately ask you, “What is your NUMBER?” The commercials are referencing the number you need saved for retirement, or financial freedom, or some other finishing point. To arrive at that is actually quite a complex set of formulas, Monte Carlo simulations and a whole bunch of assumptions about what you want your future life to look like.
The average investment rate of millionaires profiled in The Millionaire Next Door is 20%. That is, millionaires in America “invest nearly 20 percent of their household income each year” (p. 10).
In the classic personal finance book Your Money or Your Life, authors Vicki Robin and Joe Dominguez outline 9 steps to “transforming your relationship with money and achieving financial independence.” The book is outstanding. One of those 9 steps is an important reality check for all of us to take: First, tally up every dollar you and your spouse have earned in your lifetimes. Second, compare the cumulative amount you have earned with your current net worth (assets minus debt).
My wife and I just finished reviewing our 2017 finances, planned our 2018 budget, and set some detailed 2018 financial goals. Those three activities are paramount for quality financial planning: Reviewing, Planning Ahead and Setting Goals. And, they can be exciting! Doing a quick recap of what happened in 2017 allows us time to discuss our actions and decisions that led to 2017’s financial outcome. Can we learn anything from what we did last year? Did we establish a new, excellent financial habit? Did we develop a new, unfortunate one?
