RSSFriday B.S.: Money (Ad)vice
Mar 12
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Okay, I love talking personal finances. One of the original purposes of this blog was to talk about financial health for the individual, but the focus shifted pretty quickly. Here’s why.
The thing about blindly accepting advice from financial experts is that everyone’s situation is so unique that it really requires an analysis of your financial health, not just a discussion of best practices. That’s why, in some respects, Suze Orman is a better financial guru than Jim Cramer. Financial strategies that are right for one person aren’t necessarily right for another, even if both people seem to have a lot in common financially-speaking. In personal finance, the small details make big difference.
It is widely acknowledged that the economic picture can change dramatically from the time you start working to the time you are of retirement age. But what is sometimes lost in the conversation is that your personal financial picture changes dramatically too. Financial advice is often based on the notion that our income is always going to increase as we get older. But as the last couple years have proven, that’s not always the case.
It was based on these two principles that I made a conscious decision to avoid becoming a financial guru on my blog. I still love finances, and frankly, I have seen it done well (consumerismcommentary.com is a great website for basic financial strategies and lot of interesting research). So while I don’t act like a guru of personal finances on the blog, it is always on my mind.
This week, I used a financial calculator to determine the impact of my current budget on my retirement plans. I have approximately 30-35 years left before I am of retirement age. The bottom line, according to the calculator, is that I need to save for retirement somewhere between $175,000 and $400,000 to comfortably retire at my current means.
Doing some research, I found a stat that most Americans expect to need $250,000 in retirement savings in order to retire comfortably. So on the surface of it, the retirement calculator seemed to have produce some reassuring numbers.
Let me just state right now that I think $175K is a gross underestimation of the amount of money I will need to retire comfortably (defined, in this case, as approximating my current lifestyle adjusted for inflation). Furthermore, if life expectancies continue to increase, it’s entirely possible that my income will need to stretch for up to 30 years after retirement. So let’s say that $400K is a bare minimum target.
So what would it take to get there? One, consistent employment for the next 30 years. The calculator assumes that my employer match will continue to be available for my 401(k) (not a given if you ask me) and that I am making at least my current salary for that entire time, adjusted for inflation. Two, that I will be able to save at least $5,000 per year in liquid savings and another, very modest $1,000 per year in an IRA on top of my 401(k). (The reason for only $1,000 extra is because I used numbers based on my current budget, so that’s what I can afford this year).
And more generally, the calculator assumes that I will never take on any more debt than I have now. This is a questionable assumption. I have about $100,000 of debt in student loans and a $30,000 car loan. So assume that I take on a mortgage payment at some point, but both my student loans and car loan have been substantially reduced in the meantime. And of course, it certainly requires that I stay out of credit card debt.
The lesson here is that using the calculator, I have established target amounts to invest in my 401(k), an IRA, and in my savings account that gives me a good chance of meeting my retirement goal in 30 years. But personal financial situations change (lose of job, health issues, children, mortgage, etc) and when mine do, I will have to reassess my target savings. Some people, depending on their situation, might have to do a reassessment every single year. (A 2% raise, for instance, isn’t probably going to require much adjustment, but a 10% increase probably would). For me, if my income continues to steadily increase for the next 30 years, chances are really good that I will retire just fine, regardless of by how much it increases.
My point is two-fold. One, you can only assess your financial health by looking at your specific financial picture. And no matter what any financial expert says to you, unless they have looked your finances, no amount of advice is going to be dead on. Two, regardless of your age, income level, or any other factors in your life, your current financial assessment is only good for as long as your financial picture remains steady. If something changes, good or bad, then in order to truly appreciate your financial health, you are going to have to calculate everything over again.
So listen to the experts on TV, read the money blogs, but remember that the best financial advice is the kind that is tailored only to you.
