I just got done reading this story from U.S. News … it’s an interview with a financial planner. Her advice on how much to save for retirement?
“If you have children in college or in private school you might aim to save 10 percent of your income. But in the time when the kids are out of the house and before you retire you may want to bump that up to between 20 and 25 percent. It really depends on your situation. You should always save in your 401(k) at least up to the company match. You certainly need to be saving enough money to have a cash reserve for emergencies.”
Now, I’m not singling her out here, and I actually agree with everything she said. But based on our little budegting breakdown we should also realize that it is virtually IMPOSSIBLE for most people to save 10% of their gross, let alone 20% or 25%!
It’s certainly a goal to aspire to. And with enough discipline, it can be accomplished. But let’s not pretend most people even have a chance in hell of doing it in this environment.
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{ 13 comments… read them below or add one }
Maybe if more people would live in the city, own just one car, and ride transit, they could save the money they would have spent on the car payments, gas, insurance, and maintenance for retirement. It’s worked great for my wife and I.
Nilus Mattive Reply:
June 18th, 2009 at 3:43 PM
Toss in a rent-controlled apartment (or one purchased many years ago) and I’d probably agree with you.
But when I lived in NYC, it wasn’t all that easy to sock away money.
Forget even one car there, unless you want to get a parking spot for $300 a month (which was considered an absolute steal when I was there).
Heck, even the subway fare in Manhattan has risen 50% or more in the last few years!
Living in such a city is way more expensive than a moderately priced car and insurance, gas and upkeep in a more rural area. In most cases it is much cheaper to live rurally, they pay less for everything from homes, property taxes, to insurance to electricity and phones than in big cities.
Owning a car in a large city is very expensive. Owning a car in Small Town USA can be done for a couple of hundred bucks, or less, a year.
As to the savings rate, with the continuous increases in the necessities of life-while the government decries deflation-and taxes, let alone the pay cuts many in middle America have had to take, there is no way that any majority will ever save 10%.
With cap & trade being pushed through the House this week, and health care and amnesty coming, along with hidden, and blatant, tax increases, most of us will never see that kind of savable income.
10% of gross should be possible, and an absolute minimum to have a healthy retirement stack. Areas to find that extra few percent are to reduce eating out, conspicuous consumption, and most importantly transportation expenses.
I live in the largest city in Canada and currently walk to work so my transportation expenses are only for inter-city travel via bus every 2-3 weeks. My girlfriend has to drive so she bought a 3-4 yr old car and recently paid off the loan, so now the only recurring expenses are insurance, gas and maintenance. Overall there is lots of room to save 10%, same with all my friends and colleagues.
In addition to driving loan / lease free or using public transit it would also make sense to eliminate any revolving or term credit used for conspicuous consumption or doo-dads. Useless recurring expenses such as cable which don’t add anything positive you your life are also dead weight - use the internet for entertainment, at least you can access independent sources of information to form your own opinions instead of following the main stream media. All this extra monthly cash flow can be sent to the retirement or brokerage account, way over 10% in my opinion if done correctly.
Eating healthy and avoiding overconsumption of alcohol and drugs is vital as Americans can be bankrupted by serious illnesses. There’s an article out today showing that more americans are delaying treatments because of the financial situation, sad.
Since the 1970s the USD purchasing power and wages have been cut significantly, so it is now almost impossible to operate a household on a single-income - both parents need to be working (unless one of the earners is in a top bracket)
Now is the most important time to be stacking for a rainy day as unemployment skyrockets (take a look at the U-6 rate) and geopolitical uncertainty continues. Don’t spend a penny more than you have to…
-Tron
Nilus,
I just read your article today about personal finances. Something that has been a great blessing in our lives is a web based program called Mvelopes (www.mvelopes.com). I had my own Excel spreadsheet like you mentioned for tracking expenditures, but this program is much better (and less time). It’s been a great tool for both my wife and I to see our total financial picture at any time. It’s not free like Mint is (It’s $8 a month if you get the 2 year plan), but my wife and i found it to be much more powerful and well worth the cost.
Anyway, just wanted to share something that’s been great for us. Everyone we’ve recommended it to who has tried it has really liked it too.
Hi,
Just read your latest newsletter. Those lovely stories were so inspiring - just shows that I have some alternatives and flexibility in my life that I never thought about.
Rose
Not to be rude, but the assetion that most people dont have a chance in hell is more reflective on the nature of a instant satisfaction society than it is on the difficulty.
It’s only hard if you make it hard. If you make it automatic, i.e. 401K allocations comes out automatically, bills pay automatically, and all you do is MBE (Manage by exception) by monitoring now and then, it is not hard and takes very little discipline. If you micromanage everything and pay do everything manually and only give money after you see what is left….yeah it’s difficult.
When the money comes out before you ever receive it, you learn how to live on less, simply because that is all you see being deposited in your bank account. The problem is not how do you get more income. The problem is that people spend raises the second they get them, or worse yet - before they get them. 2 rules - 1. Make it automatic so you dont even have to think about or see it happeneing. 2. Everytime you get a raise, you increase the automatic allocation percent going to retirement by 1%. You were living on pre-raise before, so surely with a 3% raise you can afford to do 1% it at raise time and then enjoy the remaining 2%.
Only other thing to consider, is renting vs owning. While rents can fluctuate, I have never ever seen a fixed rate mortgage payment go up. If anything, when interest rates drop, they go down if you refinance. Renting is the only way I know of to ensure that inflation can continually raise the the price you pay to live where you do. Home ownership is best way I have seen to ensure that the biggest part of your expenses are no longer subject to inflationary increases.
No change in hell huh? Sorry, I disagree. The only thing you touched on that is right is the part about not having discipline. I actually agree there, nobody has it. That is why you have to make it easy and automated. Auto bill pay, auto 401K donations, taken out before you get your check. If you never see it, you learn to live on less. If you dont have to consciously save it, and it just happens, it is not hard to do. You need far less discipline if you make it automatic and easy.
It is not hard to increase. The problem is what we do with our raises. We spend them right when we get them - or worse yet before. Why, because surely a raise means we deserve a reward from ourselves. Not going to disagree with the last part. Getting a raise should have some reward. 1 rule on raises. 3% raise means 1% increase in savings to retirement and 2% is your reward. You lived on a 0 percent raise for some time….should still be able to, plus now you have 2% more. It is hard to reduce what you live on already. But it is not as hard to save a part of your raise, since you were living without it for some time before.
The problem is not how much we make. It is how much we spend. It is failure to make it automatic. It is failure to increase savings whenver we increase income.
And it is failure to realize the value of home ownership. Rents go up and market values go up and inflation goes up. Fixed rate mortage payment….never go up. If anything they go down if interest rates fall and you refinance.
Nilus Mattive Reply:
July 10th, 2009 at 2:08 PM
Hi, Russ.
Okay, we agree on lack of discipline/overconsumption. And that HAS been the bigger reason most people are unable to save aggressively.
And yes, automatic enrollment could alleviate that problem somewhat over the longer term. (Still, investment choices will make or break the results.)
But to be talking about saving raises — at this point in the cycle — is pointless. How many people are getting raises in this environment? Far more are getting pink slips.
You brought up the number of 3%, which is a very common figure for annual pay increases.
But let’s not forget that inflation typically rises around that same rate.
So, if the cost of the average person’s goods and services are increasing at the same rate as their pay, how are they going to live the same standard AND increase their savings for retirement? (Again, the answer comes down to outsized investment gains.)
Charts of overall purchasing power and inflation-adjusted incomes will demonstrate to you that Americans have been spending larger and larger portions of their take-home pay on necessities in recent years.
Regarding housing — I don’t think it’s what it’s cracked up to be. Particularly for anyone buying in the last few years.
I have been renting for ten years and have managed to do quite well for myself. In nearly every case, I have paid far less than the cost of owning the house, including the supposed tax benefits (a whole other rant that I’ll save for another day).
More importantly, I haven’t lost a dime in equity. I have been able to relocate for business opportunities whenever, and without economic penalty. And I have never paid anything for maintenance or upkeep, which is the hidden cost that people fail to account for when talking about the value of home ownership.
I’m sure I will buy a property at some point, mind you. And over the long term, everything you’re saying is correct.
But the last decade has been anything but ordinary and anecdotal evidence tells me people — at this point — do not have the ability to continue cutting back and saving 10% or 20% of their pay at will.
I would just like to point out that in today’s newsletter the portion regarding the Fed:
“What the Federal Reserve Does (and Says)
At Its Open Market Committee Meetings
This group of government bankers”
The Federal Reserve in not part of our government. It is a private bank controlled by international bankers. I am sure this is a fact you are aware of and only stated this erroneously. Please be more careful in misleading your readers who may be unaware of this fact.
Keep up the great work. I enjoy reading your weekly columns and find them to be quite informative.
Best wishes
I read with interest, your recent article, “Four Big Economic Indicators to Watch.” Please correct your statement that, “This group of government bankers gets together about eight times a year . . .”
The Federal Reserve is a PRIVATE CORPORATION. It has NOTHING to do with “government,” save for the clever tactic to have the President appoint the Committee Members, making it APPEAR as if it is somehow part of “government.” And of course the President gets “consideration” for doing so.
The reason that the FED has NEVER been audited, is because CONgress has NO authority to audit a PRIVATE corporation. Since the IRS is also a PRIVATE corporation acting at the behest of the FED as its collection agent, it too, would not ever consider auditing the FED. If you do not believe that either the FED or the IRS are PRIVATE, then why do they send us mail that is metered or stamped, and do not use the government franking privilege? You will find NO mention of the UNITED STATES TREASURY DEPARTMENT on either of their Websites —
http://www.irs.gov/
http://www.federalreserve.gov/aboutthefed/
The other glaring weakness in your argument, is to rely on “government statistics” such as unemployment, GDP, inflation, etc., for information to make investment decisions. It has long been known that GOVERNMENT LIES. In fact, that is their job, in order to pacify the lethargic minds of the populace. That is actually what we pay them to do, in order to deny reality. Like entertainers, they are whores who distract the masses from the reality of their senseless lives.
Instead, I would recommend that you follow more real statistics —
http://www.shadowstats.com/ These at least use the older methods of calculation, before “government” took liberties to make unwarranted “ASSumptions” that painted a far more rosy picture than Reality demands.
I do respect your research and your work. Please continue.
Sincerely,
George Daniel
Nilus Mattive Reply:
October 1st, 2009 at 8:49 AM
Yes, you guys are right … “government-appointed” would have been more accurate. I apologize for the confusion. Though in reality, my opinion has always been that anyone who relies on a government appointment for their position is essentially a government employee. No?
Daniel — regarding the accuracy of the numbers … you’re absolutely right. And I pointed that out in the piece. On the other hand, the market does still react to these numbers, which was my main point. Moreover, while not perfect, I believe they at least show a muted version of what’s really happening in the economy.
Thanks,
Nilus
P.S. Shadowstats is a great site that we use often at Weiss.
Nilus Mattive Reply:
October 1st, 2009 at 9:03 AM
Just a follow-up which I think makes my point better than I can … from the Federal Reserve itself:
“The Federal Reserve System is considered to be an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive branch of government. The System is, however, subject to oversight by the U.S. Congress. The Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government; therefore, the description of the System as ‘independent within the government’ is more accurate.”
Think about that — “independent within the government” … LOL.
I would also point out this passage from the same document, the official description of the Fed and its operations … “The Board of Governors of the Federal Reserve System is a federal government agency” … and since they represent 8 out of 13 positions during the FOMC meetings … well, can’t we just say that the FOMC is part of the government then? =^)