> FOCUS LIFE SAVERS
Putting lessons into practice
When you decide to take personal budgeting and personal finance seriously,
following a simple axiom can get you on the
right path and keep you there: Make more than
you spend. Even if you are later in your career, this
principle should guide you. While the importance of how much
more you make than spend may vary over a lifetime, the rule is
immutable, even after you retire.
Consider your young employees who have just entered the
workforce. Perhaps they have some student loans to pay off.
That has to be part of the budget they construct, and “
construct,” meaning to create or make, is an apt word. Even for
someone who has been out of school for years, building a
budget has to be done brick by brick. It requires forethought,
arithmetic and, more often than not, some delayed gratification.
If you have debt and no savings, perhaps you should avoid
buying a new car. Cars can depreciate thousands of dollars the
minute you drive them off the lot. Fancy new condo? Not so
fast. Investigate whether renting or living with roommates
might be a better way to leave the starting line. The finish line
is a long way off, and the condos and cars can come later when
you have the resources available to make that happen.
Whether you are in your 20s or your 60s, there are many
handy tools to help you budget and determine how much you
need to save for a comfortable retirement. For instance, you
can find a number of retirement calculators online. While they
may draw slightly different conclusions based on beginning
assumptions, most provide a useful outline of what somebody
needs to be doing at any given age.
Of course, those of you beginning to save late in your career are
at a disadvantage. For savers beginning in their 20s and 30s,
compounding interest will compose the majority of their retirement funds. In any case, never fear. It’s never too late. You just
need to know how much to save. For that, you need a calculator.
Bankrate.com, for instance, provides a calculator that finds
a 45-year-old planning retirement for age 67, with current
retirement savings of $100,000, needs to save $5,000 a year to
produce an income of approximately of $55,000 in retirement
before inflation. With an assumed 3 percent inflation rate, the
number falls to $30,000. Increasing yearly savings from $5,000
to $7,000 raises yearly income from savings to around $66,000
before inflation, and $35,000 after inflation.
This income does not include Social Security benefits or
income that you expect from other sources, but online calculators can help you estimate benefits and fold them into a more
complete financial picture. You can also adjust for estimated
rates of return on your savings. The Bankrate.com calculator
assumes a 7 percent rate of return before retirement and a 4
percent return after retirement, a period in which retirees often
agree to accept lower returns for less risky investments.
Assumptions are only assumptions, and it is important
to pay attention to the markets, the economy and your own
personal financial situation. If these factors
change, your calculations must change. For
instance, any retiree expecting significant
income from bonds or interest on savings in
the low-interest environment of the past several
years would be sorely disappointed.
Those who have kept their money in a bank account would
have almost done as well stuffing it in their mattresses. Some
countries have actually engineered negative interest rates, as
counterintuitive as that might sound. This trend has, for some,
destroyed the miracle of compound interest, which provides
the benefit of having the money you save earn interest, and
the money you have accumulated in interest also earn for you.
The principle of compounding extends to other savings
vehicles in which you can not only earn and reinvest dividends,
but benefit from capital gains, Townsend said. The compound
annual growth rate (CAGR) of the Standard and Poor’s Index
of 500 stocks from 1871 to December 2015 is just over 9 percent.
Not too shabby. That means $1 invested in 1871 would be worth
around $286,000 today. Adjusted for inflation, the CAGR falls
to just under 7 percent, and the dollar investment in 1871 would
still be worth more than $15,000 today.
Programs to help
Once somebody decides to invest, a number of options are available to put the principle of compounding to work, Townsend
said. One of the most important is government-sheltered programs, such as individual retirement accounts (IRAs) and 401k
plans. IRAs allow individuals to save for retirement with tax-free
growth or on a tax-deferred basis. In a typical IRA, investors put
savings in before being taxed. These investments can be matched
by employers. Taking advantage of the employer match is a no-brainer. In a Roth IRA, meanwhile, savers put their after-tax
income into the markets, but retirement withdrawals are tax-free. This kind of program best serves the younger savers who
will benefit from long periods of compound interest.
Even with these kinds of programs, regulated by the federal government and perhaps sponsored by your employer,
an investor cannot afford to sleepwalk toward retirement.
Townsend said investment vehicles are your property and
must be treated with the respect they deserve. You have to stay
abreast of the market and the government, both of which can
change the economic and financial landscape in a heartbeat.
Learning about personal finance and budget does not begin
and end with a high school or college course, or with a seminar
in your 20s or 30s. It means continuing education throughout
your earning years and retirement. Even friends and advisers
with good intentions may not be entirely reliable. No one has
more vested interest, no pun intended, in your retirement savings than you do.
HAMILTO N, a former vice president of communications for
the National Electrical Manufacturers Association, is a freelance
writer and artist living in Parkton, Md., and can be reached at
firstname.lastname@example.org. I S T