Wednesday, January 02, 2008

(My) Financial Year in Review

One thing I know - people are not comfortable talking about money. But I love talking about investing, saving for retirement, financing a car or a house, etc. I also think people should talk to each other more about money because this stuff is certainly not taught in school, and most people never care to research the matter. I am fortunate that I have a group of friends who like to talk about money and investing, and don't get caught up in comparing as much as just learning from each other.

In this spirit I will share my retirement update in hopes that you too will be inspired to take a look at where you are and where you want to be (if you need help this is one of my favorite retirement calculators). I make it a point to assess my path to retirement at least 2 times per year. Once around the New Year (that's this one) and once again at the end of the fiscal year when P&G contributes to my retirement.

From what I see - my peer group in general (Gen-X'ers) are avid savers for retirement, while Gen-Y'ers are planning to save fore retirement.... someday...
NET - the sooner you start the better!

I used the above mentioned calculator to determine how much money I would need to:
1) Retire at 55 (which is aggressive - now most people retire at 65, if at all!)
2) Continue our current lifestyle (spending) at retirement (inflation adjusted)
3) Have the retirement funds last until I am 85 (life expectancy estimate) - probably should have used 90 since Meghan is younger than me, but 25 years it a long lever arm. (also note that some calculators don't let you use them if you are under 40, that is just being lazy and poor programming. Of course people under 40 think about retirement now, you have to since the end of the pension era!)

3% annual inflation rate
8% annual appreciation before and after retirement (see S&P 500)

So I graphed the savings curve predicted if one starting saving at 23 and retired at 55 with our desired retirement income - and then added our current retirement savings. I have removed all dollar values because people are uncomfortable about this stuff (which makes me uncomfortable blogging it!) but the net of it is the amount you need to save for retirement is always a lot more than you'd expect before you start looking into this stuff! The results are below.

I have to say that when I did this exercise I was shocked. As you can see it looks like Meghan and I are "on-track". However I always thought I was an over-zealous saver for retirement, especially since I started saving from the 1st day I started working. Before getting married and having a house I was extremely aggressive in saving for retirement, so I had hoped I would be in better shape.

In fact this exercise really started to bug me, so I had to reconcile in my head what was going on. So I next took my current retirement savings and current contributions and plotted their expected growth and got the plot below.

This plot made me feel a little better, and again pointed out how complicated this stuff is. It shows that at our current savings rate with 8% return per year that we are projected to be ahead of the curve!

I don't think the human mind is very well equipped to fully grasp exponential relationships. Is that why Einstein is supposedly quoted as saying "compound interest is the most powerful force in the universe."

So what does it all mean?
Well - the truth is somewhere in-between. I don't think we will be on the maroon curve because it implies that we continue to save for retirement at our current rate, but that is unlikely for the following reasons:
1) I just bought a car and have a car payment again after not having one.
2) We hope to have kids someday, and those darn things are expensive!
3) This also implies that P&G will contribute to my retirement until I am 55, which means I would continue to work there for another 25 years. I'm not saying it won't happen - I know people at P&G who do it all the time, but that sounds like a long time! 25 more years! I don't know how anyone does it for that long! I'm just hoping for a good OJP job in 2008 (I am changing assignments).

I am hoping to stay ahead of the green curve so I can retire at 55, but if that doesn't work out, working until 65 would exponentially help matters (10 more years of savings, 10 less years of retirement funds needed). Also Meghan and I have a good attitude of balancing saving for retirement with enjoying spending some money today. I remember when I worked on Pantene there always was a big debate with one specific manager about how wasteful a week of gambling in Vegas was, and how he'd never do it (he was on the deferred life plan - where you sacrifice today in hopes of enjoying what you want somewhere down the road). There really isn't a good financial reason to spend a week gambling in Vegas, but there are a lot of great times and great memories to he had (like collecting on the spoon bet!) if you budget for it.

My wish for anyone who took the time to make it through this long blog - have a prosperous 2008 and I hope your retirement plans either begin in 2008 or are re-energized because of this post!

PS - Just for fun I have attached the "retire at 65" savings curve. It's almost unfathomable how much leeway it gives you by working an extra 10 years!

Happy Retirement!


Karen said...

as one of those people who ISN'T shy about money, i congratulate you on looking so far (and clearly) into the future. Your charts are telling and i'm going to nag Jim to do one for us.

I started adding to my 401K at age 21 and am AMAZED at what i have saved in just 6.5 years- WELL over $50K. Compound interest is an amazing thing!

ddting said...

So what are the ways to augment this curve? Increase the "interest rate"... you have 8% assumed... through recurring passive income from assets. Where can you find that?

Tom S. said...

Another thing - S&P500 from 1970 to 2006 returned 11.2% per year, though I am a conservative kind of person - so I'll stick with 8% for now.

Anonymous said...

Tom, all very informative and helpful. I have every intention of saving and making positive money choices as soon as I get some :)