Sunday, January 11, 2009

Our Financial Review 2008

I just finished our 2008 finances. It was another good year - I feel blessed that we are able to do a decent job saving for retirement while spending some money on things like the Cats and some new appliances this year. In fact - I was shocked to see that with all of the variable expenses we have - we spent within $900 of what we spent total in 2007. Pretty remarkable! Exchange our 2007 couches and landscaping for cats, appliances, and painting the finished basement and it's a push!

So why do I have a bitter taste in my mouth financially from 2008? Well - like many I am pretty upset about the financial collapse of 2008. Really, for broad indexes to be down 40% in one year is ridiculous. I agree that our government over the past 8 years was asleep at the switch while the economy eroded from the inside out. By the time it hit main street - all the fat cats on wall street were gone with their golden parachutes. In fact - it brings up 32 major questions which couldn't possibly be covered in this blog:

1) Why would any well organized and well run company want to go public anymore? The trend of future companies (in my opinion) will be less public capital(and more private).
2) What does this mean 30+ years down the road for investing in public companies if the best companies have incentives NOT to go public?

Here's a graphic of my retirement model which I started for my financial review last year (updated for 2008).

As you can see I have 2 "constant savings" curves for retiring at 55 and 65 based on our projected standard of living over that time. This is also based upon a life expectancy of 95.

I was most excited after putting this together to see that we were ahead of the "retire at 55" line. But as you can see in 2008 we fell below even though we CONTINUED TO ADD MONEY! The NET is continued savings but the entire value of our retirement savings was down about 30%.

I am not going to be too sour grapes over this because we again are blessed to have a long time before we retire and hopefully this will be a blip in the long savings curve - however I also believe we will have to lower our expected returns going forward assuming that the fundamentals of the economy were somewhat over stated as evidenced by this huge correction. I am most concerned about those who are very close to retirement or those who just retired. The effects could be devastating if you need to withdraw from market exposed fund currently.

My take-aways from the financial "crisis":
1) Retirement planning is a LONG term plan. It is never to early to start - I started at saving for my retirement at the age of 23.
2) Save MORE than you think you need to retire because you never know
3) Don't put money in the market that you will need within 5-10 years. If you put money in the market - assume you can't touch it for a decade.
4) I will begin to factor in "more secure" savings as part of our retirement plan (like CDs and bonds). At our age I didn't think we would need to but some balance to a portfolio can help you spend money now even while waiting for market funds to recover.
5) Related to step #4 - by the time you retire you should have little no market exposure - and don't plan on needing market returns after retirement! If you need 7-10% returns on your money in retirement you probably should supplement your income for as long as you can work after retirement.

This last point is especially true today. I know many P&Gers who retire at 55 but that is just not realistic in most situations. Think about working until 65 even if you can "retire" from a Fortune 500 company and then make some money while you are young and healthy to help supplement retirement spending.

I am much more optimistic about 2009 and the new administration so I wish you all a happy and prosperous 2009 full of abundance!


Dale said...

Interesting... the thing I keep coming back to is that this is my second recession I've gone through in my working career. You know that there were bubbles out there... dot coms in 2000, housing in 2008. I want to know what I can do next time there's a bubble!

Karen said...

talk my husband into waiting until 55, okay? he thinks 48 has a better ring.....

Tom said...

If Jim can pull off 48 after this recession - more power to you!