Financial Planning

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What Do Young Adults Need to Prepare for Their Future?

Posted 5:32 PM by

Are they asking how much should I save or where can I get the money to save?

My most recent blog, “If you have the time you don’t need the money,” generated discussion in a number of different directions.  My intent was and is to find ways to get young adults interested in saving for retirement while they are still young.

Someone pointed out that we should just tell a 25 year old that they need to save $1 for every $10 they need in retirement.  Keep it simple.  I agree as long as the 25 year old has already completely accepted that they need to start saving.  This simple statement can be effective if they are just looking for guidance about how much to save.

Some young adults (and many older adults as well) have more goals than money.  They may be making $30,000 but they have goals that call for them to make $40,000. Saving $3,000 for a distant expense like financial independence may be very easy to push into the future.  After all, when I am fifty five years old I will already have furnished my home, my children will likely be out of the house and I will have reached my highest earning potential.  It will be a lot easier to save later.

These young adults have more ideas for using their money than they have money.  As they decide how to prioritize sharing, saving and spending they should realize that postponing savings requires them to save 15 times as much each year.  Will their financial situation be 15 times as rosy in the future?


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If You Have the Time, You Don’t Need the Money

Posted 10:09 PM by

It is important to help people, particularly young people, understand how time is on their side.  Most people have an intellectual understanding that starting to save when they are young is helpful.  I do not think most people (even older people) understand just how much time can help.

How is this?

Which is better, saving $1 for every $10 during financial independence or $15 for every $10?

If you want to achieve financial independence ten years into the future, you need to save $15 each year for every $10 you want to spend each year in the future.

If you want to achieve financial independence forty years into the future, you need to save $1 each year for every $10 you want to spend each year in the future.

To retire at 65, start at 25 and contribute 1/15 of what you have to contribute if you start at 55.  Interest on your contributions provides the rest of the funding for your financial independence.

How do we get there?

On pretty much every financial topic there are differences of opinion.  To make my calculations, I chose these assumptions:

  • Average earnings rate 7%
  • In retirement, you can spend 5% of your nest egg each year to have it last 30 or more years

If we start with a plan to draw $100,000 from our retirement savings in addition to any pension and social security we choose to consider, we need $2,000,000 at retirement.  That represents spending 5% of your retirement savings.

Next we determine how much we have to save annually to accumulate $2,000,000 at 7%.  You would have to save $144,755.01 annually. That translates into $14.48 per $10 of annual income in retirement.  I rounded to $15.

But what if we have 40 years to save the $2,000,000?  Now you would have to save $10,018.28 annually, or $1.00 per $10.

For a second example, we might find someone seeking to draw $30,000 each year.  To generate $30,000 with a 5% rule, we will need to accumulate $600,000.  Over 10 years, our client would have to save $43,426.50 or $14.48 per $10.  Over 40 years, the client would save $3005.48 per year or $1.00 per $10.

Is that a compelling way to talk about saving early?  I would love your feedback.

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