Do you know how much to save?
This is a question I am asked frequently. I respond with “it depends” followed by a series of questions. There are many rules of thumb used to answer this question. A “rule of thumb” is a rough and easy estimation. It is not based on a specific situation.
Following are some of the questions that should be asked. What is the purpose of the expenditure? How important is the expenditure? Is the expenditure something that is needed, wanted or just a wish? What are the alternatives? Is the cost known? When will the expenditure be made? An estimate can be calculated once the variables are identified.
The savings and the variables need to be monitored. Life is a journey with many twists and turns. There will be many unanticipated expenditures, opportunities and windfalls. You need to identify what you did not plan for so that you can identify when you need to change what you are doing
Financial cycles may impact your ability to meet your expectations. The available rates of returns will vary. If you anticipated too high of a rate of return, you will save less than you planned. If your earnings do not grow as much as you anticipated you will have less than you expected. If your living expenses increase more than your income you will not meet you goals. If the reverse happens you will save more than you planned. That is easier to deal with than not saving enough.
You should monitor your savings and review your goals at least annually. The sooner you adjust to adverse events, the easier it will be modify what you are doing and improve your ability to achieve your goals.
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Most under 45 underestimate their life expectancy.
This was the finding of a survey by the Society of Actuaries, as reported the Financial Advisor Magazine August 1, 2012.
Many people forget that the average represents the middle. That is half will live longer and half will not live that long. The life expectancy for newborn American males increased from 66.6 years to 75.7 years between 1960 and 2010. During the same period the life expectancy for newborn American females increased from 73.1 to 80.8.
A majority say they would be very or somewhat likely to make significant reductions in their living expenses if they thought they would live 5 years longer than they expected. “More than half of per-retirees would also use money they otherwise would have left to heirs or downsize their housing.”
The survey also found many underestimate their planning time-line when making major financial decisions. Retires generally look 5 years into the future and per-retirees look 10 years into the future.
The report concludes this can result in underfunding for retirement. Understanding the increased life expectancy, the current state of the economy and the volatility of the stock market require people to do a better job of managing their finances and planning for retirement.
