Bad reasons not to save

Jonathan Clements, who writes for the Wall Street Journal, had a somwhat amusing article on September 9th.

His title was, “Six Bad Reasons Not to Save for Retirement.” I couldn’t agree more.

Bad reason #1: I still have plenty of time.

Say you start saving for retirement as a diligent 25 year old. Your goal is to have $1 million by retirement, which you plan to start at 65 years old. You’d need to save around $846 a month for 40 years.

If you wait until 35, you’d have to save 70% more a month, or $1,441 per month for 30 years. If you wait until you’re 45, you’d have to save 322% more a month, or $2,726 per month for 20 years. If you wait until 55, you’d have to save 803% more a month, or $6,791 per month for 10 years.

It pays to start as early as possible. The longer you wait, the more painful reaching retirement will be.

If you think you’ll earn more money as you age and have more money to save later, you’re right on the first issue but wrong on the second, because I almost guarantee you’re expenses will go up faster than your income as you age.

Start saving as soon as you can, as much as you can, and you’ll reach a bigger retirement with a lot less stress and strain.

Bad reason #2: My house is worth a bundle.

See my previous post on this subject. Counting your home as a retirement asset usually doesn’t work out.

Bad reason #3: My investments are doing great.

They may be doing well, now, but what matters is how they do over the full length of your retirement years.

For those who retired in the late 1990’s with enough money, the sell-off during 2000-2003 slammed them right back into working again. It’s not enough to have a lot of money at the peak.

A retirement plan should be set up with a margin of safety, not merely “enough money to get by as long as everything goes well.”

The best way to get there is to save continuously into your retirement plan (which should be based on reasonable assumptions).

Bad reason #4: I’ll receive a fat inheritance.

Very few people, after inheritance taxes, will receive enough money to retire on, perhaps 1.6% as Clements suggests.

If you are part of that 1.6%, congratulations.

If not, get to saving.

Bad reason #5: I have a pension.

41% of households currently have a defined-benefit pension plan, whereas 62% of workers expect to receive a pension.

If you actually have a pension and are not part of the 21% of “land-of-fantasy” types who expect a magical pension to appear in the future, be sure it will cover your actual expenses in retirement.

Also, keep in mind that, because of recent accounting pronouncements and the expense of defined-benefit plans for companies, many defined pension plans are going the way of the dodo.

If you don’t have a pension or are part of the 21% who are clicking your heels for the future-fantasy-pension, get to saving.

Bad reason #6: I’ll work in retirement.

This is actually not a bad idea.

I love my job and don’t plan to stop working until I’m unable to work, so I can sympathise with this argument.

But, many people don’t want to or can’t work into their 70’s and 80’s.

Planning to work into your 60’s makes sense, but assuming you’ll be capable of working into your 70’s and 80’s is gambling where the odds are against you.

Plan to work if you can and want to, but have enough money saved in case you just plain can’t.

Saving for retirement is like paying for insurance. You may never make a claim or need as much money as you’ve saved, but that doesn’t mean you don’t want to make regular payments so you are safe and secure in your old age.

Save for retirement as soon as you can, as much as you can, and as regularly as you can. You’ll sleep better and have greater peace of mind.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Do you include the value of your home as a retirement asset?

An excellent article in the Wall Street Journal on September 2nd, by Glenn Ruffenach, echoed what I’ve been telling people for years: you may not want to count your house as a retirement asset.

As the article states, many people have been thinking of their home as an investment asset they can cash in when they retire. The thinking goes like this, “If my budget gets tight in retirement, the equity in my home will serve as a safety net.”

In fact, a study by Bell Investment Advisors in California “found that 68% of surveyed 60-year-olds count their personal residence as a retirement asset. And of that 68%, one in four say their home represents half or more of their retirement savings.”

The problem is that home prices are falling nationwide, the decline is accelerating, and it’s particularly bad in the same places where real estate prices climbed the most, like California, Florida, Nevada, and Washington, D.C.

As the article states, “If the value of your home falls…there’s less equity to help finance your retirement.”

There are two problems with thinking of your home as an investment asset.

The first is that most people are unwilling to give up their lifestyle to cash out their home and move into a smaller place.

The second problem is that higher interest rates, which are not unlikely in the future, could make house prices fall even further and dramatically decrease the payout of doing a reverse mortgage (having the bank provide you with monthly payments as they acquire the equity in a home).

Counting your home as a retirement asset may not be prudent. It turns out that few people can turn the value of their home into cash flows during retirement.

If you count your home in your net worth or as a retirement asset, you may want to reconsider.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.