Financial Life After Yale: Your Financial Dashboard (Continued)
Your money path. In my previous Financial Life After Yale post, you’ve read that – as each of us navigates our unique life-path to/through retirement – we actually have our own personal financial dashboard. On it, we can find levers and dials – choices that we can make over the years – that change our money picture and can help us catch up:
- How much you earn
- How soon you choose to start saving
- How much (of your earnings) you choose to save
- How you choose to invest (risk tolerance; asset allocation)
- How you choose to live
- When you choose to retire.
My last post covered the first three of these: what you earn, when you start saving, and how much you set aside each year).
In your money-planning math, each of the other levers and dials (how you invest, your lifestyle, and when you’ll retire) represents additional ways to change – often dramatically change — what you’re left with at retirement.
How you invest. You can be proud of having a job, starting to save early, and regularly setting aside a goodly portion of what you earn. But for most of us, that won’t be enough to build a solid retirement nest. Unless we’re willing to save huge portions of what we earn – and to do so for the rest of our careers – we need to find a way to deploy and grow what we’ve saved. In today’s world, putting our savings under a pillow may allow us to listen contently to crisp, crinkly singles, fives, tens and twenties under our heads as we fall asleep — but it won’t get us to/through retirement.
Here’s an example of why.
Let’s say that you’ve decided that your retirement number – the amount that you think you’ll need to have set aside for the final decades of your life after you retire – is $1,000,000 (in today’s purchasing power). Let’s further say that you expect to have a 45-year career of earning money and saving some of it. If, in such scenario, you were merely to squirrel-away your savings each year (i.e., take no financial risk, and put it under your pillow), in order to save $1,000,000 you would need to save an average of $22,222,222 (and 22 cents) each year! Yikes!
You can gain some safety by putting your savings into Federally-insured bank accounts, or by purchasing Treasury securities, but – at today’s low interest rates – you gain virtually nothing in terms of growing your savings.
(And it’s even worse than it seems, because inflation will surely take away a chunk of your purchasing power, year-in and year-out.)
How can you attack and diminish this daunting annual savings hurdle? By actually allocating (rather than hoarding) a substantial portion of your annual savings into investments, and by accepting that – with any investment – comes risk. Higher returns on your investments almost always come with heightened risk. Generally-speaking, the more risk you’re willing to accept, the greater will be your expected longer-term returns (i.e., investment growth) – but the greater the risk, the bumpier the ride!
If, over the coming decades, you can grow your savings (i.e., by allocating a portion of your savings into investments) and grow the purchasing power of your investments, you can hugely-reduce the amount that you’ll need to save each year. If – in this example — the amounts you allocate into investments grow at rates consistent with historical norms, your $22,222/year average savings hurdle might turn out to be less than $10,000.
For more on risk tolerance and why it matters, see this recent article:
So…back to your financial dashboard.
If you find that you’ve fallen behind on your financial path, you can dial up risk and reasonably hope (if you haven’t been foolish) to accelerate your eventual investment growth, in order to help yourself catch up.
How you choose to live; your lifestyle. Sometimes you can get caught up in the here-and-now of money. Up-and-down markets can freeze you. In the short run, you can feel powerless to take back control of your financial path.
But there’s usually at least one dial or lever on your dashboard that is all yours. But it takes a while to see the results. What’s that? It’s how you choose to live.
Take my own circumstances, for example.
I drive a Honda Fit with 152,000 miles on it – and about that many dings on the outside. But it still gets mid-30s MPG, and it’s my own sweet little car! I don’t care that it’s plainer than the cars driven by almost everyone else I know. It has cruise control, and a radio and CD-player and power windows. And the back seat folds down so that I can haul stuff around.
And here at Yale, I live in a fourth-floor walk-up. One extra bedroom, great views of Branford, comfortable but hardly a grand entertainment space. Yet it’s wonderful!
If you fall behind on your financial path, seek out those money-related changes that you can make simply and inexpensively. You need to make those changes and then pay little or no attention to how others have chosen. This should be about your own comfort and contentment, not about keeping up with others. (Come to think of it, you should consider making those same changes whether or not you’re behind on your financial path!)
From cars to roommates to swearing off Starbucks to brown-bagging lunch to cutting the (cable) cord, there are so many little and not-so-little lifestyle changes that you can make. It adds up!
On your financial dashboard, this may be your subtlest and yet most-profound dial or lever.
When you choose to retire. Back when I had hair, and when it wasn’t gray, I had planned to retire when I was in my early/mid 60s. I hadn’t carefully thought out whether I could afford to retire then, nor why I would want to. It was just my plan.
Like so many things that happen on one’s life-path – financial and otherwise – changes came. A few years ago, Yale made me an irresistible offer: to come back, live in Branford as a Resident Fellow, and work on student/alumni relations. The pay was (and is) quite a bit less than what I’d been making, but in two key – and wildly-differing — respects it was one of the best things that could have happened.
First of all, the work is incredibly meaningful. So much so that it dwarfs the money side of things. Can you imagine how wonderful it is that Yale has given me and other alums the chance to sit down with students and alums all over the country all talk frankly about money?
Secondly – and this brings us back to Financial Life After Yale – the chance to do meaningful work for (what I hope will be) an extra decade is a financial game-changer. Instead of starting to dis-save (i.e., by retiring) at age 63 or 65 or whenever, I’m still earning money and delaying the time when I’ll start to draw on my retirement savings.
Why is this relevant to you? Because – as you plan for retirement, and as you plan for how to save for retirement – adding a few years to the amount of time you’re willing to work can make an enormous difference. At least three good things can happen. First, you delay dipping into your own retirement savings. Second, you may even be able to save some of the earnings from those “extra” years of work, and therefore bolster your retirement savings. And thirdly (perhaps best of all), you may find career-related meaning – or added meaning – for longer.
Where do we go from here? Hear endeth this lesson. But I’ll be back soon….with some intriguing money-related rules of thumb! Meanwhile, as you navigate your path toward Financial Life After Yale, keep your eyes on the road!