Sunday, January 23, 2011

The New York Times has a fairly decent article on saving for retirement over at CNBC:
What would you do if your financial planner prescribed the following advice? Save and invest diligently for 30 years, then cross your fingers and pray your investments will double over the last decade before you retire.

You might as well go to Las Vegas....

Reaching your goal is highly dependent on the power of compounding — or the snowball effect, where your pile of money grows at a faster clip as more interest (or investment growth) grows on top of more interest....

“What the wise person does is save a large amount of money when they are young,” said William Bernstein, author of "The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between" and other investing books. “And if they can do that, when they are older, they can cut back on their equity allocation. When you’ve won the game, you stop playing the game.”

I have noticed that financial experts such as Dave Ramsey, author of The Total Money Makeover: A Proven Plan for Financial Fitness, or Suze Orman have cut out some of the talk about sky high returns but not enough. If I hear Orman say one more time that the $1500.00 that a viewer wants to spend on a trip would turn into hundreds of thousands years down the line, I think I'll scream. Seriously, that $1500.00 may not do all that well, given inflation,while the trip may bring lasting pleasure. Saving is a good thing to do, but falsely letting people think that just by saving a few thousand a year, they will be a millionaire someday is often like telling them to head to Vegas.

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38 Comments:

Blogger Cham said...

Figure that trip will expand your global horizons and be quite educational. One can bring their new knowledge base back from vacation to their employer and become even more valuable an employee, thus earn more money. Otherwise, one becomes a lump in a cubicle with not much to add to the team. Take the darned trip.

11:37 AM, January 23, 2011  
Blogger MB said...

If you're female, you could marry a man who makes a lot of money. That would work as a retirement scheme.

That option isn't quite as freely open to men (although some are able to do it). Most men have to work for their money and retirement.

1:22 PM, January 23, 2011  
Blogger MB said...

Maybe Suze Orman should include that fact of life in her retirement advice, but I doubt somehow that she will.

And it is real, not some misogynistic rambling. It is absolutely real.

1:23 PM, January 23, 2011  
Blogger JG said...

Women will be cared for regardless of what they do - or don't do - for society.

If you are a woman, don't worry about it. Almost all of the old homeless people are men, and there is a reason for that.

Heather Mills and Ivanna Trump haven't done jack shit for society and they are spending money like water ... Wheeeeeeee!

And believe me, they will always be cared for in life no matter how much they spend. Same with Jane Average. It's life.

5:39 PM, January 23, 2011  
Blogger JG said...

If you are a man, however, you better be a really, really good provider if you are going to chivalristically shovel your money towards women. I mean REALLY good, because you are going to hit speed bumps in life that you didn't anticipate, and your income at age 50 or 60 may not be what you expected. And women may well NOT help you when you are in need, I've seen it over and over.

But ... I say to the men who are bragging about paying out humungous sums to women: Let's see what happens in 30 years, Revered Dude!

6:19 PM, January 23, 2011  
Blogger JG said...

I've also seen women who have married up - sometimes obnoxiously married up - look at me with complete incomprehension when I say that women marry up. Absolute, complete, full incomprehension. They really don't understand it.

But somehow it all works out. Most women marry up, or try to. Most men who have wives who earn more on a long-term basis (not just while one is studying for a degree or whatever) are shown more and more disrespect in the course of the marriage until Pumpkin finds a guy who earns enough. The abuse gets worse and worse in the course of the marriage, because she is frustrated that she sold the Golden Vagina for so cheap.

6:23 PM, January 23, 2011  
Blogger Amy Alkon said...

" Seriously, that $1500.00 may not do all that well, given inflation,while the trip may bring lasting pleasure"

That's prudent spending to me.

12:33 AM, January 24, 2011  
Blogger Larry J said...

My brother-in-law is a wise man. I'm not certain he even graduated high school but when it comes to life, he is quite wise. When my wife and I married 27 years ago, he told us that the secret is to find the right balance between saving for the future and enjoying life today. You can't just be a miser and hoard every penny in hopes of having a good retirement. You'll be miserable and there's always the chance you won't make it to retirement. On the other hand, if you blow all your money "living for the moment", you may never be able to enjoy retirement.

My wife and I have always lived below our means. We've both worked throughout our marriage. Our house is paid for, we max out our 401K and Roth IRA each year and put more money aside as well. We also enjoy life (we're leaving in a month for an asian cruise). Our retirement investments are just over the million dollar mark.

We've had to save because neither of us has any pension plan and neither trusts Social Security to be there for us. Our retirement is what we make it.

9:41 AM, January 24, 2011  
Blogger dr.alistair said...

for your investment to double in ten years you would have to get around 7% per annum.

where does one get that sort of guaranteed return?

2:17 PM, January 24, 2011  
Blogger AJ Lynch said...

It's funny that one expert recommends we save 8% of our earnings yet we already "save" 12.3% via our social security "contributions". How come none of these financial experts ever point that out or ever wonder how is it that we give Uncle Sam 12% already yet it's not enough?

7:05 PM, January 24, 2011  
Blogger Mike Finn said...

I highly recommend the book cited by Wm Bernstein, An Invetor's manifesto..." I am a professional economist and I have given it to my adult children. Any can understand him, yet his advice is based on a sophisticated knowledge of finance. Highly recommended.

7:13 PM, January 24, 2011  
Blogger Mike Finn said...

This comment has been removed by the author.

7:14 PM, January 24, 2011  
Blogger pst314 said...

Work hard, live frugally, invest wisely...and "share the wealth" liberals will seize it to benefit slackers.

"The grasshoppers agreed that the ants should share."

7:23 PM, January 24, 2011  
Blogger rhhardin said...

It's a shame that somebody didn't think to save a penny 2000 years ago.

With compounding, nobody in the world would have to work at all today.

7:23 PM, January 24, 2011  
Blogger Eric said...

That $1500 could easily end up to be $750 in constant dollars. There's a lot of merit to the idea as the baby boomers spend down their retirement nest eggs and trade down housing we'll have a few Japanese-style "lost decade(s)".

The other possibility is the government will means test social security. Or worse, as in Hungary when the government ran out of money it just appropriated everyone's retirement account. Oh, you saved for your retirement? Sucker.

7:24 PM, January 24, 2011  
Blogger Lee J. Cockrell said...

If you're male, you could marry a man who makes a lot of money. That would work as a retirement scheme. In some states. Sorry Tennessee!

7:26 PM, January 24, 2011  
Blogger Tex the Pontificator said...

JG said, "Women will be cared for regardless of what they do - or don't do - for society."

Not so. Women who do not make adequate provision for themselves during their working years (whether through savings, investments, marriage, or however) are at risk of poverty in old age. My wife and I are personally acquainted with just such a person. She mostly (barely) held together a middle-class life when younger, but now in her 70s, she lives on very little in a house she cannot maintain. She has no hot water because of the expense of bringing certain utilities up to code, which would have to be done before a new water heater could be installed. Some of us did pay to fix her badly leaking roof, improved her interior plumbing, and helped clean out debris, but she does not live the way I would want anyone in my family to live. She lives in an area where the homes are close to 100 years old but are worth much more per square foot than in most other areas. She's unwilling to sell the home she's lived in her entire adult life.

7:33 PM, January 24, 2011  
Blogger Florida said...

"Saving is a good thing to do, but falsely letting people think that just by saving a few thousand a year, they will be a millionaire someday is often like telling them to head to Vegas."

And there's that pesky problem of theft that you have to deal with.

One of the things you haven't dealt with Dr. Helen is the possibility that the government will confiscate your retirement accounts.

Don't think they'll do that?

They're already meeting in Washington D. C. to discuss privately how the federal government can forcibly convert your 401k, 403b and IRA's into annuities.

If you're saving in a way that the government can track .. then that savings is at risk.

Because they want to steal it.

http://hotair.com/archives/2008/10/23/democrats-to-kill-401ks-for-privatized-social-security/

7:58 PM, January 24, 2011  
Blogger Tim said...

The best advice I received in my RPI MBA program came from our capstone course strategy professor, the late Jean Lynch, who told us "You can marry more in a minute than you can make in a lifetime" and she admonished us for not spending more time at Skidmore...

7:59 PM, January 24, 2011  
Blogger Milwaukee said...

In addition to the wise advice of saving some, and enjoying life some, I would add, take care of yourself physically, emotionally and spiritually. While healthier people do enjoy a higher quality of life than the chronically ill, there is another advantage. When healthy people finally get their terminal illness, they tend to decline and die faster than the chronically ill would. Look at how quickly Mr. Rogers progressed through his terminal illness. Plus, being healthy does make life's challenges a little easier to handle.

My plan is to enter a second career that I can do until I am no longer able to work. Retirement just sounds boring.

While my marriage didn't work, there is a lot to be said for successful marriages. One study noted that men in a loving marriage recovered from heart surgery faster than either single men, or men not in a loving marriage. So if the situation is "It's cold and lonely here, a) without you or b) with you", do it alone and save yourself the aggravation.

8:10 PM, January 24, 2011  
Blogger jmatt said...

Doubling your money in ten years is not difficult. In fact, with a compounding interest rate of 7.2%, your investment money doubles every ten years.

8:29 PM, January 24, 2011  
Blogger MarkD said...

In the end, we're all dead.

I managed to take my wife and kids to Japan three times over the course of twenty years to see her parents before they died. I could have blown it on a nice new car. I could have stuck it away for retirement. I wouldn't trade those weeks for anything.

My wife was able to stay home when the children were young. As Mastercard says, priceless. It's not a guarantee, but they are all doing well.

I won't, thanks to the market crash, retire with a million in my 401K, but I've got a couple of modest pensions so we won't starve until they are inflated away.

Like Larry J said, balance is the key. You can't take it with you.

8:48 PM, January 24, 2011  
Blogger globallycool said...

It is important to know that money you spend wisely, like the trip, has been done -- for sure.

Investing, "might" lead to future rewards like even more trips. But, you will be older and may never go, you could get sick or die.

Even after successfully investing for years, a bad decision and you've lost it. It could be stollen by friends or family.

Save AND live

Do not always delay gratification

8:49 PM, January 24, 2011  
Blogger Iapetus said...

@dr.alistair at 2:17 pm: for your investment to double in ten years you would have to get around 7% per annum. where does one get that sort of guaranteed return?

It's not "guaranteed" (in life, what is?) but the average annual return of the Vanguard Wellington mutual fund since its inception on July 1, 1929, has been 8.18%. And over the last decade, which includes two major recessions, the fund's ROI has been 6.20%. That sounds like a pretty darn good track record to me. I'm sure there are other good investments out there. You just need to look.

9:57 PM, January 24, 2011  
Blogger boinky said...

I lived through the inflation during the Carter administration, and came home from overseas to find my savings were worth half of what they were when I had left three years before.

I have savings and am retired, but figure Obama will do the same to "shrink" the national debt, so excuse my cynicism...

10:02 PM, January 24, 2011  
Blogger ken in sc said...

Twenty five years ago, I married a woman who I was pretty sure would make more money than me. One reason I did this was because I had been married twice before to women who thought I was their cash cow. I have not regretted my final choice.

She has not turned on me for making less money than she does, in fact, she has told others how grateful she is to have me. Actually, I am retired now from two careers while she is still working, and she has no complaints about it. We pay our bills proportionately.

My step-father once said to me, “You can fall in love with a rich girl just as easy as a poor girl.” I didn't follow his advice the first two times. I should have.

10:06 PM, January 24, 2011  
Blogger jay said...

We've told our daughters many times that we didn't do a very good job of teaching them how to manage money. They reply that they got memories.

10:39 PM, January 24, 2011  
Blogger W.C. Varones said...

Buy physical gold.

You'll be glad you did when the government means-tests Social Security, or worse, nationalizes retirement accounts.

10:41 PM, January 24, 2011  
Blogger t.vago said...

$100 placed at 7 percent interest compounded quarterly for 200 years will increase to more than $100,000,000 — by which time it will be worth nothing. - Robert A. Heinlein

10:51 PM, January 24, 2011  
Blogger Milwaukee said...

My dad always told me not to expect to collect Social Security, that it was going for widows, orphans and disabled now. But, if Social Security is means tested, then those who haven't bothered saving will collect disproportionately to those who saved. Savers will be punished, while non-savers will be rewarded. Then many will really object to Social Security. How will it be different from general welfare? Where is the incentive to save?

10:54 PM, January 24, 2011  
Blogger nofuckinwayyouspammers said...

@dr.alistair at 2:17 pm: for your investment to double in ten years you would have to get around 7% per annum. where does one get that sort of guaranteed return?

There's no guarantee, Doc. In fact, one solid principle of finance is that expected risk drives returns. I have some investments paying 7.75% but there's quite a bit of risk to the capital (they are real estate private placements -- owning a share of a new retail building which is leased to the tenant. The types of risk we are exposed to here should be obvious).

Right now, investors can find few such investments... but meanwhile, the sufficiency of public pension funds is calculated using, generally, an 8% discount rate. (A few fund managers have actually tried to obtain such returns, which is why you see some eye-opening Madoff-type risks in some public pension funds). Corporate pension funds would do the same but are locked out of that option by regulators.

There's a bigger concern for investors and savers. Right now, the US dollar contains about 33 cents of value and 67 cents of unrecognized depreciation, thanks to the money-supply inflation to date. This, along with the temptation to pay off creditors in cheap inflated dollars, is going to be irresistible to our incontinent political class. So you need to be thinking about the certainty of high inflation and the possibility of hyperinflation in years ahead.

Before you take that vacation, I'd make sure you had food and fuel to survive for a year (inflation cycles may run three or four years, but hyperinflation is unstable and, absent Robert Mugabe, is usually over in less than a year. Obama is an economic illiterate, but he's not Mugabe.

I hope.

12:39 AM, January 25, 2011  
Blogger dwbosch said...

My Dad saved from his private business, bought a house for our family and his dad with a third as investment property, and planned ahead for college for 5 kids. He was worth about $3 million when mom left him and took all three houses, 3/4 of his retirement, and $50,000 cash to pay her credit card bills off in lieu of alimony. Marriage seems like a bigger roll of the dice than investing, Dr. Helen.

7:41 AM, January 25, 2011  
Blogger Larry J said...

One of the things you haven't dealt with Dr. Helen is the possibility that the government will confiscate your retirement accounts.

Don't think they'll do that?

They're already meeting in Washington D. C. to discuss privately how the federal government can forcibly convert your 401k, 403b and IRA's into annuities.


Yes, there are such discussions in DC. And I predict that there will be literal bloodshed if they try to do it. You'll see politicians swinging from lampposts and I'll be bringing some of the rope.

9:48 AM, January 25, 2011  
Blogger Jenny said...

Dave Ramsey still talks about 12% returns on mutual funds and I wonder what planet he is on. I also think he tends to build up false hope in what can actually be saved on a median income.

I believe in his general message of paying for what you buy and being debt free, but the fact is that if you make a median household income, have some children, and own a home, you will generally be able to save enough to pay for the next thing that breaks. Now that's a good thing, but it is not the life of luxury that Dave presents. It is also not just a couple of years of hard work, but several decades of discipline.

10:03 AM, January 25, 2011  
Blogger Micha Elyi said...

My financial advisor is Lenore Weitzman and Lenore Weitzman says a man can easily push his standard of living 43 percent higher simply by getting a divorce.

When Lenore Weitzman talks, legislators listen.

3:26 PM, January 25, 2011  
Blogger Larry J said...

It is also not just a couple of years of hard work, but several decades of discipline.

That's the essential point in building your own wealth - it takes time. The younger you start, the easier it is. However, when you're young, you usually have a low income so little money is left over to save.

My wife and I started saving in a meaningful way in 1990. We paid off our debts as quickly as possible and resisted taking on additional debt to the degree possible. We followed a simple strategy - pay off one debt quickly then roll that payment over to the next debt. At the start of 1990, we had a house payment, two car payments, two student loans, and a small credit card balance. By the end of the year, we'd paid off everything but the house.

Since we're both over 50 and empty nesters, my wife and I can each put away $6000 into a Roth IRA and $22,000 into our 401Ks each year. We max them out and put away as much more as possible. We've done that for quite a few years now and the results add up. It has taken 20 years to get to where we are now but the results are worth it.

In the meantime, we still enjoy life while we still have our health. A month from today, we're leaving on a 4 week vacation to Asia. It's an expensive vacation but we're not waiting until we retire to have some fun. I have a brother who is 59 and diagnosed with terminal cancer. Retirement isn't quaranteeded to anyone. If you want a guarantee, buy a toaster. Real life doesn't give many guarantees other than death, taxes and lying politicians.

3:26 PM, January 25, 2011  
Blogger dr.alistair said...

as a few poster have pointed out, there are few guaranteed rates outside of bonds, which means that investment is a gamble.

on top of that, the government conspires to take what we try to protect in legal ponzi schemes, by changing rules on the fly.

i`m going dog-sledding overnight on thursday with my wife as a mini-vacation while we put the real dollars aside for our children`s college tuition which as many here know, is guaranteed.

4:24 PM, January 25, 2011  
Blogger Milwaukee said...

while we put the real dollars aside for our children`s college tuition which as many here know, is guaranteed.

ho ho ho. That's a chuckle. Who is to say that the money you save today will begin to cover tuition needs? Further, because you have saved money, you will get less aid, because you don't need as much. I was just reading about wildly inflating tuition, while recent studies show many students not learning much of anything in the first two years of college. College is a roll of the dice. Degrees in Computer Science and Engineer and Nursing have pretty reasonable expectations of earning money. Many other degrees are very questionable investments. Sooner or later employers are going to realize that they can hire high school diplomas or associate degrees and get the same product at less than bachelor degree prices.

Children are a good investment, but good choices still need to be made. Music lessons, some sporting lessons, travel, language lessons, those are good in many intangible ways. I am sure there are other activities which are reasonable priced and pay high dividends for young people. Let the buyer be ware.

5:29 PM, January 25, 2011  

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