Do Your Future Self A Favor


I found a couple of thought provoking, personal finance articles to write about today. One was from White Coat Investor (WCI) that pondered the question how much is enough and one by Jonathan Clements that argues for not living your 20's like they are an extension of your college years, that you should instead consider waiting until your 50's to travel and pursue your passions.

To the point of having enough, the first answer might be whatever you think you need for retirement. It's not that the idea of a retirement number is wrong but frequently people have the wrong amount for their number in mind. Also while you may have some number in mind, it is the number you end up with that will be your reality.

WCI also includes some general rules of thumb like 25 times your annual spending saved in order to take out 4% of your savings. I like that they focus on spending not income which we've debunked here a bunch of times. Assuming Social Security pays out what it is "supposed to," how much will you get, and what is the difference between that and how much you spend? That gap is where your number (the size of your portfolio) comes into play. Regardless of whether your portfolio appears to be on track to being big enough or not, will you have other streams of income to fill the gap thus reducing the burden you place on your portfolio? If you don't think you will have other income streams can you create any? Any burden you can off of your portfolio can make you less dependent on the stock market or more accurately more resilient in the face of normal market ups and downs like if by virtue of all the details of your circumstance you only need to take 1.5% out to fill your gap.

If you have $250,000 in your mid to late 50's and think you need $800,000 to fill your gap (at a 4% withdrawal rate that would be $32,000) you're probably far behind where you should be but that can be enough time to make a very big dent in the short fall by maxing out various savings vehicles if you're able. If not, you have plenty of time to figure out how to spend less and consider downsizing in order to manage your reality. To put some numbers to the potential for catching up; $24,000 to a 401k, $6500 to a spousal IRA, $6500 to a Roth (subject to income limits), $7900 to an HSA adds up to $44,900/yr times however many years until you plan to retire; say it's eight years another $359,000 added to the existing $250,000 plus whatever growth you get. You'd still be short of $800,000 but you'd be much closer. Admittedly $44,900/yr would be difficult but it illustrates the potential (the amounts assume catch limits and once you get to 65 you can't contribute to an HSA anymore).

If you're doing this exercise you may also want to rerun the numbers assuming some sort of big hit to Social Security just in case. You should probably have a sense of what you're numbers look like with a big hit to your payout, especially if SS will play a big role in your retirement.

The Clements article makes the point that by hunkering down in your 20's you get a much greater benefit from compounding when you start saving in that age range versus not starting until your 30's. Another important point is that often in our 20's we turn out to be wrong about what we think we want. This was absolutely true in my case. I knew I loved markets but I started out (post college) in the wrong part of the business for me (cold calling people all day into the evening to pitch them stocks).

Clements argues that we start to figure ourselves out later in life than our 20's and in that light if we're going to ever goof off (his term), that we should be older because we are more liking to spend time goofing of on the right thing so we'd get more out of it at 55 or 60 than 22.

That either resonates with you or it doesn't but there is no arguing the compounding benefit. He crunched the numbers and starting at 22, saving $821/mo you'll have $1 million at 55. Starting at 32, you'd need to save $1215/mo to have $1 million at 65. I'm going to say something is not right with the above, it's the same 33 years but maybe I am missing something but the take away is you potentially are sitting on a big piece of money at a much younger age which will give you more optionality.

Maybe, you go goof off for a year or two at 55 and in the interim find something that you're more passionate about to do as a second career even if it pays less. You have a better chance of having that choice. You may end up not needing that choice but it would be nice to have it.

Tying back in the WCI post, maybe the figure is not $1 million but some other amount that will get the job done for you. Whatever number you think you need, if you're 90% of the way there at 50 or 55 you can look back and thank the 25 year old you for making a couple of good decisions back then.