Saving for Retirement

Let’s start with a couple of trick questions: What is the difference between a 1% return on one thousand dollars and a 1,000% return on one dollar? Nothing. Next, does it matter? Yes. And, who has more money in ten years: you or someone who invests $10,000 in the stock market today? No one knows. Finally, what is Autophagy and does it have anything to do with your retirement? Autophagy is how cells recycle damaged, diseased, or worn-out bits of microscopic machinery into new, fully functional organic stuff, see 2016 Nobel prize for Physiology or Medicine, and no it does not affect your retirement. Yet.

What does all that have to do with me you may be asking. If this discussion is framed in a retirement conversation, then these are all important questions. The likelihood that you will receive a 1,000% on anything is extremely rare, but a 1% return is much more likely although not as exciting. What is a more reasonable return? If you were to invest part or most of your retirement savings in the stock market, the average annual return since its inception is about 10% when we adjust for inflation over that time period this brings the return down to 7%. At that rate, your investment nearly doubles every ten years! Before you say the stock market is too risky, remember that stable value funds are only found in retirement plans. These are relatively conservative investments backed by a ‘wrap,’ or an insurance contract, that backs a stated positive return which are subject to the financial strength and claims paying ability of the issuer, usually an insurance company. This gives you a very valuable, relatively safe option that is not available outside a retirement plan.

If you don’t save anything or you save very little, returns don’t matter. The biggest determinant of your retirement account balance is simply how much you contribute. You cannot invest your way to retiring without putting in a substantial amount of your own money. So, how much should you contribute? That varies depending on the person. Why not do it now and adjust it as you calculate your needs? Most retirement plans are very flexible and allow for regular increases or decreases.

One rule of thumb is 10% of your pre-tax income. There are many reasons this may be a good starting point. One reason is that this may help you replace approximately 50% of your pre-retirement income if you start early enough (20’s or early 30’s) and earn about 3 – 4% per year – a reasonable return according to many investment providers when reviewing past market performance. Social Security may replace about a third of your income and the remainder would either be a reduction in your income or made up from other savings or investments.

As an advisor for over seventeen years I have heard many excuses for not saving, some bragging about investment returns, good & bad investment ideas, a variety of strategies and other interesting points, but I have never heard anyone say they have too much money!

So why not start paying yourself today by contributing to your own retirement?