As foolish as the the title may sound, there may be a new generation of hyper investors that are unwisely maxing out their 401k’s, Traditional or Roth IRA’s, and their children’s college funds. For these individuals, delaying pleasure so that they can have a bountiful retirement is an obsession.
In my opinion, there is a general expectation in our country that as we grow older, our standard of living will increase.
On one end of this spectrum are individuals and families who try to emulate a perceived financial lifestyle that is unsustainable. Access to easy credit for homes and automobiles has accelerated these families eventual financial hardships. Too ofter these families have little left to save for retirement after their monthly debt obligations are paid. They spend in the NOW with little or no regard for tomorrow.
On the opposite end of this spectrum is the hyper-investor. This individual or family has deliberately suppressed their living standards so that they can focus all of their discretionary income towards their golden years making huge sacrifices along the way.
When I began my professional career out of college at age 21, I would spend hours running various retirement calculation scenarios (keep the DORK comments to yourselves PLEASE!).
What I calculated amazed me. Looking at the statistical 11.8% average of the stock market over the last 70 years, what I was allowed to contribute into my company sponsored 401K per year ($10,500 at the time), and a 2.5% estimate for inflation, by the time I reached the age of 59 ½ (threshold for penalty withdrawals) a person my age would have accumulated over $6 Million.
Obviously, having this much money in retirement would be great, but at what cost has this windfall come? Will I really need this much money in retirement if I have been living relatively modestly in my working years? Even if we had a quarter of this amount, my wife and I could still have an amazing time in retirement. So how do you find the correct balance that is right for you?
There is a new trend coming in the world of financial planning known as “Consumption Smoothing” that aims to address this issue. The goal of consumption smoothing is to find a balance between what we WANT to do with our money now vs. what we NEED our money to do in the future.
Consumption Smoothing goes beyond just finding “your number” (the increasingly popular term in financial planning for the amount of money you will need to have saved to meet your predetermined retirement lifestyle). In fact, some programs such as ESPlanner (Economic Security Planner) allow you to set virtually an unlimited number of parameters in finding the best mix of what you can spend now and throughout the rest of your working and retirement years. You enter your financial details and it will automatically calculate your highest sustainable living standard along with the saving and life insurance needed to sustain that standard.
If you’ve been making an effort to stockpile as much money away as you can for tomorrow, you may want to take a look at what your real standard of living could be today.
{ 8 comments… read them below or add one }
It was not all that long ago when most middle-class workers were not able to retire at all. We just worked until we dropped. That’s why we do not yet have good answers to a lot of basic questions.
My sense is that we have been making major progress in our understanding of how to manage our money in recent years. The only problem is that learning new stuff requires taking notice that a lot of the old stuff we have put our faith in does not necessarily check out. It’s a bit disconcerting to see the rules of the game changing as much as they have been in recent days.
Rob
Absolutely true! Just when we get comfortable with one train of thought, reality begins shifting in a different direction!
I am a hyper-investor. I’ll have to explore this concept a bit more. Interesting.
I am most certainly a hyper-investor. I’m glad you made the point that you did… can it become too much? Absolutely. What good does 6 million do when you can’t even move?!
There’s definitely a balance. Luckily my wife frequently reminds of that balance.
PS- nice blog!
LOL!
Mine too!
I think your assumption of a 9% real return on your investments long-term is wildly optimistic. By making more realistic assumptions (I use 5%), I think you will find that maxing out tax-advantaged retirement accounts – or at least coming close to maxing out – makes much more sense. Here’s the most authoritative source I’ve used to help with this assumption…
http://www.ssab.gov/Publications/Financing/estimated%20rate%20of%20return.pdf
Key quote: “A rough guess for the long term, after the adjustment process is complete,
might be a geometric average equity return of 5% to 5.5% or an arithmetic average return of
6.5% to 7%.”
Good balanced view here. I can only hope my stocks go up 11.8% like that:)
And Rob’s earlier comment is important: how much are the rules of the game changing? Look at the death of mutual funds and the rise of ETFs.
Or in Canada, the life and times of the income trust industry. You really have to keep on your toes. There’s no real “buy and hold” anymore in the sense that you don’t need to keep tabs on your investments once a month.
I feel that maximizing our savings early gets us into the habit. We will be able to live a lifestyle in even 5 years that most can’t dream about. Why? Because savings will be a habit before we have kids.
I know for a fact that kids throws everything for a loop. This way we are used to budgeting and surviving on less. Any increases in income can go to fun.