Monday, July 23, 2007

Assumptions, ASSumptions

Money Magazine has an article telling readers how to tell if you're
On Track for Retirement. It's a good article but personally I'm put off by the tone of Part I.

The author, Walter Updegrave, says "A 401(k) gives you the biggest bang for every buck you save, so if you are not making maximum use of yours, you're not really serious about retirement."

I agree with the first half of that statement, but I think the second part is both untrue and unduly harsh. Some of us who are "serious about retirement" are also serious about rearing our children, serious about paying off debt, serious about meeting our medical needs and seriously underpaid. Actually, I don't count myself as being underpaid, but I don't have the financial wherewithal right now to max out my 401 (k) contributions. For the majority of Americans who make even less than I do, being serious about today is every bit as important as being serious about tomorrow.

I took the little "savings quiz" on the Money site, and learned that I should be saving 30% of my salary in order to retire. I currently save 16% and my employer contributes another 6% of my salary. But then I read this: "Savings percentages are rounded figures. Assumes retirement age of 65, annual inflation of 2.5%, that Social Security and savings will replace 80% of pre-retirement salary after deducting annual amount saved and that savings are invested in a portfolio that gradually shifts from 91% stocks, 9% bonds to 46% stocks, 54% bonds by retirement date. At retirement, funds are invested in an inflation-adjusted lifetime immediate annuity."

Well, there ya go! My assumptions are very different from Money's assumptions.

I won't be retiring at age 65. I'd like to retire at 67 but age 69 is also OK by me.

I won't be needing 80% of my pre-retirement salary. My home will be paid for, and I have a second home that can be sold to meet extraordinary expenses, should they occur after retirement.

Most of all, I will definitely NOT be investing in a portfolio of 46% stock and 54% bonds during retirement. I've never understood this rush into bonds--which, over time, lower returns without providing the kind of safety they advertise. I don't intend to be fully vested in stocks as I am now, but the majority of my post-retirement funds will stay in them.

I may or may not invest in an inflation-adjusted lifetime immediate annuity, though I know this author greatly favors them. So far, I see them as too expensive for the benefit they provide. They may change, or I may change my mind about annuitites by the time I retire but right now, this is another assumption I don't make.

As always, one-size-fits-all calculators and assumptions don't fit me.


Louise said...

Yes I agree with you on this, possibly Walter has a much larger disposable income than we do! I am also trying to put 2 kids through college as well as save for retirement and pay off my house, they make is sound so easy don't they!

Engineering My Finances (EMF) said...

I don't care for web retirement calculators either. I've set up a spreadsheet and model my retirement based on my own assumptions. Which I hope don't turn out to be ASSumptions. But since I did it myself, I know how it works.

Most of the personal finance blogosphere assumes that Social Security won't be there for them. Maybe for the bulk of personal finance blogosphere that's a good assumption for planning purposes, since most of them are Generation X or Generation Y.

Like you, I am a Boomer and think that Social Security will be there in some form. I also have a personal finance blog. I've looked for other personal finance blogs written by Boomers and haven't had much luck.

I've added a links section on my blog for blogs written by Boomers, and have added links to your blog as well as Bare Bones Living. Please check out my blog and if you like what you see please add a link on your blog.

Grace. said...

Welcome EMF--I've added you to my blogroll. I do wonder at the dearth of boomer posters in the personal finance blogosphere, since we seem to dominate the political ones. I am encouraged by how many younger people blog about their finances, but where are my contemporaries? I'm glad you found me, and I will be reading your blog.