PODCAST EPISODE 235: The Debt We Owe To Our Future Selves

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Paul 0:08

Hello, and welcome to your business, your wealth. My name is Paul Adams. I’m the CEO and founder of sound financial group. And we have we got a fun article today, along with an Easter egg. So if you stick around to the end, there’s a special gift for people that make it to the end. If you’re listening on our podcast platform, this might be a good reason to go pull this episode up on YouTube, so you get a chance to participate in the Easter egg. So with that, let’s jump into this article today. Are you saving enough for retirement odds are probably not. Now what I like about this article is it looks like it was written by a journalist who interviewed both an economist about how much people are saving, and then also interviewed a financial advisor. And we’re going to see why those sets of answers and a very different one is looking for the truth, if you will, of what it takes for people to be prepared for retirement. And the financial advisors, Linda is some lenses somewhat impacted by the fact that they have to actually coach people to take action, or sell people into working with them, either of which has them perhaps make the same message far more palatable than an academic economist might. So we’re going to jump right into this article. Now, one of the first things that showed up for me was that it talks about the latest Federal Reserve survey of consumer finances, which is 2019 Is that the average savings in retirement plans for the average American is 65,000 a year, I’m sorry, 65,000. Total, that puts approximately half of all Americans at risk of not being able to maintain their pre retirement standard of living after they stopped working. And that’s Angie Chen, the research economist at the Center for Research, Retirement Research at Boston College. Now, when we think about this for a moment, okay, we need to set aside money on a consistent ongoing basis in order to replace our income when we are no longer wanting to work, or we just want to work optional lifestyle. And by the way, we hope that’s always at age 65. But we all know people’s whose life circumstances have caused them to be in a position earlier than age 65 that they needed to stop working. And so the very same may happen to any of us listening to the podcast right now that we may not have until age 65. But the question then becomes is how much money does it take? So Ashley Chen talked a little bit about the rule of 25. And it suggests that you want 25 times your annual expenses, all throughout your old age, so that you can sustain a 4% distribution rate, so that your assets will last long enough. Now you guys can look up some of our other podcasts we’ve done on the 4% rule, and why that 4% rule is what it is.

But the big deal is that whatever your current income is, that means you need to save up 25 times that. So if it’s 200,000, that’s $5 million. Now, it’s not 5 million needs to be like including your home equity, your RV, your second home, no, this is 5 million of capital is at work on your balance sheet that’s not encumbered needing to do other things like provide shelter as you would with your primary residence. So if you’re making $200,000 a year, it certainly seems like it’s an enormous jump, to be able to have enough capital to then be able to draw income off of that for the rest of your life. And I think Ashley Chen makes a good point is that people should reflect based upon what’s the amount or percent of their current income, they need to set aside on a monthly, weekly, bi weekly, whatever works for you basis, to then be able to get to where they want to go. Now, when we think about that replacement rate, how much of our income needs are be replaced? Many of you listening this podcast have bigger than average incomes. You know, we know that just being a little over 500,000, as a household puts you in the top 1% of income earners in one of the wealthiest countries on earth, the United States of America, but lower income households require higher replacement rates and lower income households, lower ones. Now, the replacement rate is how much do your assets need to work to produce your income versus something like Social Security. So if you’re a household that makes generally less income, so also security is going to support more of your annual expenses in your old age than say somebody’s making four or $500,000 a year, they’re going to have to replace much more because the amount Social Security will replace is much smaller as it relates to their incomes. But this is where the numbers get a little bit bigger and can almost be scary for some people. Now, if these numbers scare you, I think that’s probably a really good reason to get engaged either with our firm or some other advisor. Because the scarier the numbers are, the more you might want help and guidance on how to get there. So the article goes on to say, for example, a medium income earner to replace 70% of pre retirement income has to save 24% of their income, if they started at age 35 24%. Now, we’ve all heard that idea of like you should get 10% going your 401k 10% seems to be the minimal saving number that has worked across our culture as Americans, when in fact, it probably needs to be 24%. If you’re starting at age 35, and you don’t already have money on your balance sheet. And then they say an impossible 44% If they start at age 45. Now by no means is a 44% savings rate impossible. People do it all the time. The difference is if you weren’t saving anything, and then somebody told you, you need to start setting aside 44% of your gross income, that will definitely be a shock and might very well be impossible the first year. But then they give the example of a 35 year old could save 15%, too, if they were planning on retiring at 65, or just 12%, if they delayed to age 67. Now, of course, one of the things we teach our clients to do is that it’s important that you just set an initial amount of income that you’re going to work towards saving, and we start with 20% of gross income. Now, why 20% of gross? Well, we know it’s going to take 20% of gross income at a minimum, to have a shot at closing the gap on financial independence. And it might take more. But the key thing is that we begin shooting for that 20%. And as time goes on, we can further vector in what that number ought to be for you and your family for the long run. But what it takes from your perspective right now is just imagine if I was saving 20% of my income, put that in a future value calculator, put in six and a half percent for an after tax rate of return that you might be able to expect in an academically allocated globally diversified portfolio. And you get some sense of what that’s going to amount to. And if that amounts to more than enough money for you to live independently the rest of your life, that’s great. But keep in mind that big number can seem huge. You always want to take that big number, multiply it by 4%, to find out what the actual income would be on that very large number you think you’re going to accumulate. Because just the larger number with all the commas and zeros can almost satiate us from taking action. Because it feels like well, we’re on track to have that. So I can go ahead and get that new car. That might not be the case, you want to definitely take that big number that you see when you put in here’s my current investable assets, not home equity, not other parts of your net worth capital at work assets. What 20% savings rate would be for me, and then see what that would accumulate to. And if that feels like it’s not enough, then you can go about the math of how do I work on Save increasing my savings rate above 20%. But getting that first 20% of setting money aside into assets is often the first and most critical step in people examining their cash flow. Because if you’re setting aside 10% Right now, the breakdown that you have may not be for 15 or 20 years. Well, it’s too far out for us to take action, which is why we encourage our clients to sort of confront that 20% of gross savings number so they’re present to it and they start figuring out right away, how to make up the gap. Now this is where we get to hear from a little bit. The financial advisor that was interviewed for this article alongside the Economist.

Take these numbers with a big grain of salt, targeting numbers or even savings rates can be countered and productive said Certified Financial Planner Jude Burdo. The big problem with setting targets is they can be behavioral cost of missing them. If someone can’t meet a target, they often end up doing nothing at all. And here’s the thing. I think that that’s true. I think that’s true in cases of many financial advisors where they build a big financial plan and there’s 3040 pages of color graphs and charts and in that it says you need to save an X For $1,200 Every month, I think that can be counterproductive. Because every time we tell somebody that number, we’re telling them that based upon these pages and graphs of charts, even behind those pages would be numerous sheets of Excel spreadsheets if you’re looking at all of the data that made up those graphs. And yet, that’s not persuasive. What tends to be persuasive to us as individuals, is just understanding that it’s a financial mechanic we’re working with. It’s not just a calculation, that we’ve done the math over and over again, that if somebody has an income that increases over their lifetime, and they increase their savings rate at the same pace that their income increases, basically, it’s got to be 15%. If you’re in your 20s, and it closely crosses into 20%, into your 30s, that money, you have to set aside on a consistent basis, get it invested, and let that money grow over your lifetime to provide an income beyond your participation in the workforce. Now, I don’t want to take anything away from financial advisors who do their best to try to communicate that to people to get them to take whatever step those people are comfortable taking with taking right now. Like, hey, just I know you’re only saving five, let’s just save six next year, let’s save seven next year. And if you’re one of those advisors listening, know that I’m not taking a side against you. But I would love to encourage you to just tell your clients that economic truth, it’s going to take 20 plus percent for you to be able to have enough capital to be able to retire in a similar lifestyle to the one that you had prior to retirement. Because that’s the last piece that retirement doesn’t take into account, even if you’re saving the quote unquote, right amount, right now, that doesn’t mean it’s going to be the right amount for the future that we have to live into. Because in the mid 1970s, we only had to worry about one TV in one room of the house and we had shag carpet and you raked the carpet, you couldn’t even vacuum it properly. That’s the kind of lifestyle we might be trapped in. If we didn’t have enough surplus in our old age, to be able to buy a flat screen to be able to get an iPad to be able to have a phone from which we could garner the world’s information at the drop of a hat. All those things would have passed us by because we only had enough budgeted for what retiring in 1970 would be like. So for all of you out there, as you’re listening to this, it’s like it might be more than 20%. But I would much rather deal with budgeting and thinking through my money right now while I’m earning a lot of it, then trying to solve my budgeting issues when I’m not going to be able to go out and earn another dime because I’ve aged out of the workforce at some point. So to whatever extent it feels like you don’t want to do the budgeting, you don’t want to set up the spending plan. And you don’t want to have an asset accumulation strategy, because it seems like it’s so far off. Put yourself in the position of trying to deal with bills, when you’re 70 years old, and you don’t have another income stream coming in, and you’ve got to make it on whatever you’ve got. And that’s like a debt we owe to our future selves that too often people don’t take seriously. So one more quote that I really liked from the financial advisor that was interviewed for this dude, don’t take more risks to make up for lost time, you could end up in a much worse situation. You see, oftentimes when people see that there’s so much money that has to be saved all that they begin to hang their hopes on some future market activity, I’m

gonna buy these stocks, I think they’re gonna go up a bunch of value or I’m gonna go into crypto. Or maybe now’s the time to go into gold. Rather than implementing a proven discipline to investment strategy. And then controlling what you control most. Your patience with the markets, as well as your ability to say no to some of the things you could easily say yes to. That’s the biggest part of controlling our spending is cultivating contentment with that which we have now. So that we can continue to provide for ourselves in the future and know that even as you’re providing for your kids now, if your financial picture is in shambles, some of you listening right now or supporting parents or know that that’s coming for you and your future, will taking good care of your balance sheet doesn’t just mean that you might get a chance to leave a legacy through your children when you leave this earth because you’re gonna leave them some amount of capital, but it also means that you’re going to leave the legacy of you not needing to depend on them. To be an example of a life well lived where you took tremendous responsibility financially and in taking yourself seriously in this area. Finance in your financial future, you actually give them the greatest chance of them being able to be productive with their financial future because part of their future won’t involve taking care of you as their parent. So I promised today we’d have a special Easter egg. It is Easter this last Sunday. And this is the Easter egg. And our fun giveaway is if you just take a screenshot of this, put in the comments below, I took the screenshot, like this video, subscribe if you haven’t, but email this to info at SFG wa.com. Give us your mailing address and we’ll send you your choice. Just let us know what you’d like our book sound financial advice that really deals with high income households, or your business, your wealth, a book that we designed and wrote specifically for planning for the future finances of an entrepreneur and business owner because there are certain concerns you have as an entrepreneur business owner that other people don’t have. With that. We hope all of you had an amazing Easter this last weekend, a great time to be able to spend with family to be able to celebrate what we’re grateful for, and all the gifts that we have in this life. As always from me and the entire team here at your business, your wealth and sound financial group. We hope that this episode has been a contribution to you being able to design and build a good life

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