Quote:
Originally Posted by fotze
When trying to figure out how much you need to save, it is always tricky because the models always allow you to enter a rate of return on your investments, like its an afterthought. I'll just slap 7% in here, yet that is the most important number in the whole thing. 3% vs 10% is massive.
and cowperson, what do you mean massive wealth transfer? I am certainly not going to count on inheritance.
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The wealth transfer he refers to is the baby boomers passing their wealth to the next generation, which is considered to be the largest wealth transfer between generations in history. It brought up constantly at financial advisory meetings of one sort or another. For a few reasons I think that its largely bunk....but thats another story.
The biggest failing of people planning for retirement though is horrible planning. Most people have this idea that they are going to downsize, and spend less money than they currently live on - that figure is approximately 75% of their income. Mysteriously though they plan to reduce their spending to this point while having more free time (no longer working for 40 or more hours a week), and no schedules to hold them back from their likely poor spending habits! The reality is that a lot of people spend more than they are actually earning when they initially retire. They travel, they buy stuff for the grandkids and kids, they do things in terms of hobbies more than they were able to before. This comes to an average of about 135% of their pre-retirement income. In other words people are planning for a retirement where they'll have much less budgeted than what they will actually spend in their retirement!
(Saving to be able to spend 135% of your pre-retirement income would be a nightmare btw, but the numbers are what they are; and I'm looking at the first 10-15 years where most retirees are active and spending the most money)
Your rates of return are great and maybe you will hit 10% when you base it on 7%, but if the target you aim for in the first place is off by that much its basically a moot point. You won't have enough money.
Lastly on rates of return I should make a comment. The financial service industry has done a bad job for people here. While most financial plans are based on this average value of 7% per year before retirement and then 5% during retirement there are way better methods to approximate things. We would never build a bridge based on the "average load". As soon as we had to have a large truck drive across we would be doomed! So why in the world would basing retirement (and someones entire financial future, including how they will eat and clothe themselves) make any sense at all? It doesn't. Advisors have the tools to do better, and some do. Part of the problem is that people don't actually want to hear it. Another problem is that anyone can figure out that if you start with $100 today and add $100 per month compounding for 25 years at 7% how much money you have to retire on; its lazy planning and the results are predictable.
/rant