Third-Quarter Review of Investments and Personal Finance : Mapping Out Your Own Road


How can you adjust your circumstances to the lessons of Lucy and Raul, whose financial life is illustrated on these pages?

Where you live, your earning power and whether you remain single or have children all affect your spending and saving. Other issues--such as an expected inheritance or your health--also alter calculations.

You may be satisfied to retire with less than $2 million. A $500,000 nest egg could still provide a reasonable annual after-tax income of between $25,000 and $30,000.

Future economic conditions are impossible to predict, but if a comfortable retirement is a major concern, a very general guide may be to have $100,000 saved for every $10,000 you want in annual pre-tax retirement income. You need more if you live to 100 or want to leave money to charity or children.

Here are some considerations:

Savings rate: As you get older, you'll probably want to raise your standard of living rather than lower it. But it's not immoral to spend more while you are young. Just make sure your money buys real pleasure, because every dollar you spend now is several dollars you won't have in a few decades.

Income: If you earn less than Lucy and Raul, you probably have less to save. But don't allow that to demoralize you--the important point is to pull yourself out of debt and live within your means. You still have the same options available to people who earn more--and you could retire more comfortably than many of them by saving more aggressively.

If you earn more, you have the option to save more. If you earn a six-digit income, for example, but live on the same budget as Lucy and Raul do, you can retire a decade earlier. But if you just keep raising your standard of living instead of saving, retirement may be a rude awakening.

Household size: If you don't have children, it's much easier to save--but it also might be more important, since you'll have fewer options if you become destitute. If you are a single parent, saving is tougher but also a higher priority, since there is no partner to provide a backup.

When all else is equal, it's more expensive to live if you are single, but of course a frugal person who marries a spendthrift is worse off financially. Overall, if you marry or otherwise live with another working adult without having children, sharing basic expenses translates to a higher standard of living than if you remain single. But if you aren't as frugal as Lucy and Raul and you want to maintain your spending habits through retirement, you still need to save aggressively, if not quite as aggressively as they do.

Investment risk: No one knows how future interest rates, inflation, tax changes, job security, health or other unforeseen circumstances will affect your plans. If you fear major turmoil and want to be conservative, you can put your money in more secure places that earn about 5% today. But every percentage point translates into huge differences in what you end up with. Earn just one percentage point less over a decade and you give up a lot--about 20% of your gain at current interest rates.


Average Annual Savings Rates

In 1993, households with middle-aged wage earners saved more of their income than any other age group. Other factors affect savings rates as well, particularly income (savings rise with earnings) and family size (larger families save less).


By age group

25-34: 0.6%

35-44: 3.7%

45-54: 5.0%

55-64: 2.5%

65+: -6.5%

Source: Bureau of Labor Statistics

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