Due to increasing time demands, this is my final contribution to our blog here – and I’d like to summarize some points I’ve tried to make in this space before. ETF in this case, refers to Eat That Frog!, a wonderful little book with a big idea by Brian Tracy. The big idea is a simple, yet powerful one. Do the one thing first each day that you’d really like to put off doing the most. In good financial planning, we know we should pay ourselves first in a high amount (savings) but we keep putting if off because of other pressing obligations. Go eat that frog first thing today.
Do you know your personal rate of return? I’m not talking about what your mutual fund returned or your stocks or your bonds; I’m talking about calculating what you, individually have earned in the time you’ve owned each investment. This is different from an investment’s rate of return and the only rate that matters. Let me explain the difference.
INVESTMENT RETURNS RARELY OVERCOME A LACK OF SAVINGS
During the 20 years ending 12/31/2008, the S&P 500 Index averaged 8.35% a year. The average equity fund investor earned 1.87% in the same period due to behavior of buying high and selling low.
But it’s getting better! At the end of 2009, the average 20-year equity fund investor earned 3.17% per year.1
What it really takes to retire – a LOT of money. More than most people think. For example, I am seeing clients that will go from $16k/month in income while working to $4.6k/month in retirement income due to a lack of savings.
How much should I accumulate? Rule of thumb on savings (share this with as many young people as you can) – 17% of gross for future lifestyle and another 2% of gross for future healthcare expenses. This is the ideal from your first paying job. If you’ve been saving less, then you need to save more now.
How much can I spend from what I accumulate? Another rule of thumb – expect to withdraw 5% of whatever balance you’ve accumulated to make up your ‘paycheck’ in retirement. Add any pensions and social security to that (and any other known income) and you’ve got what you can expect to ‘earn’ in retirement.
Remember the 3 D’s of most good things for you and in life: Decision, Discipline, and Determination. Maxing out those three traits when you go after a goal (like saving) will be the key to getting it done. I’m going to go tackle some frogs – happy eating!
1 Dalbar, Inc.
Bonnie Hughes, CFP®
American Capital Planning, LLC
Reston, VA / Miami, FL