Putting the Discipline Back Into Financial Planning
There are two types of people:
Those who spend first and save last and those who save first and spend last.
Will there be a silver lining in the economic conditions our country (and our planet) is coping with these days? I have this graph that shows how dramatic savings rates in this country have declined over time and how dramatically consumption has increased. Oddly enough, it was 1984 when the two intersected and our savings rate fell below our consumption rate. It's quite remarkable actually. The divergence of the two lines is dramatic and through the years they have continued to pull apart. I am hoping that out of this entire experience people actually start spending what they can afford, save at the same time, and not live on credit...I say it is odd that this divergence occurred in 1984 because it was then that 401 K plans were popularized. That's when the average worker started to actually put money away into the market. Prior to that time it was really viewed as a vehicle for the affluent, near affluent, etc, to maximize their estate growth. Companies opted out of pensions and installed 401 K plans as an alternative. It was FAR less expensive for them to administer the 401 K plans because they weren't guaranteeing income for life. That was when the exec's started to say: "retirement, health insurance (especially health insurance after retirement), and other financial concerns are the responsibility of the worker and not of the company". It worked for the company’s bottom line but not for the worker. Ironically, by the companies paying attention to the bottom line, it made the stock market far more attractive to the average worker to invest in the stock market, via mutual funds, etc. To this day companies continue to remove pensions from their menu and take less and less responsibility for workers. Take a look at how popular HSA plans have become!Interesting times abound and this is no less of one. What we should all remember is that every market crash we have had (25% in 1987, 48% in 1974, etc) people across the board have maintained that "this time is different". We have always recovered. It has always been the same. And it will be this time too...
But let’s get back to savings and how I am hoping we can make the shift to a culture that is more tempted to put our money away and less tempted to purchase the latest and greatest gadget. I would love to walk into my client’s home and not be a witness to wall sized television sets where there are no retirement plans, emergency funds, savings accounts, life insurance, and other financial instruments in place.
The fact is that based on current statistics for every 100 people starting their career today, by the time they turn age 65:
13 will have died
10 will have incomes under $11, 418 (poverty level)
65 will have incomes between $11, 418 and $65,000
only 12 will have incomes in excess of $65,000
65% of elderly depend on social security for over half their income. 33% rely on social security for 90% of their income, so my guess is the vast majority of those 65+ folks who earn $11K-$65K earn well below $40,000 per year.When Social Security was developed the retirement age was set at 65. Life Expectancy was 62! Does this have an impact? Of course it does. For those who are younger today, full benefits begin at age 67. Life expectancy now, on average, is close to 79 (this includes all genders and races which is how it is measured). Do we see the problem?Before 1932 folks worked until they died. My father, who died at the age of 82, saved and had a great income. Yet, he worked until he died, working at what he loved, which was writing and teaching. He didn’t have to work. He wanted to. It was part of his ethic. Am I suggesting all of us should work until we die? No. What I am saying is that we live in great privilege, both in terms of our wealth on this planet currently as well as historically.
Prior to 1932 when the whole concept of Social Security was developed, unless you were really affluent, there was no concept of retirement. Social Security was developed because at the time life expectancy was only 62, which means half the people were still alive at age 62. Mortality tables went out until age 100. People didn’t live that long. Now mortality tables go out until age 120. At any rate, the government developed a program where our elderly were partially cared for through a government program. Social Security was never meant to be your retirement plan. It was meant to be a leg of planning on a three legged stool. Personal savings and company pension was the other two legs of retirement planning. With the rise of the middle class after WWII, that evolved into a concept of a leisurely retirement. Further, the average life expectancy increased with the improvement in healthcare.We are in a true paradigm shift where people actually have the concept of arriving to a time in their lives where: 1. they don't have to work... AND2. they can actually ENJOY that time... This is not a long standing thing in human history... It is a NEW concept since WWII...
I truly understand that if you are living on $20,000 a year it is near impossible to save to a significant degree. As a financial planner I can tell you I have clients (I am thinking of a couple specific here) who live on a combined income of $50,000. Over the course of the last 5 years, they have saved in a ROTH IRA, purchased life insurance, purchased TWO homes (small yes but they have real estate), and had a child. Oh, and now have a 529 plan for their baby. Do you think the two of them practice financial discipline? You bet they do. And they have the success and stability in their financial lives to prove it. Yes, as far as savings is concerned there are only two types of people... Those who save first, spend last… and those who spend first and save last.
Who do YOU want to be?
Those who spend first and save last and those who save first and spend last.
Will there be a silver lining in the economic conditions our country (and our planet) is coping with these days? I have this graph that shows how dramatic savings rates in this country have declined over time and how dramatically consumption has increased. Oddly enough, it was 1984 when the two intersected and our savings rate fell below our consumption rate. It's quite remarkable actually. The divergence of the two lines is dramatic and through the years they have continued to pull apart. I am hoping that out of this entire experience people actually start spending what they can afford, save at the same time, and not live on credit...I say it is odd that this divergence occurred in 1984 because it was then that 401 K plans were popularized. That's when the average worker started to actually put money away into the market. Prior to that time it was really viewed as a vehicle for the affluent, near affluent, etc, to maximize their estate growth. Companies opted out of pensions and installed 401 K plans as an alternative. It was FAR less expensive for them to administer the 401 K plans because they weren't guaranteeing income for life. That was when the exec's started to say: "retirement, health insurance (especially health insurance after retirement), and other financial concerns are the responsibility of the worker and not of the company". It worked for the company’s bottom line but not for the worker. Ironically, by the companies paying attention to the bottom line, it made the stock market far more attractive to the average worker to invest in the stock market, via mutual funds, etc. To this day companies continue to remove pensions from their menu and take less and less responsibility for workers. Take a look at how popular HSA plans have become!Interesting times abound and this is no less of one. What we should all remember is that every market crash we have had (25% in 1987, 48% in 1974, etc) people across the board have maintained that "this time is different". We have always recovered. It has always been the same. And it will be this time too...
But let’s get back to savings and how I am hoping we can make the shift to a culture that is more tempted to put our money away and less tempted to purchase the latest and greatest gadget. I would love to walk into my client’s home and not be a witness to wall sized television sets where there are no retirement plans, emergency funds, savings accounts, life insurance, and other financial instruments in place.
The fact is that based on current statistics for every 100 people starting their career today, by the time they turn age 65:
13 will have died
10 will have incomes under $11, 418 (poverty level)
65 will have incomes between $11, 418 and $65,000
only 12 will have incomes in excess of $65,000
65% of elderly depend on social security for over half their income. 33% rely on social security for 90% of their income, so my guess is the vast majority of those 65+ folks who earn $11K-$65K earn well below $40,000 per year.When Social Security was developed the retirement age was set at 65. Life Expectancy was 62! Does this have an impact? Of course it does. For those who are younger today, full benefits begin at age 67. Life expectancy now, on average, is close to 79 (this includes all genders and races which is how it is measured). Do we see the problem?Before 1932 folks worked until they died. My father, who died at the age of 82, saved and had a great income. Yet, he worked until he died, working at what he loved, which was writing and teaching. He didn’t have to work. He wanted to. It was part of his ethic. Am I suggesting all of us should work until we die? No. What I am saying is that we live in great privilege, both in terms of our wealth on this planet currently as well as historically.
Prior to 1932 when the whole concept of Social Security was developed, unless you were really affluent, there was no concept of retirement. Social Security was developed because at the time life expectancy was only 62, which means half the people were still alive at age 62. Mortality tables went out until age 100. People didn’t live that long. Now mortality tables go out until age 120. At any rate, the government developed a program where our elderly were partially cared for through a government program. Social Security was never meant to be your retirement plan. It was meant to be a leg of planning on a three legged stool. Personal savings and company pension was the other two legs of retirement planning. With the rise of the middle class after WWII, that evolved into a concept of a leisurely retirement. Further, the average life expectancy increased with the improvement in healthcare.We are in a true paradigm shift where people actually have the concept of arriving to a time in their lives where: 1. they don't have to work... AND2. they can actually ENJOY that time... This is not a long standing thing in human history... It is a NEW concept since WWII...
I truly understand that if you are living on $20,000 a year it is near impossible to save to a significant degree. As a financial planner I can tell you I have clients (I am thinking of a couple specific here) who live on a combined income of $50,000. Over the course of the last 5 years, they have saved in a ROTH IRA, purchased life insurance, purchased TWO homes (small yes but they have real estate), and had a child. Oh, and now have a 529 plan for their baby. Do you think the two of them practice financial discipline? You bet they do. And they have the success and stability in their financial lives to prove it. Yes, as far as savings is concerned there are only two types of people... Those who save first, spend last… and those who spend first and save last.
Who do YOU want to be?
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