August 1, 2017
The Most Underrated Number In Finance
Years ago a fellow canoeist saved my life by warning me - no,  SCREAMING at me - to swim out of the way of my swamped canoe that was about to pin me against a big rock in the river. His volume and sense of urgency got my attention. Moments later that canoe was wrapped around the rock like aluminum foil around a potato. Without his warning, I would have been crushed.

I often use that experience as a metaphor for the slow-moving dangers we face in life. Perhaps the biggest and slowest moving danger many of us face is saving for retirement. Unfortunately, no one is SCREAMING at us about the danger.

Despite the potential of living for 25 or so years past the last paycheck, most Americans are oblivious to this huge risk. Why? There are many reasons, but perhaps the two biggest are:
  • A shift in retirement savings responsibility from employers to workers. The advent and growth of 401(k) plans have dramatically reduced the number of employees covered by pensions. Now, fewer than 2% of all private workers are still covered by a company-sponsored pension plan. Without a pension, retirement savings is up to the worker.
  • Procrastination. It's the same problem we have with eating healthy and exercising: we'll start tomorrow. Instead of getting control of our savings rate today, many can't resist spending money. Blame advertising. Blame peer pressure. Blame credit cards! Whatever the excuse may be, over-spending is toxic to our retirement savings.
The average U.S. citizen has dangerously little in retirement savings. Half of U.S. families aged 32 - 62 have saved less than $5,000 for retirement (1). And even those who have saved enough to put them at the 90th percentile of savers have only enough to add another $1,000 or so to their monthly Social Security income.

The consequence of this saving failure is dreadful: family stress, disappointment, and shattered retirement dreams. Oh, and the possibility of moving back in with the kids!
This collective poor retirement savings leads to what CAVU believes is the most under-appreciated number in finance: y our retirement savings rate.

Few people know their savings rate, and fewer have a savings rate target that they monitor. Measuring your retirement savings rate may be the most important thing you can do with your personal finances.

What gets measured gets done. - " The soundest management advice I've ever heard."  
Tom Peters, author of I n Search of Excellence .

For most boomers, the die is already cast - there is too little time to move the retirement savings needle much. But for younger generations, focusing on their personal savings rate can result in a vast improvement in their lifestyle when the paychecks end.

What is the right savings rate?
The easy answer, and ultimate mantra for all workers, should be:  Save 15% of gross income for retirement.  Yes, 15%. For retirement only. This will consist of four primary sources:  retirement accounts (like the 401k), the company match, IRA contributions, and personal savings earmarked for retirement. In total the annual saving should amount to roughly 15% of your gross income.

Want to buy a house? Save the down payment in a different account. Don't touch that 15% retirement amount. How about a car? Same thing. College? Weddings? Ditto. Your retirement savings should be used only for retirement, not as a piggy bank to help you fund current spending.

Why is 15% such a good number? Successfully saving 15% of your income for retirement should help you reach financial independence (i.e. a paycheck isn't required any more) sometime in your early 60s. (Assuming you begin saving with your very first paycheck.) Yes, everyone seems to be working longer these days. But how nice would it be to have the financial freedom to do what you want to do when you are in your 60s rather than working because you need the paycheck?

How to improve your retirement saving rate? That will be the subject of our next post. In the meantime, embrace the following:
  1. You are completely responsible for funding your retirement. (For the generally affluent readers of this post, Social Security is likely to cover only about 1/3rd of your monthly lifestyle costs.)
  2. Determine your current retirement savings rate and compare it to your saving rate in 2015 and 2016. Talk about this with your spouse.
  3. Set a saving rate goal for the rest of the year. You might not make it to 15% right away, but having a 2017 goal will allow you to make better decisions on future spending options. 
what gets measured gets done .

The CAVU Team
David Sylvester, CFA, CFP®                                 
Founding Principal    

Nick Foy, CFP® 
Portfolio Manager             

Hilary Disher, CPA (non-active)
Tax Strategist

(1)      Economic Policy Institute:  The State of American Retirement - March 2016
Plan well.  Invest Wisely.  Live Richly.
CAVU Wealth Advisors LLC