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October 10, 2012


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Looks like I am well behind since I started at 26 and have only saved 6% up until recently. Although I am part of the new-age never retire crowd. This does not mean I am going to keep working, I am just planning a passive income portfolio.

I like the Oregon Trail analogy and will likely use it when talking with clients about their children or even when I talk to younger clients.
Worth noting though is that there is research in the financial planning community that argues there are choices even in this basic decision on when to start saving. The alternative choice this research emphasizes is forgoing savings in order to raise lifetime income by increasing job skills. For example, putting a savings program on hold to pursue a higher academic degree or to study for a higher certification can make sense.
I also like the idea of young people starting a Roth if feasible.

I'd rather save a lot early on and put it on cruise control the rest of the way to 65. I started at 21 and I'm cutting down now that I quit my job.

If you understand the first critical fact about investing this topic is a no-brainer.

That fact is: "Learn and understand the Power of Compounding".

The second critical fact is "Don't Lose Money" since a 50% loss requires a 100% gain just to get even again.

I agree with most of this. The compounding interest, start early, etc. My issue is with this whole save XX% of salary theory. Income does not remain steady over time. We all should make more as our experience grows. As a result a significant portion of our savings do not benefit from compounding.

It is better to have a number, a goal that will give financial independence. I've have always saved at least 15% in retirement vehicles. I am now 48 and my portfolio is OK, but no where near where it needs to be. In a couple of years, when the kids are finished with college and the house is paid, we will be saving like mad to hit our number. Saving early has put our number within reach, but it will still take some effort to get there.

Good analogy. I just think that when you start later in life, the rules of the game are different and that's what you're stuck with. Call it a late entry penalty. So instead of saving a modest amount and putting it into an index fund returning 8% over the next 30-40 years, now you have to be more creative. Buy rental property, start a blog, create an e-product, live on less money, etc. There is always more than one way to succeed.

"Retirement planning is like the pioneers who set forth on the Oregon Trail."

ha. ...

"You have died of dysentery."

In order to accumulate a really large investment portfolio, at some point in your life you need to learn how to become a very smart investor. When I was fully occupied raising a family, working long hours to build my career, and spending quite a bit of money providing a good life for us and the 3 kids it wasn't possible to learn how to be a smart investor. In those days I also didn't have much money outside of our company IRAs and with those we had very limited control.

Our money didn't really start to grow fast until after I retired at the end of 1992 at the age of 58. That was when "investing wisely" became my primary interest and I put my all into it for several years. The amount of money we had when we retired amounts to only 4.5% of what our portfolio is worth today. A great help was that we both had company pensions, and then at age 62 we both took Social Security, minimizing the amount we have had to take out of our portfolio over the last 20 years.

Now examine the result of "smart investing" compared with holding Vanguard's S&P500 fund (VFINX).

From 12/23/1992 to 10/9/2012
VFINX .... ANN= 8.20%, Total Gain = 375.3%
Old Limey ANN=16.95%, Total Gain=2,113.5%

From 11/5/2007 to 10/9/2012 (The period I gave up trading and have been entirely in Bonds)
VFINX .... ANN=1.31%, Total Gain= 6.63%
Old Limey ANN=4.12%, Total Gain=22.04%

Admittedly, having 4 checks arrive every month is a huge advantage that fewer and fewer retirees will benefit from. My old company stopped the pension plan for new employees soon after I retired. My wife worked for the school district and they still have pensions and classified employees are still eligible for SS.

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