• Carnival of Personal Finance – Investing Basics: What Is a Security?

 

• Money Hacks Carnival – How to Get Out of Debt: Step 3 – Create a Budget & Stick to It

       I only found a couple good articles I wanted to share with you this week. Here they are:

• Personal Finance by the Book – Seven Ways God Works Through Our Finances [Joe highlights seven ways God can use our financial decisions to help us grow in the likeness of Christ.]

 

• Money Help for Christians – When Am I Financially Ready to Be Engaged? [Craig gives some great financial advice for soon-to-be and already engaged couples.]

       Have a great weekend!

Related Articles at Provident Planning:

1. Weekend Reading – 12/11/09
2. Weekend Reading – 02/05/2010
3. Weekend Reading – 08/14/09
4. Weekend Reading – 11/13/09
5. Weekend Reading – 09/25/09

       What I hadn’t done, though, was to test the advice it gives against historical investment periods. I based the calculator on historical market data and ran millions of simulations to build the back-end of the calculator (which you don’t see when you use it). But I didn’t have a chance to test how it would have actually worked out for people until recently. So using historical performance numbers for a diversified portfolio along with historical inflation rates (all from 1927-2009), I tested what your results would have been if you had followed the advice given by my free retirement calculator. I tested two different scenarios:

1. If you had saved the target amount the calculator estimates, would that have lasted throughout your retirement?

 

2. If you had annually saved the amount the calculator tells you to, would you have reached that target amount by your retirement date?

       Basically, I wanted to see if this calculator would work in telling you how much to save and how much you can safely withdraw in retirement. Click here if you don’t want to read the nitty gritty and just want to get to the point.

Withdrawal Results

       I found that my calculator was extremely good at estimating how much you should have by retirement so you don’t run out of money before you die. What I wanted to avoid was having any historical period where you would have run out of money before you hit your life expectancy. In most cases, you end up with quite a bit of money left over at your death. But in a few, you barely make it. All of these withdrawal scenarios assume you need $36,000/year in retirement income and you retire at age 65. I looked at three different scenarios: you die at age 85 (20 years of withdrawals), you die at age 80 (15 years), and you die at age 75 (10 years). You’ll need to click the graphs to get a clear, full-size picture. Here are the results for withdrawing from age 65-85 (20 years):





Here are the results for 65-80 (15 years):





And here are the results for 65-75 (10 years):





       As you can see, you never would have run out of money if you had saved what the calculator estimated you would need. Now there’s no guarantee that would always be true, but it is good to see that it would have worked out historically. In many cases, you would have ended up with way more money than you needed, which illustrates why this isn’t a perfect calculator. (No calculator is going to figure this out perfectly for you, and this is why you have to revisit the calculation every so often.)

Savings Results

       Where I found the calculator needed some work was how much it was telling you to save every year. I was running a scenario where you start saving at age 25, retire at 65, and die at age 85 (40 years of saving, 20 years of withdrawals). What I found was that many times you’d end up with waaaaaay more than you needed to retire. You could have either retired earlier or saved less. This kind of result is almost as bad as finding out you didn’t save enough – simply because of all the sacrifices you would have made to meet your savings goal. I don’t have the results here to show you, but let’s just say you ended up with anywhere from 2-6 (yes 6!) times what you would have needed to retire.

       After a long process of studying the results, figuring out where it went wrong, debugging, and retesting, I made one small tweak to the calculator and now it works great. Historically speaking, you’d still save too much most of the time (anywhere from 1.25 to 2 times more than you need). But it cut the required savings rate back to a much more manageable and realistic level. So I’ve run four different scenarios and included the results here to show you how it worked out. These scenarios assume you retire at age 65 and die at age 85 while needing $36,000/year during retirement. The four scenarios differ in the age you start saving (with no savings to start): age 25 (40 years to save), age 35 (30 years), age 45 (20 years), and age 55 (10 years). Here are the results if you start at age 25:





       On average, you would have saved about 50% more than necessary. Assuming you have 40 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving 15% of your target retirement income every year. Here are the results if you start at age 35:





       On average, you would have saved about 50% more than necessary once again. Assuming you have 30 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving 29% of your target retirement income every year. Here are the results if you start at age 45:





       On average, you would have saved about 50% more than necessary once again. You would have fallen a little short of your retirement goal 8 times out of 64 historical 20 year periods, which would have required you to retire on a slightly smaller retirement income or wait one more year to retire. Assuming you have 20 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving 63% of your target retirement income every year. And here are the results if you start at age 55:





       On average, you would have saved about 30% more than necessary. You would have fallen just short of your retirement goal 6 times out of 74 historical 10 year periods, which would have required you to retire on a slightly smaller retirement income or wait one more year to retire. Assuming you have 10 years to save, nothing in savings, and you’ll be in retirement for 20 years, you need to be saving an astounding 170% of your target retirement income every year.

       Though it’s not necessary to get the point of this article, I threw in those required savings amounts to show you why you need to start saving for retirement early in life. If you start at age 25 (when you have 40 years to invest), you only need to save 15% of your target retirement income every year. But if you wait until you’re 45 or 55, you’re looking at 60-170%. Ouch!!! Start early and save yourself from scrambling at the end!

The Point

       While it worked great for withdrawals (during retirement), I’ve made the retirement calculator a bit more accurate and realistic while you’ll be saving – especially if you follow the instructions and run through the calculations again every 3-5 years. I hope you find it useful. If you have any questions, please feel free to leave them in the comments here or on the calculator’s page. Thanks!

Related Articles at Provident Planning:

1. How Much Should I Save for Retirement? – Part 3: How Much Should I Save Each Year? (Free Retirement Calculator!)
2. How Much Should I Save for Retirement? – Part 2: How Much Will I Need to Have Saved by Retirement?
3. How Long is Long Term?
4. How to Invest for Retirement: Asset Allocation
5. How Much Life Insurance Do You Need?

       Albert Einstein once said, “It’s not that I’m so smart, it’s just that I stay with problems longer.”

       A reporter, doing a story on people who were tired of the effort that it takes to control spending, approached me recently. She wanted suggestions for people who were struggling and thinking of just giving up. What makes some people continue when the easiest course was to quit? And, how can you become that person?

       The first suggestion is to make a decision and stick with it. Unless you have significant new information, you have no reason to rethink your decision.

       Breaking big goals into smaller pieces is the second suggestion. Dividing a big goal into smaller goals allows you to savor successes along the way. Each one helps to motivate you to strive for the next small goal until you’ve accomplished the big goal.

       Giving yourself rewards along the way is another great way to accomplish financial goals. If you’re paying off a credit card, treat yourself to a small reward at predetermined points along the way. Take your mind off of the struggle by looking forward to the reward.

       Stay motivated with reminders. If you’re saving for a vacation, you’ll find that a picture of your desired destination can be a great motivation. Some people put a card in their wallet to remind them of their commitment to reduce debt. When they reach for cash or a credit card, it helps them resist needless purchases.

       Finally, it’s helpful to have friends to encourage you and share experiences. A long journey is always easier if you have someone to share it with. Find a frugal partner at work or in your neighborhood. Or join an online discussion group. Not only will you find help, but also you’ll become stronger when you encourage others. In fact, we have one specifically on Frugal Fatigue.

       So don’t be discouraged by the length of the journey. What’s important is that you stay on track for today. And, that’s something that all of us can do.

_________

Gary Foreman is the founder of The Dollar Stretcher website and newsletters including Financial Independence a step-by-step approach to achieving your financial goals.

Related Articles at Provident Planning:

1. Weekend Reading – 08/07/09
2. Frugal Tip: Beware When Buying in Bulk!
3. To Live without a Budget, You Must First Live within One
4. What Makes Christian Personal Finance Different?
5. Weekend Reading – 01/01/2010

What Should We Do?

       Assuming we agree that God does not call Christians to a leisurely, luxurious retirement where we sit around and do nothing all day, we have to start looking at what we should be doing during retirement. Let’s compare and contrast with typical retirement goals:

• Pursuing Hobbies – Many people plan to pick up new hobbies or spend more time on their favorite hobbies in retirement. While there’s nothing inherently wrong with this, Christians must be looking at how much time they’re spending focused on themselves and how much of their money they’re putting toward their own wants. We must look for a balance – and we must look to God to find that balance.

 

• Travel – This is a major goal for many retirees. As Christians, we need to look at recreational travel versus missional travel. I’m not saying vacations are sinful, but we have to consider two things. First, our desires to spend on ourselves while others are in desperate need. And second, we must listen to God’s unique call for our lives. For some Christians, this will mean limiting travel in retirement so they can give more or spend more time volunteering. For other Christians, this may mean allocating more than they would have to travel so they can take or fund mission trips. (This is not to say that you should ignore God’s call for you to be a missionary until retirement. If He’s calling you now, you should go now.)

 

• Volunteering – Volunteering is a great way for both Christians and non-Christians alike to spend their time in retirement. Besides transportation costs, volunteering requires little money but can provide great rewards. The caution here is to avoid volunteering to every cause or postponing volunteer activities until retirement. Seek God’s will for where you should serve now and in retirement.

 

• Entertainment – It’s easy to spend more on entertainment during retirement because you’ve got so much free time. But for Christians, again, we must look at how we’re using the money God has entrusted to us. Some entertainment is fine, but we need to seek God’s guidance for what we should plan on in this category.

 

• Spending Time with Family – Another noble pursuit regardless of whether you’re a follower of Christ or not. However, we still must seek God’s will and be sure to balance this activity against the other things God wants us to be doing. Strong families are encouraged by the Bible, but we must not become so focused on our own families that we ignore God’s family.

How Should We Spend in Retirement?

       The decisions we make in the “What Should We Do?” category will greatly impact how much income we’ll need in retirement. But there are a few other areas we should consider as well:

• Housing – Will you stay where you are now, move to a larger place, or choose to downsize? Also, will you buy a second home (vacation home)? Again, I challenge you to pray for God’s will on this matter. Many retirees dream of owning a vacation home in the Bahamas, but Christians must be looking at how such a decision fits in with God’s call to care for the poor. Should we be building a larger house or buying a vacation home while people are starving? Maybe that sounds ascetic, but it’s a legitimate and serious question for those who wish to follow Christ.

 

• Shopping – Shopping for the sake of shopping excites some people. How should we approach this issue? Again, I’m not advocating an ascetic lifestyle where you never buy anything for yourself. But we must seek the guidance of the Holy Spirit. Should we deny some of our wants so we can give more? I feel like that’s a definite yes. But where we draw that line can only be determined through communion with God. He calls some to deny many or all of their wants while others only a few. (Personally, I think that call to deny yourself increases more as our faith and maturity increase.)

 

• Insurance – Overinsurance can indicate that we are placing our trust in money and not God. Underinsurance can be a sign of folly. We must seek God’s will on this matter, as all others, and perhaps help from others. Health insurance is likely a necessity, but what about life insurance, long-term care insurance, homeowner’s/renter’s insurance, etc. There can be legitimate needs for these during retirement, but we can also buy them out of fear or ignorance.

 

• Health Care – While some or most of this may be covered by health insurance, there’s another aspect I want us to think about as Christians. Where do we draw the line between pursuing health within God’s will and pursuing longevity for fear of death? Should we fear death as much as our society does? Indeed, part of the reason health care costs so much is because we try so hard to stay alive. I’m not saying we should kill ourselves, but it is something we should think and pray about (even when we’re young). The world seeks after eternal life but will not find it. We (Christians) already have it promised to us in Heaven – so why do we seek it so much on Earth?

What’s Your Take???

       What did I miss? What did you think about my thoughts? What do you think a Christian retirement should look like? What are your plans? Please, please, please share your thoughts in the comments. I’m hoping we can all help each other think about these issues from a Biblical and eternal viewpoint rather than the American/worldly ideals.

Related Articles at Provident Planning:

1. How Much Should I Save for Retirement? – Part 1: How Much Income Will I Need in Retirement?
2. Should You Buy Life Insurance for a Stay-at-Home Mom (or Dad)?
3. Should a Christian Retire?
4. How Much Should I Save for Retirement? – Part 2: How Much Will I Need to Have Saved by Retirement?
5. Do You Need Life Insurance?

       A while back, I wrote about an article I read at Oblivious Investor that prompted me to rethink retirement. I had been contemplating how retirement, especially early retirement and the retirement marketed by the media and financial companies, could be congruent with a Christian’s faith. The Bible says nothing of retirement as we think of it today. There’s only a passing mention of the idea that the older generation should stop working full-time when the Bible discusses how the Levites should stop doing their regular service and work and only assist their younger brothers in the work (Numbers 8:23-26).

       Beyond that, there’s absolutely no mention of retirement in the Bible. The best case you can make for retirement in the Bible is the elders who sat at the city gates. As far as we know, they didn’t work or do manual labor. But they didn’t just sit around either. They were involved in the leadership and administration of justice in the towns and villages they lived in. We could equate this today to older people who are actively involved in volunteering, mentoring, sharing the Gospel, and serving the Lord in many other ways.

What Kind of Retirement Are You Planning?

       A retirement focused on owning your dream home on the beach, or spending countless days golfing, or traveling the world purely for pleasure, or any other of the numerous “goals” people set for their retirements does not glorify God at all. On the other hand, a retirement that revolves around spending more time ministering to the needs of others and finding ways to serve God can and will glorify God.

       There will come a time when you cannot earn all of the income you need from your usual work because you are either unable (physically) or you are replaced or some other reason outside of your control. When that day comes, there is no reason you shouldn’t retire and live off of your savings. However, until that day comes there is no Biblical reason why you should seek an early retirement either. The only possible reason I can think of is a Spirit-led decision to pursue something other than paid work that is related to spreading the Gospel, sharing God’s love, and bringing people to Christ. Pursuing early retirement because you’re sick of your job or because you just don’t want to work anymore is purely selfish and does not honor God or reflect well on your witness as a Christian.

       With all the starving, sick, and homeless people in the world, how can we as Christians be focused on retiring early just so we can relax? If that’s our goal, the love of God is not in us and we are not truly following Christ. The same can be said of a regular retirement. Even if we can no longer work because of some reason outside of our control, our actions still reflect our beliefs about Jesus and His message. If we wish to truly do what He taught, we won’t plan for a retirement that’s all about leisure and pleasure. We’ll look for ways we can help others and glorify His name with our extra time.

Live Out Your Faith in Retirement

       A Christian can prepare for and enjoy retirement, but it’s how we prepare, what we plan to do, and what we actually do in retirement that matter. Your choices can make your retirement honorable to God or a stumbling block to others. Plan for a moderate retirement that allows you to serve God more fully with your time than you did while you were working. Just as true followers of Christ wouldn’t live extravagantly and wastefully while they’re working, don’t plan for an extravagant or wasteful retirement either. Seek God’s wisdom on how you should prepare for the day when you won’t be able to work any more. Ask the Spirit to help you plan a retirement that will glorify God and accomplish His will on earth. Don’t let retirement be a time where Satan can distract you with the leisure and rest “you deserve”. Live out your faith during retirement, and let it be a testament to God’s goodness the and glorious gift He gave us in His Son!

Related Articles at Provident Planning:

1. What Should a Christian Retirement Look Like?
2. What Is God’s Provident Plan for a Christian’s Personal Finances?
3. Rethinking Retirement
4. Contentment & Hard Work – The Engine for God’s Provident Plan