Posted by Tim Stobbs on November 9, 2009
You might have noticed if you have read this blog for a while that I’m not a big fan of rules of thumb. Often they oversimplify things or just fall apart outside of a narrow band of application. What really gets me is some people follow them blindly only to realize that they screwed up their retirement dreams. So here are a few rules that you should just ignore.
- Save 10% of what you earn for retirement. Someone obviously forgot to tell the person who came up with this one that your saving % is a sliding scale. When you earn more it is easier to save way more than 10% and when you earn very little even 10% can be hard. Also you age, family situation and a thousand other factors will determine what you can do. Find what you can do regardless of it is 60% or 5% and adjust as you go.
- You need about 70% of your working income in retirement. This is one is so wrong I’m always not sure where to start. First off your required income in retirement has nothing to do with your working one. Instead it is related to your spending prior to retirement. Then depending on your retirement lifestyle you could need anywhere from 30% to 110% of your working income. It all depends if you want to vacation for six months of every year or stay at home most of the time and read library books. Do a budget based on your spending and you should be a lot closure than this rule.
- The 4% rule. Which states that you can typically withdrawal about 4% of your portfolio each year on an inflation adjusted basis and not run out of money in your retirement. I do use this one for quick back of the envelop type of analysis. I would not hang your entire retirement plan on this number, because again things slide around depending various factors. If you retire at 50 or younger you might need to plan for around 3%, while if you retire at 70 you might want to use 5%. The reality is this rule is a function of age at retirement, stock/bond split in your portfolio, when you die and your comfort level with risk. Do your homework prior to assuming you can use this one.
- Everyone should… If you every hear these words prior to advice about retirement your brain should automatically generate the following message: bullshit. The reality is retirement planning is a unique thing. There are certain trends and helpful hints, but there is nothing that applies to everyone in every situation. It sucks for everyone when it comes to planning to realize this, but it is true.
I think perhaps that last point is key to all rules of thumb. Your retirement plan will be unique. It might have certain similar things to others, but it won’t be the same. We are all different and so must our plans. Read what you can and expand your exposure to ideas and make up your mind what will work for you. Yes it means work, but it’s better to do a bit now and avoid a big surprise or two later on.
Posted by Tim Stobbs on November 6, 2009
Cars are money pits. So in the world of personal finance avoiding them is often worth some consideration. When you include insurance, gas, oil changes, other maintenance and depreciation you can spend around $4000/year with out trying hard. So that is why my second car is the bus.
You see we don’t need a second vehicle all that often, perhaps a couple times of month. So rather than keep a second car for those odd times I invest $18 in a sheet of 10 bus tickets and keep them in my wallet (they don’t expire ever). That way I’ve never looking for change to take the bus (also it’s cheaper than the $2.25 per fare). So at the upper limit I spend $172 per year on bus fare, which compared to $4000 is steal of a deal.
Then there is the time factor. Yes it takes me longer to get to and from work by an hour in total, but I also get some extra reading done on those days. So all in all I consider the whole thing a small price to pay to save around $3800/year. On a hourly basis per year that works to $158/hour in savings which is certainly a hell of a lot more than I make at my job.
So yes you can call taking the bus good for the environment in lowering greenhouse gas emissions, but really I’m doing it to save a small fortune in costs. So don’t always think that reducing your carbon footprint makes you spend more, often it is about fattening your wallet.
Posted by Tim Stobbs on November 5, 2009
It’s interesting to me to realize all the things kids have taught me so far in life. Case in point this morning I had great plans to write up a link post. I was going to review some of my favorite blogs and some news sites and put together a short post. Apparently my youngest, now 18 months old, didn’t get the memo. He’s now awake on my lap and watching daddy type with some interest.
So now a chance of direction, let’s talk about plans. Plans are like maps useful, but in the end sometimes you have to just ignore them if they are out of date or you just don’t care exactly where you are anymore. I’ve had some many different plans in life shot to hell it hasn’t even been funny, so that begs the question: if we know plans often don’t work out why do we do them?
You see this is where I like to separate two concepts: first there is a vision of where you are going. For me with this blog I want to be retired or financially independent by age 45. Vision is often very long term and some what vague on the details of how. Then there are plans which are often more shorter in nature and more detailed in nature like a goal for a year. Plans should change depending on what happens in a year. That is ok, the situation you started with often doesn’t stay that way. Plans to me are the short pieces to achieve your vision. You might find a better piece to get your to your long term vision than your current plan so it’s ok to change plans.
So a key piece of happiness to me has been not worrying so much about plans. I make them to help get to my vision but I’m not really that attached to any of them. So when things change or I have to give up a plan as being unworkable I don’t get too upset. It’s like getting too attached to writing my link post and then having ‘but daddy I’m not tired anymore and I can’t read the clock yet’ boy wake up early. Life happens so do have a vision where you are going, but do not panic about a specific plan. Otherwise you will be very unhappy over something in the end you really can’t control.
So what plan for you lately hasn’t worked out?
