Static vs. Indexed Savings
Our most recent efforts in financial planning and retirement projections have us scratching our heads. Why is it that most investors keep their annual savings rates static? People tend to save for retirement with the same dollar figures year-in-and out, but plan for inflation-indexed incomes in the future. I think we can all agree, that over meaningful periods of time, the cost of living on this planet is going up.[1] So why the disconnect? I think it all comes down to the concept of abstraction. When I physically save money now it is concrete, real, and in some sense, a delay of a purchase. It requires a sacrifice of immediate consumption and pleasure (a Starbucks, a new car, a vacation) and this is quite removed from the idea of retirement income 25 years down the road. The future is abstract, and distant, and people have a very hard time saving for it because it just doesn’t feel real. But just because we don’t want to believe in something, this doesn’t change its existence. The future may be uncertain, but it’s bound to be costly.
Our simple remedy to this cognitive disconnect is to plan for increased savings while working. Here are three simple ways to do this:
- Adjust annual savings based on a measure of inflation (such as CPI) so you keep up with rising costs. Remember to never adjust backwards! In a year with no inflation, keep it the same.
- Increase savings in pace with employment earnings. As bonuses and raises occur, adjust savings on a percentage increase from your initial base.
- Ask yourself the tough question: Is this purchase really necessary or will it take away from a better future? I suggest making the “better future” a concrete image in your mind and not an abstract income stream. Maybe it’s one more golf game a week at your choice of course, or a fully stocked wine cellar! You decide, but make it stick in your head.
I realize that this is not the most scintillating subject for discussion, especially when considering our previous comments on “zombies” and “marijuana” stocks, but it deserves a post out of respect to one of the fundamental principles of wealth generation: sacrifice. If saving for retirement was easy, then everyone would do it.[2] Clearly, this is not the case. But we can take it a step further, and index our savings, so that our future needs are more closely met. If we overshoot our goals, I am sure we can find creative ways to spend the money!
[1] https://www.imf.org/external/pubs/ft/fandd/basics/inflat.htm
The enclosed article expresses the opinions of writer, Patrick A. Choquette, and not necessarily those of Raymond James Ltd. (“RJL”). Statistics, factual data and other information are from sources believed to be reliable but accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James Ltd. is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities.
Information provided in the attached report is general in nature and should NOT be construed as providing legal, accounting and/or tax advice. Should you have any specific questions and/or issues in these areas, please consult your legal, tax and/or accounting advisor.This provides links to other Internet sites for the convenience of users. Raymond James Ltd. is not responsible for the availability or content of these external sites, nor does Raymond James Ltd endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Raymond James Ltd adheres to.
Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Patrick Choquette, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision.
Raymond James Ltd. is a Member - Canadian Investor Protection Fund.
