Part 1: Measure and Plan

In 1984, I had just started at a new job at a big company and was presented with the benefits package and all of its glossy information booklet and all of the redundant name, address and social security number forms. Inside the package was a gimmicky card board calculator. A series of wheels on a pivot and sandwiched between two more pieces of cardboard with windows exposing numbers on each wheel. I don’t remember exactly how it worked but essentially you rotated each wheel to select parameters in some windows and then read results from other windows.

What I remember was I selected to save 10% of my salary each paycheck into a 401k plan.  I also predicted a modest salary increase every year (3%), a reasonable return on my investments (12%) during growth and a safe rate during my income period at retirement (5%). The result was I could retire comfortably at 59.5, which was the earliest time you could draw on a 401k without penalty. I have since replicated this calculation in a spreadsheet and the results are a retirement net worth which provided an income at retirement that seemed huge in 1984. I would actually get nearly a 20% increase in income on the day of retirement and I would only be living on the interest from my savings.  I would still have the savings itself for emergencies or legacy. Of course that income would erode with inflation unless some of the interest was left invested for growth to compensate.

Plan1

Remember, that in 1984, all of these assumptions were reasonable for the time but were completely different than they would be today. In 1984 the prime rate was 12%, mutual funds were regularly earning 18% and you could earn 5% to 8% in a bank savings account or a 5 year CD. So my numbers were actually conservative for the time.

The economy was booming and I was in one of the fastest growing fields of automotive electronics. If I was just starting out today and were to do the same calculation with numbers from the last 5 to 10 years it would be a completely different picture.  I would have choose a 6% ROI during the growth period, keeping the 3% annual salary increase and then to achieve a reasonable income at retirement I would have to annuitize the principal at a more conservative 3% growth during retirement for a 40 year life starting from 59.5. To make that plan achieve a reasonable  retirement income,  I would need to contribute 25% of my annual salary and accept a 20% decrease in income at retirement. I would then have to hope I don’t live past 100 or need any lump sums during retirement because at age 100, it would all be gone.

Plan2

Now the thing is this is still what the financial planners are selling. Their numbers may be somewhere in between these two scenarios to make their product more appealing. The other change in their plans is that you should plan to work longer, eventually that red curve will get up there, but not until your 60’s or your 70’s. Unless of course you can get a government job that still pays a pension. But even these plans are not promising what they used to. No more 20 and out like we used to hear.  No more golden parachutes when your service years and age equals 75. No more gold watches, a party and one way tickets to Florida as soon as the kids graduate.

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