Thursday, February 17, 2011

No Substitute for Saving

The generation who endured The Great Depression knew about the importance of saving. My father tried to ground it into us kids as we grew up.

In Canada the average family debt is now $100,000, one and a half times family income, despite the fact that a significant number of families "struggle economically."

Several business writers warn that we should be wary of retirement planners who figure 8-10% annual returns on people's investment portfolios.

"Wall Street would love us to believe that the magic of compound interest gives us a free lunch; that a small amount of savings, if compounded at a high enough rate, can set us up for life. That might be true mathematically, but saving doesn't work that way in the real world. Interest rates are low, now, and wages are growing sluggishly.

The three big drivers of big retirement accounts -- sharply rising salaries, sharply rising house prices and a sharply rising stock market -- are all looking very uncertain these days. So let's not perpetuate this pipe dream that if only we can get an 8% return on our funds, everything will be fine. Because chances are we won't."

To be comfortable in retirement, one needs to save a lot more and spend less.

"Look at the income your (grand) parents lived on. How did they do it? Not because those were halcyon days when incomes were better and working men lived like kings. No, if you really think about it, you'll realize that they consumed less stuff than you. Of course, this was easier to do, because other people were also consuming less stuff."

Unfortunately today living on less than you make, when everyone else is leveraged to the hilt, makes you feel poor?

Essay from The Atlantic.