“There’s no easy answer” as to how much a person should have and when a person should start saving, Roth said.
One unknown is future medical expenses — will they crack your nest egg?
The more a person ages, the less “human capital” there is, Roth said, adding that later, “If you’re saving $100 a year, you’re not going to get to your goal.
“To get to retirement, there’s no shortcut to living below your means. You have to not spend all the money you make and put some away.”
To achieve a goal, people need to minimize their expenses and maximize their discipline and diversification, Roth said. Discipline in what the client saves, and diversification in where the client invests money.
Professionals attempt to buy at a low price and sell at a higher price, based on their customers’ desires. But many individual investors don’t do that, he said. They hear of a market crash and, out of fear, they start selling their assets at a low price.
The ideal age
The younger a person starts saving, the better, financial planners say.
“To the younger kids, I say start putting something away now, and forget about it,” said financial planner Dale Payne.
Advice for people varies, depending on their age, income and goals, Roth said.
“You can’t just use a formula,” he said, because some people are more comfortable risking more, and other clients prefer to play it safe and place their money in conservative investments.
Still, as a general rule, “The younger person should be more aggressive, only if they’re going to stay the course,” Roth said.
“Money is stored energy that gives us choices later in life. Once you have enough stored energy to do what you want with your life, there’s no reason to take risks. Once you’ve won the game, quit playing.”
For young people, Payne said, “My advice is to put money away — $25 a month.
“Over 40 years, you cannot believe how much you can accumulate if [you] can form the habit.”
Financial planner Michael Pennica advises his clients to start young. A client recently came in to his office with the client’s son.
“He said, ‘Listen to Mike and do what he says,’ ” Pennica said. “The key is to start saving as soon as possible.
“It’s the savings part we struggle with. And I don’t mean put the money in the bank at a half percent interest” but, rather, invest, Pennica said.
Younger people have a better opportunity to compound their money and can be more aggressive with their investments said financial planner Jeremiah Erickson.
As clients age, Erickson said he attempts to look for alternative investments.
For example, real-estate investments can pay monthly income.
“It’s a different kind of investment that doesn’t go up and down like Wall Street,” Erickson said. “There are a lot of people looking for other ways to get income because interest is at a near-record low.”
For clients who start saving later in life, “it’s almost impossible to catch up,” Payne said.
People who work for companies that offer a retirement plan with a company match should take advantage of that, Payne said.
Rule of thumb
Erickson said the first step is to determine how much is needed during retirement, then work backward to compute how much the client can save to reach that goal.
For example, a person wants to retire at age 66 and needs $30,000 annually to pay bills and live a comfortable life. Social Security will pay $18,000 annually, so the client will need $1,000 a month to meet expenses, or $12,000 yearly.
Erickson uses the 4 percent rule of thumb; from $12,000, he would divide by four and determine the client would need $300,000 in retirement savings to meet her goal.
“Folks that have been using the 4 percent found they have excess dollars at the end of their plan (life),” Erickson said.
“Sticking to an asset allocation is more important than picking it right in the first place,” Roth said. “You avoid that behavioral thing,” where people panic and sell investments at a low price.
Payne recommends tithing 10 percent to a church or nonprofit. That advice “turns some people off,” he said. “It’s kind of a karma rule. If you can give away 10 percent, it comes back to you and it takes away the greed.”
However, “I think God wants you to pay your bills before you tithe,” Payne said, quoting a pastor.
Some of Payne’s clients “have more money than God. They have no need for anything.” For some of those clients, their desires are to disperse some of their income to nonprofits, Payne said.
Some clients don’t want their children to receive a large inheritance, Erickson said. One problem for some people relates to having too much money.
“If kids inherit too much, it can be harmful to them,” Erickson said.
Meeting regularly with a financial planner will help those individuals determine what to do with their money.
The other extreme
For people with little or no extra money at the end of the month, “figure out how to spend less,” Erickson said. He said he has clients who have smaller portfolios. “It’s about having a good life and doing things that don’t cost a lot of money.”
He also recommends clients use fee-only financial planners, not planners who are paid commission for what they sell, which “takes away some of the conflicts of interest.”
“My heart goes out to them,” Pennica said. “If they don’t have the resources to put away, there’s not a lot of resources. They’re going to get Social Security and state help.”
“If someone is making $30,000 and they have three kids, I don’t have an answer for them,” Erickson said. He said he’s seen physicians who make $1 million annually spend it all.
“They need a psychologist,” he said laughing, But seriously, he added, “Changing behavior is difficult.”