It appears that investors may be lucky to see any positive returns at all this year from
their investment portfolios. With the economy sputtering, gas prices increasing and
housing prices dropping, we’re off to a bad start so far. An essentially no-risk way to
boost your portfolio in lieu of little or no returns is to increase savings. Ben Franklin’s “A
penny saved is a penny earned” is just as appropriate today as it was in his time.
Numerous studies have shown that Americans are saving too little for their retirement.
In the 2008 Retirement Confidence Survey published by the Employee Benefit research
Institute, the percentage of workers very confident about having enough money for their
retirement dropped to 18% from 27% in 2007. One reason for this drop is the increase
in health care expenses. Nearly half of retirees surveyed (44%) said they are now
spending more on healthcare than they expected. More than half of retirees now say
they are more concerned about their financial future than they were right after they
retired. Fewer workers expect to have health care coverage from their employers than
in the past.
Less than half of the workers surveyed had done any retirement planning. Of those who
had, however, nearly two thirds had increased their savings. Forty-nine percent of
workers report that their total savings and investments were less than $50,000.
Forty-two percent of workers surveyed believe they will need at least $500,000 by the
time they retire to live comfortably in retirement. Sixteen percent believe they will need
between $250,000 and $499,999, and 25% think they will need less than $250,000.
Those who have performed a retirement needs calculation are more than twice as likely
to expect to need over $1,000,000 before retirement. Clearly, most U.S. workers need
to save more.
Even a small amount of additional savings can make a huge difference. And due to the
time value of money, the sooner you increase your savings the better. You’ve probably
seen the savings example of two individuals, John and Mary let’s call them. John saves
$3000 a year starting at age 20 and then adds no more after he turns 30. Mary starts
at age 30, saving $3000 a year until age 65. If both invest their savings in a stock index
fund and earn 7% a year (ignoring taxes), John will have $442,533 at age 65 and Mary
will have $414,710, or $27,823 less.
In his book Your Money and Your Brain, (Simon and Shuster, 2008), Jason Zweig,
senior writer for Money Magazine, states that one reason people don’t save more for
their retirement is that they tend to focus more on the near term because they believe
that they will be less happy when they are older. Therefore, they believe they should
enjoy their money now. Yet in an online survey of 300 people, those aged 70 rated
themselves happier than those in their thirties.
So how do you go about saving more when gas costs more, food costs more and you’re
having a hard time making ends meet. The first thing you can do is track your expenses
for a few months and see where your money is really going. You may discover that
you’re eating out more than you realized and that perhaps you can do without a couple
of those lattes you have every week. You might try taking your lunch to work or car
pooling. Consider saving your tax rebate when it comes and the next time you get a
raise direct it immediately to your 401(K). After all, you’ve been doing without it. If you
really need some extra cash, try to save at least half of the raise.
If you get creative you can likely increase your savings more than you might imagine.
It’s a great way to grow your portfolio without having to take on more risk in the volatile
market!
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, May, 2008
Boost Your Portfolio By Saving More
By David Patterson and Erin Preston (formerly Patterson)