This is the first installment of Smart Money, a new monthly column exploring ways to maximize your personal finances.
We’ve all heard it one time or another — sock away 10 cents of every dollar over a lifetime of earnings, and you’ll be sitting pretty in retirement.
It was still about the best piece of advice that a parent gave me, and like so many other words of advice, sacrificed to youthful temptations to spend, cover the occasional piece of bad luck, contribute to others in need, and who knows what more.
A quarter-century after the fact (and ideally with less than a quarter-century to go, with said retirement starting to loom ever larger) it is worth looking back to see where I would be, in an alternate universe in which I had adhered to the “10 cent” maxim upon entering the working world and had stuck to it through thick and thin.
Or more to the point, it is worth looking ahead. A calculation of earnings over the period using a conservative measure of investment returns would have me on pace for a retirement fund of a little over $600,000, assuming I average the state’s median individual income of $51,000 over my remaining working years to the retirement age of 65. Tack on another three years — I’m good with that — and we’d be north of $700,000.
It is the most crucial question to ask of anyone assessing their personal finances: what’s the bare minimum needed to live out the retirement years, and what steps should one take to have plenty of cushion to live the retirement they want? For Connecticut Magazine’s Smart Money column on personal finance, it is the question we will return to again and again, whether talking through saving, investing, spending — or seeking out advice on any of the above.
Back to that “north of $700,000” number, which would have represented a giddy fortune in the eyes of a modestly compensated journalist at age 24 or others from any number of vocations.
As a sole earner on a modest salary, would that 10 cents of every dollar have been enough? Not quite, according to an online calculator by AARP — I would be left more than $100,000 short in fact, factoring in Social Security and interest rate increases but omitting other income.
Bump up to 12 cents of every dollar, however, and magically you get there — without much wiggle room to spare, but you get there. Chuck in an extra 2 cents on the dollar earned, and you get there a millionaire — and if a million does not carry the same cache it did for many of our parents, there’s nothing like that extra zero to change your outlook on retirement.
For the rest of us? It’s a game of catch-up, and that’s assuming one stays gainfully employed, is successful sidestepping any catastrophes life might throw one’s way, and otherwise does not succumb to life’s little financial temptations. If an overwhelming prospect depending on how distant the finish line, exercising a psychological boost or two can do wonders for the outlook, according to Devone McLeod, a financial planner in the Danbury office of Reby Advisors. For him, step one is not to think of it as socking away savings but treating excess income as a paycheck to oneself.
“Pay yourself first,” McLeod advises. “Do not [make] saving an afterthought. Make saving a line item in your budget, no different from rent or utilities.”
It also helps to have access to a retirement plan through one’s employer — and taking advantage of that, if the case. The Pew Charitable Trusts estimates that whereas 58 of every 100 Connecticut workers took advantage of that access as of 2016, the number dropped to 37 out of 100 for those below age 30.
The same study found that only a quarter of Connecticut workers are satisfied with their current financial status, and just four in 10 have attempted to crunch their retirement needs.
Connecticut is among the states that is forcing the issue, with the state comptroller’s office overseeing a new Connecticut Retirement Security Authority that, under a 2016 law, will auto-enroll workers at all but the smallest businesses in retirement savings plans, while allowing them to opt out.
An online calculator from Kiplinger suggests a nest egg goal of a little over $1 million for the individual matching my profile, and that I best be putting away $1,300 a month or thereabouts (factoring in 2 percent appreciation in home value — wait, what?) to get there with wiggle room to spare. In a separate 24/7 Wall Street analysis of annual retirement needs in every state using federal data, the website calculated at more than $48,000 the annual cost to live a comfortable Connecticut retirement.
I’ll leave unspoken how many cents on the dollar earned that amounts to for the journalist on a modest salary. But the picture improves with a hundred fewer channels on the cable TV dial, skipping that lobster roll or Hawaiian poke bowl, or simply pocketing that debit card the next time it comes out, and going without whatever it would have brought into my life.
If this column represents the simpleton’s guide to personal finance and the possibilities and limitations it creates in a life, going forward we’ll add layers of sophistication as we explore the perils and promise of our financial lives.
But for my 2 cents it’s still the best advice I ever got, squirreling away that 10 cents. Or 14 cents, come to think about it.