5 Questions with Philip Dawson: Personal financial planning

1. Older Americans are falling short of the levels needed for a healthy retirement in nearly every state, according to a study by Interest.com, conducted with data from the U.S. Census Bureau. Americans age 65 and up failed to possess 70 percent of their pre-retirement income, a level usually desired, in 49 of 50 states. Why are so many Americans falling short of this benchmark?

“I owe, I owe … so off to work I go”  There are potentially dozens of reasons why Americans of the Baby Boom ilk find it difficult to save money at the rate necessary to reach comfortable balances for retirement.  Two key contributing factors to this phenomenon are personal debt and cultural attitudes toward savings rates in the first place.

An older man working at a computerThe effects of famous money-spending binges of the past continue to linger.  Many Americans find it difficult to save for retirement given the rising cost of other essential living needs, such as housing, food, education, and costs associated with healthcare.  In fact, rising healthcare costs are a particular concern as early boomers wrestle with the rising cost of their own peculiar aches and pains associated with aging, as well as challenges dealing with providing care to their aging loved ones and parents. 

We can’t save because, well … maybe we just don’t like to!!  It could be said that the age of conspicuous consumption has a hangover that just won’t quit.  According to a survey done by Economic Co-operation and Development, Americans ranked among the lowest rate of personal savings in the industrialized world:

Australia:   11.1%
Canada:   5.0%
Germany:   9.9%
Ireland:   5.0%
Japan:   0.8%
France:   15.4%
Spain:   9.1%
UK:   5.8%
US:   4.5%

2. It’s an extremely difficult situation, but what is the best approach for individuals nearing retirement that have a large gap between where they need to be financially?

Retirement savers in this situation really have to do one fundamental thing before they can close any gap that may exists between their current retirement account balances, and where those balances need to be:  They must first learn to forgive themselves. 

Dismiss the dissonance, or perhaps downright shame, you feel when you consider your balances as they appear today vs. the lost opportunity to save over the glory years of the past.  It’s over… so get over it and ask yourself this fundamental question: How much cash will I need on a monthly basis in retirement to meet my basic living needs?  Then calculate what known sources of fixed income you will have in retirement in order to meet your monthly budget.  Upon doing so, you can then begin to develop a wealth building strategy to bridge the gap. 

Be practical. Understand that you may need to tolerate higher levels of risk in your savings vehicle that you would like in order to approach the potential rates of return that you need at this late stage of the game.  Next, save with a systematic approach.  Decide on a dollar amount that you will contribute daily/ weekly/monthly to your retirement portfolio and commit to saving that amount, no exceptions! Reinvest any dividends or interest earned and before you know it, your portfolio will grow quite nicely.  Key thing to remember… there are no magic bullets (not even the lottery). 

So, hug yourself, grab your bootstraps, develop a plan to deal with this problem, and (forgive me Nike folks) Just Do It! 

3. The study revealed that many states in New England and the Mid-Atlantic are home to individuals in the worse shape for retirement.  Why are certain areas of the country better or worse for retirees?

A slightly more compelling question in my mind is: why are certain areas of the country better or worse for pre-retirees to live?   We consider the obvious metrics: higher gas prices, higher tax rates, higher cost of food and clothing, higher rental districts are partial explanations of why certain areas of the country are better or worse for retirees.  From a planning perspective, however, I offer the following question: If the cost of living is an important factor as to where you reside during retirement years, then perhaps the same compelling questions should be asked as you plan to increase your retirement plan model in the final 10 to 15 years of your productive working life.

 If we have limited resources to count as personal income, and if we need a significantly higher rate of savings as we approach our last decade in the workforce, then it stands to reason that perhaps we should be more aware of the daily spending patterns related to the cost of living during that last decade in the workforce.  Early boomers should be looking for opportunities to relocate to a desired retirement destination, if it is practical and feasible to do so, and work remotely as a means to mitigate the impact of their personal savings rate long before retirement day arrives.

4. The positive result from the study showed that nationally, replacement income ratio (income paid out by a pension program upon retirement) for individuals 65 and up rose from 57.4 percent in 2011 to 59.6 percent in 2013, and has jumped nearly 10 percent in the past 10 years. What is causing this increase in replacement income ratio?

Typically, when we study the notion of ‘retirement income ratio’ we are talking about the percent of your pre-retirement income that you need in order to live comfortably in retirement. For example, if you earn $40,000 per year, and if your expenses in retirement do not significantly change from your expense structure before retirement then you will most likely need an income during retirement that is 100% of your last earned income, hence making your retirement income ratio 100%.

Typically, the driver of replacement income ratio ties to a persons living expense structure during retirement. Late boomers can and should develop strategies that reduce pre-retirement expenses such as, income tax rates, living expenses, education-related expenses, and transportation related expenses. Increased asset allocation to tax exempt holdings such as municipal fixed income investments and tax-deferred annuities are also strategies to consider.

5. What should Generation X and Millennial workers be doing now to avoid the same shortcomings their elder generations are facing?

Millennial workers and Gen X’ers should learn to pay themselves first.  Be mindful of your savings or investment strategy and realize that you must be your own best friend when it comes to building wealth.  Save early and often. 

Maximize the amount of tax advantaged savings that you can save through your employer.  Most employers offer 401k savings plans or something similar.  For the most part, your contributions to a 401k are made on a pre-tax basis, and grow tax deferred until you make a withdrawal.  If you are very fortunate, your employer will also have a competitive dollar matching benefit, where your savings will be matched by your employer up to a certain level.  It’s very important that you take advantage of this benefit as much as possible.  Continue to live within your means and keep extravagant living expenses to a minimum.  Last but not least, don’t be afraid of market risk early in your saving years. 

One less latte per day. 

In my years as an Investment Advisor, I created a dynamic and interactive spreadsheet model which illustrated for investors the power of compound returns as it relates to investment performance and portfolio growth.  So hypothetically, if a Millennial were to begin investing $50.00 per month today into an equity investment which earned 13.2% annual total rate of return, never took withdrawals from the account, and reinvested all dividends, the portfolio value in 45 years would grow to a value of $1,350,154.92 while your principal investment ($50/month x 540 months) would cost you $27,000.  And since you asked; $50.00 divided by 30 days equals the tidy sum of $1.66 per day.  One less latte per day can go a long way indeed.


Phillip Dawson is the Academic Program Manager for Post University’s Finance program. Dawson holds extensive leadership and executive experience in diverse industries including medical supplies, insurance and risk management, financial services, asset allocation, strategic marketing, business development, brand equity, cost efficiencies, productivity and profitability. Dawson earned a Bachelor of Arts in Psychology from Connecticut College and a Master of Business Administration in Finance and Marketing from the University of Connecticut. 

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