COUNTERCOLUMN: All Your Bias Are Belong to Us

I originally wrote this for an insurance company client, and kept it under wraps until it was published. But the client's newsletter is out now, and this applies to soldiers and their families as much as to anyone else:

$167,144. That's the magic number. That's what it takes to produce $10,000, adjusted for inflation, in annual income over a period of 21 years. That's assuming level 6 percent annual returns and inflation of 3.5%.

Multiply that magic number by your desired retirement income divided by 10,000, and that's how much money you need to have saved up at retirement in order to fund your retirement for 21 years. (I'm assuming you'll retire at 65 and die, like a good actuarial citizen, on schedule at age 86. Ladies, you'll have to save a little more.)

Now, what does that mean? Let's look at it another way:

For every $100,000 today's 40-year-old worker needs to amass by age 65, assuming an 8 percent annual return and ignoring inflation, he or she will need to save about $104 dollars every month.

However, if our hypothetical snuffy waits 10 years to start saving, that monthly required payment increases to $287, an increase of 175 percent. That's a stiff penalty for waiting less than half of the available time to start a rigorous savings program.

WHAT IT TAKES EACH MONTH TO SAVE $100,000

How much time you got?

If you have 30 years to save (I.e., you want to retire at age 65 and you're 35 now:) Save $66.65 per month

You have 25 years: $104.45 per month

You have 20 years: $168.85 per month

You have 15 years: $287.07 per month

You have 10 years: $542.99 per month... and it gets ugly real fast from there.

You have 5 years: $1,351.96 per month.

If you only have one year, you need to save $7,978.98 per month.

All of this assumes an 8% annual return, with payments made at the beginning of each month. I'm not taking taxes or inflation into account. Remember, this is just to raise 100,000 dollars. Depending on your goals, you will need many times that to generate your retirement income.

Also, the longer you wait, the more difficult it will be to attain 8% at any acceptable level of risk. Finding assets with an 8% expected rate of return over 30 years is probably doable. Finding assets with an 8% expected rate of return with only 4 years is a much tougher nut to crack. So waiting to begin saving is even more costly than these figures show. Unexpected illnesses and other setbacks may throw off your plan considerably.


Soldiers, sailors, marines, and airmen, what does all this mean?

It means, to quote General Patton, that "a good solution violently executed NOW is better than a perfect solution next week! Don't delay. Delays cost, and they get more costly every year.

Here are some tips especially for deployed servicemembers and their families:

Make good use of the extra money in deployments. $250/month in hostile fire pay is a good start to help you get ahead.

Also, since money earned in a combat zone is free of federal income tax, consider doing your saving in a Roth IRA account as much as you can. That's $4,000 per year this year and next year. Your hostile fire pay alone will fund most of that. And you can save even more for your spouse's IRA. That way, you not only avoid income taxes on the money, you will ALSO recieve the tax free growth on the money. It's a freebie all the way around!

If you use the military's Thrift Savings Program, on the other hand, yes you do defer taxes on the current income. But you get that anyway in a combat zone! So why duplicate the benefit? You don't get to defer DOUBLE the income tax because you are in a combat zone AND You will have to pay income taxes on that money anyway.

Consider funding a Roth IRA first. Then use the TSP for any available savings you have left over, since the TSP allows for tax-deferred compounding. But for deployed soldiers (so long as their income plus their spouse's income do not combine to render tha couple ineligible for the Roth), the Roth is almost always going to be the better deal.

Splash, out

Jason