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Last week, a chart was circulating the internet helping to illustrate how much you should have saved for retirement based on your age (See Below).
Like many rules of thumb, it can serve as a guide but it lacks several key assumptions. It doesn’t factor in pensions, annuities or real estate. The biggest flaw deals with a term called replacement income, this chart assumes that you will be able to live off of about 80% of your pre-retirement income. You would only know that if you dug into the research that is mentioned in the footnotes.
And in our experience, how much income a retiree needs to live on each year varies greatly.
This chart is probably most helpful for younger savers (50 years and less) and who do not expect much in the way of a pension and have no idea what their retirement income needs will be.
Recent reports show that the average baby boomer spends less eating out than millennials. On average baby boomers spend $2,386 per year eating out, while the average millennial spends $2,639. For baby boomers, 37% of every dollar spent on food is spent outside their home, while the figure for millennials is closer to 43%.
This got me thinking…
If millennials, reduced their out-of-home food expenditure to what baby boomers spent eating out ($253) and instead invested that money in the market at 9% per year, they would have close to $35,000 when they retired.
This simple step of saving less than $5 a week can really add up over time.
What’s wrong with this chart?
Give up? The folks that created the chart are trying to predict the next Black Swan – the next significant event that could derail the economy. The problem is, that by definition, black swan events are unpredictable and exceptionally rare. Much of what’s listed here has been dissected and extensively analyzed. They are serious concerns but may already be baked into the current price of the markets. Just look at how the S&P 500 has responded due to the tensions in Russia and Ukraine
Sometimes the biggest risks are the ones that do not appear on anyone’s Black Swan chart!
At first glance, the trend of stock ownership in the US is quite declining. It appears that for most Americans, the percentage of stock in a portfolio is less and less. That’s scary… but there is more to this story than just another post about investors sitting in cash.
What explains the declining ownership of stocks? In part, it’s the following:
American Funds recently wrote about innovation from a different angle than from my original post: the benefit to the innovative company. Here are a few highlights:
“The markets often underestimate the impact innovation can have on a company’s growth prospects and future cash flows” – Steve Watson, Portfolio Manager at American Funds.
The technology industry is not the only area investors should look toward for innovative companies. They can be found in some of the most stable industries.
Thomson Reuters tracks the top 100 Global Innovators and found that spent over $223 billion on R&D but their aggregate performance beat the S&P 500 by 4%.
At the end of the day, innovation is affecting our daily lives. It has changed the way we shop (e-commerce), the way we communicate (smartphones), and the way we use energy (LED light bulbs) to name just a few. And if that’s not enough, investing in innovative companies may have a positive effect on your portfolio.