Time to Underestimate Our Financial Goals

Simon Zhen

By  Thu Mar 7, 2013

Simon Zhen is an analyst, staff writer and columnist for MyBankTracker.com. His columns draw focus to all aspects of personal finance and to bank rates, products, and services. More Columns »

kayugee / Flickr | http://www.flickr.com/photos/kayugee/2286678246/

kayugee / Flickr source

Dream big, they say. Tell that to all the cynics who’ve abandoned the conventional money wisdom that we’ve relied on to plan our finances. Thanks to the financial crisis, those lofty money goals appear more and more difficult to achieve, given that the previous numbers used for financial projections don’t seem to apply during a struggling economy.

With declining interest rates, an inharmonious government and volatile stock market, planning for retirement is more difficult than ever. It’s a playing field that offers less room for error, especially if you’re nearing retirement. As a result, we have gradually begun to trim our financial outlooks, possibly for the better.

The expected 8 percent annual return

One of the biggest parts of financial planning is estimating the growth of your investment portfolio. Prior to 2009, the thought of an average 8 percent annual return was typical — you can expect your nest egg to double every 9 years. Today, attaining such a return is almost as if you hit the lottery.

Despite the stock market yielding double-digit returns and reaching records-highs, any advice that dares to suggest a reliable 8 percent annual return is met with sneeringly bitter responses like: “Please tell me where I can find an 8 percent return on anything.”

Investments such as stocks and peer-to-peer loans have been offering such returns but their risk levels deter investors who’ve grown wary of investments that appear too good to be true. As a result, they’ve shifted to more conservative options such as bonds and cash — effectively cutting their growth potential.

So, many people have downgraded their expectations to a modest 5 percent annual return. At that rate, an investment portfolio can expect to double roughly every 14 years.

The 4 percent annual withdrawal

Traditionally, soon-to-be retirees were told that they should withdraw 4 percent from their nest egg every year — forecasted to be enough to last 30 years after retirement (e.g., investment firm T. Rowe Price preaches such advice).

However, the financial crisis sheds light on the potentially harsh conditions presented when the economy tanks in the initial years of retirement. Many new retirees started to panic when their hard-earned retirement portfolios lost half their value — shattering the notion that they’d be able to pull out 4 percent without worries.

Rather, retirees may have to become more adaptable and take a personalized approach to retirement withdrawals. Some may prefer to use the guaranteed income from annuities while others simply reduce the amount they pull from their retirement funds.

Furthermore, the 4 percent rule will continue lose its foothold in financial planning as more older Americans stay part of the workforce. According to the Bureau of Labor Statistics, roughly 18.5 percent of Americans of age 65 and older were working in 2012, compared to 10.8 percent in 1985. Whether it’s due to enjoyment or necessity, the delayed retirement likely renders the 4 percent rule inapplicable.

Prepare for the worst, hope for the best

While underestimating our money goals will hint at a future of less wealth, it forces to us to be more realistic with our financial goals. It forces us to save more money and spend less because we already see the the financial troubles that have become a reality for many Americans.

Perhaps, this way of thinking will foster a smarter financial mentality that doesn’t rely on our abilities to meet overly ambitious goals to be deemed successful.

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