Mapgirl’s Fiscal Challenge

So I am going to make a stink about this article I found via Hedonic Adjustment.

The article is from a trade journal for financial planning professionals. The story is about finding the right savings rates for people. They go through different income levels and different scenarios. I especially love the Monte Carlo analysis. (Table 6, math nerdery that merits its own sidebar at the bottom of the page. Read it if you are a numbers geek like me.) Table 6, Panel A says, guesstimating my salary and age, that at 65 I should have about $603K saved up. I think that is actually low and I am gunning for more like $1 million dollars. (Yes, secretly that is my Number, but I just made that up because I think $603K is not enough. See the next income bracket? The one to which I aspire? That says $903K, so we round up to $1 cool million.) However, that is only at 50% confidence numbers. More realistically, I’ll have only $523K at the 90% confidence number (i.e. more realistic results).

The study shows the importance of starting to save no later than age 35. It shows how higher-income people will have to save more to offset the impact of Social Security, which has a larger impact for low- and moderate-income people. Lower-income individuals who are more dependent on Social Security will also be most vulnerable to political changes in the system. Those who have failed to accumulate adequate savings will need to delay retirement or take a substantial reduction in their retirement standard of living. Finally, it suggests that those whose income increases faster than inflation will have to save an increasing amount to “catch up” so as to be able to provide for the higher assumed standard of living in retirement.

Ok so this means that everyone should start saving before they are 35. How lucky we are to be in a crazy volatile market now. Sounds like a lousy time to jump in, right? But not so. You can start socking away cash for right now. Even that will get you farther than doing absolutely nothing.

Read Table 1 of the article carefully, for 80% income replacement of a $20K annual salary in your 20’s, you can save as little as 6.8% a year. That’s not a lot. I admit, that’s pretty tight, but as your income rises over time, saving more should be come possible with cost control. Remember, spending less than you make?

The closest scenario to me would be 30 at $40K. I think when I turned 30 I was making just over that amount. Sadly, I wasn’t saving nearly 12.8%. I think I was saving 3% with 1.5% in matching funds, so a total of 4.5%. Now that I’m older, and making 70% more than what I was making at 30, I am proudly socking away 19.5% (17% and 2.5%). It’s still less than what I need for 80% replacement, but well over 60% replacement. I’ll take it. The reason is that 60% replacement assumes that your mortgage is paid off. And I certainly could do that if I stay in my little studio for the rest of my life, or upgrade even to a 1 bedroom someday.

Read the article. Think about your financial goals and where you are headed. Are you going to need 80% income replacement or 60%? There was a big stink about oversaving in the US this past spring, but I think that’s related to the assumption about our expenses in old age. I would like to play it safe and have 80% replacement and stuff leftover than 60% and money run out. Jebus only knows that the 20% difference could easily be eaten up by medical costs at that point.

Today, 80 blogs are linked to me. That’s a nice round number.

My heavy on the religion post about Lent this week was post number 666. That makes me chuckle and no, it was not planned at all.

It’s a math geek thing to look at the significance of numbers. I’m not one of those crazy numerology types. I don’t read into numbers and find mystical messages. I’m going to go see that movie ‘23′ because I don’t really like horror films. (Though I might if it’s mostly suspense without gore and the reviews are good.)

I’m kind of bummed I’m going to be hosting the 90th Carnival of Personal Finance in two weeks. I seriously thought I was going to be 91, which is a prime number. Though 90 factors down to 3 x 3 x 2 x 5.

CNN/Money has an article which instructs you how to calculate your blended mortgage rate.

I found this rather interesting. I got a figure of 6.0% from a mortgage at 5.75% and a HELOC at 7.18%. If I wanted to refinance, I’d probably have a tough time finding a loan for that price without incurring lots of points and closing costs. I think I’ll sit tight and forget about refinancing as I watch interest rates climb higher and higher.

I highly recommend their method though. It punches into a spreadsheet very easily. My numbers are not down to the tiniest penny, but in the rough thousands. I think it’s good know what your balances are roughly so that you can make quick calculations on the fly with a minimum of research.

EDIT: Dammit. Republishing because I don’t know AM from PM apparently.

Frank, the Financially Savvy Atheist has a rockin’ spreadsheet for a payment amortization schedule. He walks you through the formulas you need to set up and it’s actually pretty useful if you are a spreadsheet jockey at work. It’s definitely intermediate to expert level skill.

It’s been quite fun to noodle around with it. Of course, I don’t like what it’s saying to me. Pretty much, I need to scale back my life even further and start tripling my 2nd trust payments if I want to be done with them anytime soon. (About $30K in 2 yrs = ~$1350/mo.)

I suggest everyone give it a little whirl if you have Excel. I haven’t yet tried it with MS Works. I’ve been busy reading another PF book which hopefully I’ll find time to review soon.

Thanks for being patient with my light posting. I am still trying to serve up something hot and fresh every day.

Title insurance and why you need it.

No Credit Needed has an excellent list of money saving tips that you will actually use. I mean, if you owned a printer or a swimming pool, which I don’t. But it’s still a great list of small tips!

Frank will make you an Excel genius. And here I thought subtotals and pivots were cool.

J.D. on how many credit cards should you carry. I like his answer. NONE!

Cap on an impulse purchase. Read the comments for my own true confession.

You can’t know what salary to ask for if you don’t know what you really need to make. Before you start a job hunt, I think it’s important to know what your target salary is. It’s not that a number should be your only goal, but even if you find a job you love, if it can’t sustain you, you’ll end up leaving it.

The quick and dirty way to figure out what to ask for is to list down all your monthly payments and expenditures. Kind of like a budget, but not really. People use budgets to figure out where they can trim back. This isn’t about trimming back. It’s about covering it all. It’s more like an expense report. This is looking at what you actually spend per month. Try to include one-time annual events or quarterly payments as well (just turn them into a monthly number). Add in any savings goal you might have too, since savings is important.

After you tally up what you outlay per month, divide it by .70. That other 30% is about what you’d pay in taxes, so you need to add that in, and then multiply by 12 to figure out the gross annual salary needed to cover your expenses. Voila! Very easy. If you passed 7th grade, you can do this.

These are fake numbers, but I like providing concrete numbers now that I know how to do pictures in Blogger. Sure it gets more complicated when you factor in 401K savings and other pre- and post-tax amounts, but 30% for taxes is a good rule of thumb. Bully for you if you use something more accurate.

Rather than Paycheck Calculate your way down to a take-home pay figure, try going the other way round the next time you are doing a job hunt.