Michael Kitces is a partner and the director of wealth management for Pinnacle Advisory Group, co-founder of the XY Planning Network, and publisher of the continuing education blog for financial planners, Nerd's Eye View.
Below are some takeaways from his conversation with Karen Wallace of Morningstar.com. You can listen to the conversation or read to the entire transcript here.
The unfortunate reality is, just kind of the mathematics of the compounding. If you had a couple of thousand rupees and you earn an extra 1% of returns, which in the investment world is a pretty big number, an extra 1% of return on a few thousand rupees dollars won’t get you far. It doesn't have a big impact because the account balance just isn't as big yet.
Whether you save and creating the savings habit is overwhelmingly, dominatingly the biggest factor that drives the outcome.
As you get closer and closer to retirement, that equation starts to flip around. Even a thousand or so every month towards getting a big nest egg doesn't really actually move the needle very much anymore. But if you've got hundreds of thousands in savings already, a 1% change in your returns could be a year or two worth of savings, all at once.
There's this kind of balancing shift; it's mostly about whether you save at the beginning but how you invest starts to really, really matter by the end.
Those that allow their lifestyle to creep higher over time, means that they are saving a little bit less and because their spending is moving up as their income moves up. And, they now need more in order to retire because the lifestyle has gotten more expensive. This means they've got further to go on this journey.
You say, I'm making more money. I'm going to upgrade a little. I'm going to get a nicer car. The expenses start creeping up. Once it becomes a part of our lifestyle, it's hard to go backward. I used to mow the lawn, but now I got a little more money. So, I'm going to pay someone to mow my lawn. Once I pay someone to mow my lawn, I rarely go back and mow lawn again. We do it with cars. We do it with houses. We do it with a lot of kind of lifestyle maintenance-oriented things.
We routinely see situations where people who are saving are further from retirement in their late 30s and early 40s than they were on day one. Because their lifestyle increased at a much faster rate than their income and savings.
All those little items individually may not really be budget breakers. But you start adding here and there regularly and suddenly the cost your lifestyle is much higher than it was. Consequently, the money you need to retire now is much more than it was because you got to replace this much heavier lifestyle that you sort of unwillingly adopted or crept into.
Save aggressively.
The more aggressively you save, the less you spend since there is only so much money that comes in.
The more aggressively you save, the less you spend, the less goes in upgrading your lifestyle.
So the people who are the best at the savings also are the ones that need the least to retire.
