It is important to invest for the future, particularly in retirement. There comes a time when saving for the future can have diminishing returns. This means that you may be sacrificing your current life experiences in order to secure a more secure future. This blog post will explore a case study of a real client and the principles behind compounding and chance cost, which led to an unexpected recommendation: stop saving for retirement.
The Case of Tommy & Linda
Tommy and Linda are a couple between the ages of early and mid-fifties who approached us to help with their financial planning. The couple were diligent savers and had a networth of around two and half million dollars. This was a result from their consistent saving, smart investments and even the liquidation stock options.
The retirement portfolio consisted of 401(k), Roth IRAs and real estate. They were on course to have a significant retirement nest egg when they reach their late 60s, with a projected growth rate of 8 percent.
Goals and Dilemmas
Tommy was passionate about his work and wanted to continue working until he reached 67 years old. Linda, who stayed at home to raise her children, wanted to spend more time with them. They set financial goals of $6,000 per monthly for living expenses and $15,000 per year for travel.
The couple, however, expressed a desire to spend more time with their family and regretted the lack of funds available for meaningful experiences, due to the aggressive retirement saving strategy they had adopted, including maxing out their 401(k), and contributing to Roth IRAs.
Using the Principles
When assessing the financial situation of Tommy and Linda, we used two key principles: opportunity cost and compounding.
- Compounding:
- Compounding is a process that works with time. Contributions played an important role in the growth of the portfolio during the initial years. However, as the size of the portfolio increased, so did the impact from the market. The portfolio’s growth could be achieved without aggressive contributions over time.
- Opportunity Cost
- They risked losing out on precious experiences with their kids, especially in these crucial teenage years, by saving relentlessly for a future they might over-secure.
The decision to pause retirement savings:
We recommended to Tommy and Linda that they pause any additional retirement savings. We advised them to keep receiving the employer matching in their 401(k), but suggested that they use the excess funds for immediate and memorable experiences with the family.
The Impact of:
The projected portfolio for age 90 decreased by $4 million when the retirement contributions were reduced. The couple had enough money to cover all of their retirement expenses including travel, healthcare, and basic living costs.
The case of Tommy and Linda is a good example for when it makes sense to put off retirement savings. When carefully considered, the principles of compounding, and opportunity costs, can guide couples and individuals towards a balanced financial plan that will not only provide for their future, but also allow them to enjoy the precious moments of today. Do not let retirement be your only goal. Instead, aim for a life that combines prudent planning and the enjoyment of the present.
