By: Edward Leone Jr. DMD MBA CFP RFC
Contact Information: leonee@vzw.blackberry.net
I find much of the information available to the population regarding the strategies for retirement savers as misleading and week in describing the discipline required in such a savings effort. One of the major 401k administrators reports that for every $1,000/ month in needed retirement income that a 25 year old would have to save $160/ month for 30 years assuming a 5.5% return on investment. This is misleading in that it does not appear that an inflation factor has been considered. If the average inflation factor of 3%/ year is introduced, the amount needed in 30 years to match the purchasing power of $1,000 today is $2,420. The 25 year old needs to save $384/ month to meet the desired goal in a tax deferred 401k account. Do you see what I mean?
Many concerns are expressed regarding monetary policy conducted by the Federal Reserve Bank and the eventual end of such stimulation to the economy along with when this will occur. In order to wind down this strategy, it must be accomplished slowly and only when the economic growth as measured by GDP increases is evident. The experience we are having with slow economic growth may persist for a while due to the protracted deleveraging cycle we are in. History tells us that this is what happens after a credit bubble. A rapid rise in interest rates would put the economy into a tail spin defeating the purpose of the QE strategy to begin with. Monetary easing will become a tightening policy, but in a gradual and tapered effort over time if done adequately. It will be quite a relief to fixed income investors when this occurs since the interest rates received on these investments will increase. Another element in the mix is a concerted effort by government to engage in a measure austerity in order to reduce the burden on economic growth along with tax structure modification which is all a part of fiscal policy.
There are many statistics available to give us a panorama regarding changes in life, work and opportunity. In 2003, the average student loan balance for a 25 year old was $10,648 while today it is $20,326. The average cost of a wedding in 2012 was $28,427—WOW!! $80,900 was the average 401k account balance at the end of Q1 2013.It is obvious to me that we are victims of many factors including the barrage of advertising we are experiencing from day to day. It is extremely difficult to ignore all of this in the process of distinguishing needs from wants. This task is a stress in many households in the form of emotion and budget discipline. Look for cost increases for 2014 in the following areas: health care costs and health insurance premium levels; property and casualty insurance costs; accounting and auditing costs for business; fuel costs; rents; travel and entertainment costs; freight and shipping rates. How can inflation stay low and under control even with the excess capacity our economy exhibits in manufacturing and labor?
We face many unknowns for the near future. The challenge of personal planning and business planning will remain as a problem for most all of us.
For The Record:
DJIA 14,930.87
NASDAQ 3,649.04
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Suggested Reading: “Profiting From Monetary Policy” By Thomas Aubrey
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