You’re Not Saving Enough

Last month, California’s largest public pensions system, CalPERS, lowered its forecast of expected annual investment returns to 6.5%. Prior to this decision, the expected annual return was 7.5%. This was a major decision affecting the future of our largest state pension system. Here are a couple more relevent facts regarding CalPERS: it currently has $291.4 Billion in assets, and is only funded at 76% of its long-term obligations.

If you caught that last fact (that CalPERS is only funded at 76% of its long-term obligations) and thought that sounded wrong or even scary, your thinking is spot-on. The first logical questions you might be wanting to ask is why they are so underfunded or what is going to happen to all the retirees who have been promised a specified retirement income. Your guess is as good as mine, but some drastic change on California’s tax-payers, new hires, and/or bond issuances will undoubtedly be called up to help buttress this shortfall.

So what suggestions would I offer to a client who exposed the fact that they are only 76% funded for their retirement? Let’s go over some of the advice I might suggest:

  1. Create a budget and stick with it. Without a budget, there is no control on spending. With no control on spending, goals cannot be fulfilled or funded.
  2. Make sure everyone on your team (your family) is on board with your plan. A relationship is not healthy when only one spouse is concerned about finances while the other one is out spending. Open dialogue with each other, your kids, and even close friends can help you feel accountable for doing what you know is right.
  3. Pay yourself first. Your dad told you this; you know this; so why don’t you do it. As soon as you receive a paycheck, commission, or gift, set aside a certain percentage for your future. If you do this enough, you won’t even notice that the amount was removed from your income in the first place!
  4. Make a two-column list – one column lists your needs, while the other lists your wants. Obviously, you should satisfy all of your needs prior to paying for items you want, but don’t necessarily need. Then start by cutting the most frivolous spending from the want category and continue down the list until you’ve reached your budget.
  5. Be honest with yourself. If you cannot afford the lifestyle you want, then adapt your lifestyle to your income. This is also known as “having Champagne taste on a beer budget.” Or, if you are privileged enough to be in the position to generate more income, then do so. Either way, you’ll have to match one to the other.

I bring up the example of CalPERS as it represents the backbone of income and retirement savings for more than 1.7 million people and their families living in California. What this latest news means is that there might be adjustments made to future income guarantees and/or the amount of employee contributions required to ensure their ‘promised’ benefit remains intact.

This should be a leading example of what you and I should be discussing when reviewing your portfolio, budget, and goals. By meeting at least annually, we can monitor your progress towards your goals and make adjustments before it’s too late. Unlike CalPERS, your individual portfolio doesn’t have the same privilege of being pooled with millions of other accounts with future generations (aka CalPERS pension workers/contributors) to fund it.

For 2016, let’s review your plan in greater detail so we can know with some certainty whether you are on the right glide path. If not, we’ll try to make changes to bring your goals closer to reality. If we’re on track, a report will reflect that you are doing the right thing for you and your family.