It might be possible to capture the entirety of personal finance in one question: Am I going to be OK?
In our thirties and forties, we become increasingly aware of the time left to invest for our future financial stability and independence. We’re more prone to asking about how our savings compare to others, and what assets we should already have to our name.
Maybe it’s just a weird way to convince ourselves that maybe we will be ok.
Perhaps the reason we start considering so many parameters and reaching out to an independent financial planner is that retirement calculators are so unrealistic and life rarely cooperates with linear spreadsheet assumptions.
There are times when a crisis, career or life event will cause us to increase or decrease your savings. Volatility in savings from year to year is normal for many households.
The reality is that it’s difficult to answer the question: Are you on track with your long-term investing?
It’s less of a tick-box item and more of a life-long conversation to have with your financial advisor. There are myriad factors involved, from your savings rate, income, market returns, luck, expectations, lifestyle choices, unplanned events – and the list goes on. Some of these factors are within our control, while others have nothing to do with our decisions.
In a recent blog on this topic, Ben Carlson (top financial author and CFA in the USA) wrote:
It shows why relative comparisons can be so tempting with your finances. I understand why young people would like to know where they stand in relation to their peers. No one wants to fall behind and knowing you’re ahead of the game would obviously make life easier. And regardless of where you stand, it’s nice to know how you’re doing financially.
It’s important to remember that guessing is part of the retirement process when it comes to financial planning. Although educated guessing, that needs to consider as many factors up top as possible – it’s still guessing. And it’s the best we have.
Carlson also says that some guesses are in the ballpark while others never make it close to the stadium’s parking lot. Life happens, and we adjust our assumptions based on reality.
At SFP, when we consider the journey to financial independence for our clients, we find that these conversation sparkers are helpful:
- How much do you spend now?
- How much do you plan on spending in the future?
- How much do you save now?
- How much do you plan on saving in the future?
- What is your savings rate?
- What do you think your savings rate will be in the future?
- What do you want to do with your life?
We cannot easily ask ourselves questions; they are focus points that help us most when we can deliberate, ruminate, and conversate with a trusted financial adviser.
Some general principles will always ring true. Starting at an early age affords some flexibility later in life in terms of savings rate and spending decisions because compounding plays a pivotal role in long-term investment planning.
We know it’s hard, but it’s not helpful to compare your financial situation to others.
And as hard as it can be — avoid comparing your financial situation to that of other people. The only benchmark that matters when it comes to saving for retirement is comparing reality to your own expectations. It’s less about a magic number and more about the journey of choice and freedom.