Retirement savings needs of renters prior to any financial planning improvements Starting to plan with a non-optimal baseline projection
Fran and Fred Frugal, both age 30, are a married working couple with $100,000 in combined annual earned income. They want to understand how valuable different personal finance strategies could be to their lifetime finances and retirement security. In this baseline projection scenario, they plan always to rent, will not have children, will retire at age 65, will not use any tax-deferred investments, and will pay average investment costs.
See the “BASELINE PROJECTION ASSUMPTIONS” section at the bottom of this article for more information about Fran and Fred’s current personal finances and their other lifetime financial planning assumptions.
In this “baseline” case, Fran and Fran have NOT adopted many of the lifetime financial planning practices that make it easier to achieve financial success in life. In a series of articles, The Skilled Investor will compare different lifetime financial planning projections for Fran and Fred to illustrate the relative value of adopting different financial planning strategies.
A hard financial road for Fran and Fred to travel in life
At age 30, Fran and Fred have begun to reevaluate their financial practices. They still have $20,000 in educational debts and $15,000 in credit card debt. They have accumulated $30,000 in financial assets. They want to know how much they “need to save” or “could spend” this year and in the years ahead and still have enough over their lives until age 95.
How much should they be saving each year over their working years? This “Pre-retirement Savings Rate” graphic tells the tale. In summary, they should be saving a lot and at higher percentages than most people think are necessary.
As renters in this baseline case, who will not take advantage of tax-deferred investment accounts during their lives, their nearer term savings percentage requirements are very high — exceeding 20% in the early years. Several things should be noted about this Pre-retirement Savings Rate graphic.
First, during the initial six years of their forecast, Fran and Fred are inhibited from saving more by their outstanding debts. From ages 30 to 36, they plan to repay both their remaining educational loans and their current credit card debt. Then, they intend to remain debt free thereafter.
From ages 30 to 36, the green line in the graphic above shows how much their projected savings [...]