With the average savings rate below 5%, a median 401(k) of only $100,000, and an average 401(k) balance at retirement age 60 of around $230,000, most Americans are financially screwed. Just do the math yourself. Add the average Social Security payment per person of $18,000 a year to a 4% withdrawal rate on $230,000 and you get $27,200 a year to live happily until you die at 85.
Let’s think about this some more. You spend almost 40 years of your life working just to live off minimum wage in retirement. Hopefully you were able to live it up during your working years, otherwise, how else can we explain a national sub 5% savings rate? Blowing lots of money for fun is fine if you expect to live like a pauper when you’re old. The better way to do things is to smooth out your spending across your expected life expectancy to reduce stress and live a much steadier lifestyle.
We’ve talked in detail about the proper asset allocation of stocks and bonds by age. Just know that stocks should be a minority portion of your net worth by the time you are middle age. If you so happen to have 100% of your investment allocation in stocks before retirement and 2009 happens, well then you are poop out of luck. Calculate how much you lost, equate your loss to how many years it took you to save the value of the loss, and expect to work that many more years of your life. Now that’s depressing.
We also found out that the median net worth for 2010 plunged to $77,300 from a high of $126,400 in 2007. Surely the median net worth has recovered since 2010, but such data from the government only rolls around every three years. The main nugget of information is that from 2007 to 2010, the median home equity dropped from $110,000 to $75,000. In other words, the median American’s net worth almost ENTIRELY consists of home equity! What another bad idea.
Finally, despite a 120%+ rebound in stocks since the bottom of the crisis and savings interest rates of only 0.1% due to a dovish Fed, a lot of people missed out on the recovery as evidenced by a tremendous amount of cash still sitting on the sidelines due to fear. Billionaire hedge fund manager David Einhorn is suing Apple for hoarding their $134 billion in cash due to a “grandma depression mentality.” Anybody who has lived through the 1997 Russian Ruble crisis, the 2000 internet bubble, and 2006 housing correction probably has a good portion of their net worth in CDs, bonds, and money markets because they’ve been burned so many times before.
The question we must all ask ourselves is, “What is the right net worth allocation to allow for the most comfortable financial growth?” There is no easy answer to this question as everybody is of different age, intelligence, work ethic, and risk tolerance. I will attempt to address this question based based on what has worked for me, and what I believe will work for anybody who is serious about building enduring financial wealth for the long run. I’ve spent over 10 hours writing this post in hopes that every Financial Samurai reader can build a rock steady net worth portfolio to make money in good times and lose less in bad times.
THE MENTAL FRAMEWORK FOR NET WORTH ALLOCATION Read more…