According to an ING global survey, people are worried that won’t have enough money in the retirement phase. Europe, the US, and Australia had an approximately 60% share that ‘agree’ or ‘strongly agree’ with the sentence: “I worry about whether I will have enough money in retirement.”
Also, the majority of the respondents believe that they will continue to work after already being retired. 54% in Europe, 60% in Australia and 64% in the US. This is really impressive especially in the US where almost 2 in 3 individuals believe that they will have to continue working.
In terms of savings, the percentage that answered ‘no‘ to the question “Does your household have any savings” is 27% in Europe and the
This is a bit scary because these are individuals and families that will have a hard time if something unpredictable shows up in their financial life.
Savings and different sources of income (independent from work) are the key elements that can contribute to financial freedom.
How Much is Enough?
In this study I see three big problems:
- People are worried that they may not have enough money;
- People are worried that they will have to work when they’re old;
- Some people have 0 (zero) savings.
We hear all the time: Money doesn’t bring happiness. Money does give you options. It can buy you some time, whether you’re between jobs, or facing an unexpected financial problem.
Thus the big question: How much is enough in terms of emergency funds? Personally, I like to think in terms of expenses, because is something easy to track. Therefore easy to quantify how much do you need in order to feel safe.
How to choose between 0, 3 or 36 months? And after deciding the number of months, and saving that money, where to allocate these resources? Stocks, bonds? Certificate of deposits? Funds, ETF?
Here is where it gets personal. Many considerations could play a role in the final decision, such as job security, health situation, kids, age, tolerance to risk, and so on.
Naturally, the recommendation would be: if you want more peace of mind, include more months in the emergency fund. After saving that amount, allocate it to a financial product with ‘zero risks’. For example a certificate of deposit covered by the FDIC. The problem here is that in the example above, for monthly expenses of $15k, and a 36 months emergency fund, this would mean: + half million in a certificate deposit. And the FDIC only insures $250k.
On the other hand, if I have great job security, no health condition, zero kids, relatively young (< 35 years) and a high tolerance to risk, the smart move would be to allocate the emergency fund to an ETF of stocks globally diversified with a low TER. Although with more volatility, the return of stocks – historically speaking – is far higher than bonds or certificate of deposits.
For the majority, the answer will probably be in between these two scenarios. Also will probably vary with age. Therefore the key takeaway here is: draw a plan that you feel comfortable with and stick with it.
Adjust if something new happens. Don’t overthink. If I had zero savings, I would start from the beginning: 3 months of savings in a certificate of deposit. And I would go from there.
“Freedom is nothing but a chance to be better.”
– Albert Camus
Financially Independent Retirement
In the end, the retirement phase will be more
Savings + Monthly source of income (other than work or Social Security/Pension fund) will give the so much desired long term stability to enjoy your golden years.
A good plan will surely turn a fiction into a enjoyable reality.
And you reader? Agree with this? Different approach? Tell us all about it.