March - April 2018

Written by Keith Schwanz
From his column It’s Your Money

its-your-money-03-18_article.jpgLaggard! My cell phone proves it. Until the first week of 2018, I used an old-school flip phone. Until then, I actually talked to people with my phone rather than stumbling down the street staring at tiny words on a screen.

But all that changed with the dawn of the new year. I am now the owner of a smartphone. My first computer weighed 25 pounds, but the slim, five-ounce thing I now have in my pocket is exponentially more powerful.

I have loaded my phone with apps that help me find my way when I need directions, entertain me when I’m bored, or check the weather. This thing will do everything! Who knew?

One of my favorite apps can digitally modify a photo. I took a picture of myself, but when I tapped the icon to make my image look older, nothing changed. The pictures of the real me and the older me looked exactly the same. When I tried the photo app with my 10-year-old grandson, he aged beautifully. The “man” icon made him look about 20, and the “old man” icon made him look about 50.

The Future Self

People who consider what they will be like in 20 or 30 years tend to make decisions today that will serve them well in the future.

Hal Hershfield, a professor at UCLA, and his colleagues used digital processes to age photographs of study participants, adding physical characteristics such as jowls, bags under the eyes, and gray hair. In this study, half of the participants saw an altered photo—their future self—and half saw a photo of their current self. After viewing the shots, participants were asked to divide $1,000 between four alternatives: to buy a gift for someone special, to invest in a retirement fund, to plan a fun event, and/or to deposit money in a checking account.

The results of this study fascinate me. Participants who saw their senior selves put almost twice as much money into the retirement fund compared with the control group. Researchers conducted other studies to verify their conclusions and the results were confirmed. People who consider what they will be like in 20 or 30 years tend to make decisions today that will serve them well in the future.

Three Calculations

A few financial calculations can provide a financial snapshot about future living expenses. First, estimate annual expenditures in retirement. This could be as simple as using the amount currently being spent, although expenditures often decrease in retirement. For this example, we’ll use $59,000, the median household income as reported by the United States Census Bureau in September 2017.

Second, subtract from estimated expenditures what will be received from Social Security. The Social Security Administration estimates that for many households Social Security provides 40% of their income in retirement. Specific information about an individual’s benefits can be retrieved by registering at ssa.gov. Continuing our example, a household could expect $23,600 (40% of $59,000) from Social Security each year. The expected costs in retirement ($59,000) minus the projected Social Security receipts ($23,600) equals $35,400, that is needed annually from other sources.

The 4% rule can be used to calculate the estimated amount needed to fund a given income stream. As a rule of thumb, a person can withdraw from a retirement account 4% annually for about 30 years. So, third, divide the annual amount needed from sources other than Social Security by 4% (0.04) to calculate the beginning balance necessary to fund living expenses in retirement. In our example, $35,400 divided by 4% equals the retirement fund goal of $885,000.

Sophisticated processes can be used to make more detailed calculations, but this method provides a quick way to get a basic picture of future financial needs. From these calculations a person can develop action plans to implement today. If in our example there is a current balance of $25,000 in a retirement account and retirement begins 30 years in the future, the minimum annual contribution to a retirement account should be $9,378 to reach the goal of $885,000 (assuming a 6% return). To do less than that is to risk a sharp drop in the standard of living during the retirement years.

I’m already old, and I have the photo app to prove it. My grandson, in contrast, has years to go. If he envisions life when he is old while he is young, he will likely make better decisions today that will provide benefits years from now.

Keith Schwanz is a writer and editor. He previously served the church as pastor, church musician, and seminary educator.