Personal Career and Financial Security Ch 25

Savings and Investment Strategies

• Maximizing Returns: Studies show a maximum low-risk "real" investment return of 4% over a century. Real return subtracts inflation from total return. For example, if inflation is 3% and savings earn 7%, the real return is 4%.

• Retirement Planning: Start by determining your necessary retirement income. Total all costs (taxes, insurance, food, medical, rent). This total is 4% of your nest egg requirement.

• Nest Egg Calculation: If yearly retirement income needed is $40,000, savings (plus property) should total $1 million. $80,000 income requires $2 million plus home.

• Inflation and Savings: If your nest egg earns high returns (e.g., 10% due to inflation), extract expenses, plus a small amount for continued inflation, and reinvest the remaining earnings into savings.

• Long-Term Savings: Never assume access to large amounts from the nest egg. Savings reduce ability to earn income. Plan for a longer period than you think you will live (e.g., 30+ years after 65).

• Importance of Business Ownership: Conventional employment often does not provide enough savings for retirement needs. Earning from business ownership is viewed as more likely to achieve and maintain financial prosperity than traditional work.

• Opportunity Cost: Every decision (buying, saving, spending) involves an opportunity cost – what you lose by choosing a certain action.

• Calculating True Cost: The "true" cost of purchasing an item today (e.g., CD player) is significantly higher than the purchase price. Calculate the future value of that money, factoring in the lost opportunity cost. 

• Investment Risk: Risk decreases with age. A younger individual loses more money by risky investment decisions than someone close to death, in terms of lost future earnings potential from the investment.

• Avoid High-Risk Investments: Avoid promises of unusually high returns (e.g., >5%). While some achieve tremendous returns, most do not. Business success often involves hard work. Avoid schemes claiming large, effortless returns.

• Eric's Experience (1983): A personal account of a substantial loss from an unwise investment in 1983 highlights the potentially disastrous impact of poor investment decisions. $17,000 investment had an opportunity cost of $235,000 if lost in that time frame.