The gang of 8%

Did you know the tagline for the Ashley Madison website is “Life is short. Have an affair.”?

Ashley Madison is, of course, the infamous website catering to lying men (and I guess now women) who want cheat on their significant other, but don’t have the cajones to be honest about their deception.

The first time I heard about this website, I chuckled a little because I thought it was something The Onion came up with.

When I found out it was a legit website, catering to for-real adulterers, I was horrified.

What kind of scumbag uses this website?

Apparently, millions of men.

Millions of men are… liars.

Who knew?


Speaking of liars, there are lots of ways men (and women) lie… and some of those lies are not at all obvious. And in fact one of the best ways to lie is through the use of statistical data and numbers.

Now, this is admittedly a scary thing because financial planning (and really, everything you come into contact with) revolves around numbers.

Honest numbers build stable and secure bridges. Honest numbers build practical computer systems. And, of course, honest numbers are responsible for making sure you have enough money to spend on things you enjoy like hot dogs, Honda automobiles, your house, and your kid’s braces.

But dishonest numbers do the opposite. They destroy lives… just like cheating spouses.

Why do I bring all this up?

Well, a few years back Fidelity (one of the largest brokerage firms in the U.S.) did a study on retirement plan savings. They have one of the largest databases of retirement plans in the U.S. (maybe the world)… making their data fairly representative of the U.S. populartion. And, since they have all the information they need at their fingertips, it was a simple matter of gathering up the numbers and analyzing the data in their database.

Do you want to know what they found?

You do?

Good, because I’m going to tell you.

They found most people earn modest rates of return on their savings… somewhere between 4% and 6% (before taxes). Some people earn a little more, some a little less.

Interestingly, Fidelity’s study found the average return of 401(k) millionaires was under 5% annually. So much for the popular notion that you will earn 8% on your investments. That story — the 8% return story — is mostly a myth. It’s a narrative designed to make you feel good about not saving very much money. For some people, it’s a way to rationalize not saving a lot of money. If you can earn 8% or 12% in your investments, then you don’t need to save a lot. You can “get away” with saving less because your high rate of return will make up the difference. But, it’s not a harmless narrative. Not saving enough money will destroy your life. That’s not hyperbole. It will destroy your life and probably the lives of your loved ones. Why? Because, without money, you are at the mercy of others to help you pay for expensive things in your old age like… nursing home care, routine medical care, and (eventually) your funeral. But, you’re also mostly helpless to buy expensive things before you get old.

Don’t get me wrong. I am not saying debt, qua debt, is bad. But drowning in debt is bad.

Moving on…

Hardly anyone is earning those high rates of return. Even the Vanguard fanboy club of ultra low-cost mutual fund investing earns substantially less than published market rates of return (according to Dan Wiener, anyway).

Part of the reason why is because it’s technically very difficult to be a good investor… but a not-so-secret reason is because almost no one can afford to sit on their investments forever. In order to have a good chance of earning a lot of money through investing, you need a dedicated pot of money that you never touch.

One of the (many) reasons Warren Buffett is so good is because he doesn’t need to touch any of the money he has invested. Most people are not like him.

Most people need money throughout their lifetime for things like… you know… transportation and emergencies, medical bills, and to fix things that break.

Back to the Fidelity study… the interesting thing about this study was not about how much people earn on their savings. Most of the study focused on retirement account balances and how much people saved and so on. The company wanted to publish data on how prepared people were for retirement.

What stood out to me was rate of return didn’t drive peoples total savings. Savings rate did. In other words, how much money people saved every month was far more important than the return on that savings. 401(k) millionaires saved more of their income than non-millionaires.

OK but what does this have to do with the price of tea in China (as my mom always used to say to me)?

Simple as a dimple, my friend.

The key to growing your savings is to save more and not focus so much on rate of return on your savings.

And there’s the rub. If you’re like most people, you are already maxed out on your budget, and maybe can’t save more than a few hundred dollars a month, if that. You have student loan debt, a car payment, a house payment, credit card payments, and a whole bunch of other payments… and of course every time you get just a little bit ahead in life — emergency. BAM… something wipes out what little savings you have.

… Which is why you need a different strategy for saving money. Cuz the one being pitched to you right now ain’t working.

David Lewis, AKA The Rogue Agent, has been a life insurance agent since 2004, and has worked with some of the oldest and most respected mutual life insurance companies in the U.S. during that time. To learn more about him and his business, go here.