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Senior Correspondent

The new Apple iPhone 5 was about to come out.

At the start of our weekly call, a new client said she was really tempted to get one right away.  And she wanted my input on what she should do.

I asked what she used now.

“iPhone 4.”

“Locked or unlocked?” I asked.

“Unlocked.”  (She’s not on one of the contracted carriers, so we’re talking a minimum of $649.  Plus new accessories because they changed the shape of the phone and its connections.  Plus-plus-plus.)

I had just started working with this budding entrepreneur and we hadn’t put together her “money snapshot” yet.  (That’s where we identify what she brings home, what she spends and what she owes.)  That meant I didn’t know the details behind whether a new phone made sense or not.

I have to admit, I wasn’t leaning towards saying “yes.”  Instead, it sounded like someone who has to have whatever Apple launches.  An Apple fanatic.  If she was swimming in money and already secure for the long term, she could buy whatever she wanted.  But I knew she wasn’t.

I just didn’t know how bad things were.

So I asked one more question.

“You’re 47 years old.  How much do you have in savings … IRAs, 401k’s or whatever … set aside towards retirement?”

“Nothing,” she answered.

I gave her what is probably one of the most powerful decision-making tools I know.  I gave her a vision of what her later years will look like … a vision she can either live with … or change.  Here’s how I did it.

Social Security

Without savings, she’s going to be living on Social Security.

According to the Social Security website, in 2012 the maximum monthly retirement benefit for a worker retiring at age 66 is $2,513.  (This assumes the person earned the top amount listed on the “taxable income table” for every single year after age 21.)  And for a retired worker in 2012, the average monthly Social Security benefit is about $1,230.

So let’s be generous and assume she falls right in the middle of those two numbers.  In that case, the 2012 value of her future Social Security payment would be about $1,870.  (It should more or less keep up with inflation from now until then.)

I asked her how she envisioned her lifestyle if she had to cover absolutely every living expense on $1,870 per month.  Oh, and that includes the Medicare supplemental of a couple hundred dollars …

She didn’t sound too happy.


Then I explained that she could add to that monthly amount with savings.

Knowing what investments will be paying in 19 years, when she’s age 66, is like licking your finger and putting it in the air.  We used to use 10 percent in these rough calculations.  But with the volatility in the world economy and the potential for inflation, let’s say she’ll be making 7 percent per year.

If that’s the case, she’ll add $100 per month to her available money for every $17,150 she has in her investment portfolio by the time she’s age 66.

How Does That Compare With Others?

The forties are the peak earning years for most people, so it’s a time when they should be well on their way towards their long-range savings goals.  But they’re not.

When Leslie Haggin Geary wrote about retirement in Bankrate.com, 35 percent of workers between the ages of 45 to 54 had less than $25,000 in retirement savings. And only around 40 percent had more than $100,000.

But there’s hope.  And it’s called compound interest.

The Beauty of Compounding

Very few people understand the power of compound interest.  (Or compound earnings.)  Regardless how many years are left before retirement, it’s a very strong reason to save as fast as you can, starting as soon as you can.

As an example, if my client already had $40,000 saved and invested—and never added another cent—by simply reinvesting all the interest being earned year after year, at 7-percent interest she’d have $144,661.10 in the account at age 66.  That alone would add about $850 per month to her available money.

What’s the Verdict?

So, what do you think?  With that scenario, should my client buy herself a new iPhone 5?

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