Traditional advice is wrong: Here’s how much you actually need to save for retirement
I’m generally an even-keeled guy. I don’t get worked up about much. I understand that different people have different perspectives, so I try to be respectful when others disagree with me. Having said that, there are indeed certain things that piss me off. Here are a couple that are centered around the idea of planning your retirement based on how much of your paycheck you should save.
Myth #1: You Need to Have 70% of Your Income
For instance, I get mad-dog lathered up at traditional advice about how much to save for retirement, such as this article at Business Insider (echoed here at The Wall Street Journal):
So how much are you supposed to be saving in order to finance 20 to 30 years post-work? The commonly accepted rule of thumb is that you’ll want about 70% of your former annual income — at least — to continue living at or near the style to which you’ve been accustomed.
Let me be blunt: This rule of thumb is asinine.
This “rule” (which is used by most retirement calculators, both on the web and from financial planners) estimates how much money you’ll need by using your income as a starting point. The 70% ratio is commonly used, but plenty of places use 80% or 90%. Regardless the percentage, estimating your retirement spending from your current income is ludicrous. It’s like trying to guess how much fuel you’ll use on a trip to grandmother’s house based on the size of your vehicle’s gas tank!
- Say you make $50,000 a year but spend $60,000. In this case, your income understates your lifestyle by $10,000 a year. If you based your retirement needs on your income, you’d be screwed.
- On the other hand, if you’re a money boss who saves half what she earns, you’d only spend $25,000 of a $50,000 salary. Basing your retirement needs on your income would cause you to save much more than you need. You’d be working long after the point at which you could retire safely.
Predicting how much much to save for retirement based on income makes zero sense. (Zero!) It’s one of those pervasive financial rules of thumb — such as “buy as much home as you can afford” — that does more harm than good. There’s a real danger that if you heed this advice you won’t have enough saved in retirement. If you’re proactive like many Get Rich Slowly readers are, you run the risk of saving too much, meaning you’ll miss out on using money to enjoy life when you’re younger.
Instead of estimating how much to save for retirement based on your income, it makes far more sense to plan your retirement needs around your spending. Your spending reflects your lifestyle; your income doesn’t.
So, how much do you need to save for retirement? How much will you spend? It depends.
For many people, expenses drop when they stop working. They drive less. The kids are out of the house. The mortgage is gone. And, ironically, they no longer have to save for retirement. Meanwhile, other expenses increase. (Most notably, health care costs tend to balloon as we age.)
That said, it is possible to get a general idea of how much you’ll need in the future. According to the 2016 Retirement Confidence Survey: about 38% spend more in retirement than when they’re working. 21% spend less, and 38% spend the same. Past iterations of this survey have shown that roughly two-thirds of Americans spend the same (or only slightly different amounts) during retirement as they did while working.
Translation: In general, your pre-retirement expenses are an excellent predictor of your post-retirement expenses. That’s why I prefer this rule of thumb: When estimating how much you need to save for retirement, assume you’ll spend about as much in the future as you do now.
Forget the “70% of your income” bullshit when planning for retirement. Use 100% of your current expenses instead.
Financial planner Michael Kitces — who has an awesome blog — sent me a note to explain why advisors use the “70% of your income” rule. The answer? “Because it works.”
Generally speaking, the 70% of income replacement ratio works because once you subtract taxes and work-related expenses (plus savings), it’s close to 100% of expenses in most cases. I still think this is a crazy way to come at it — why not just use 100% of expenses? — and that it’s completely off-base for folks with high saving rates. For more on this subject, check out Michael’s article in defense of the 70% replacement ratio.
Myth #2: You Need to Save 10% of Your Income
GRS reader Carla dropped me a line because she’s puzzled where the standard “save 10% of your income for retirement” advice originated. She’s afraid that ten percent isn’t nearly enough. Carla writes:
The financial experts always say to save 10% for retirement (for example, in your review of The 1-2-3 Money Plan). Buy why 10%? It doesn’t make sense to me.
I’m 25. If I retire at the normal age of 65, that will give me about 40 years of full-time wage earning. Let’s say I plan to die at 85. That’s 20 years of retirement. I’m assuming that I’ll be fully funding my own retirement (not counting on any sort of pension or social security).
How on earth would saving 10% for 40 years cover your expenses for 20 years? I know that expenses should be a bit lower in retirement, and I know that the money will make some gains due to being invested, but really? How the heck could that ever add up?
The short answer to Carla’s question is that, in general, if you start saving early, and if you invest aggressively, 10% can often be enough. But there are a lot of things that could go wrong, too. The stock market could drop nearly 40% in the year you choose to retire (as it did in 2008). You might suffer a catastrophic illness. The country might experience hyperinflation.
Each of these things are unlikely, but they are possibilities. Because of this, many people save more than the 10% commonly recommended by experts.
Why 10%?
I think that the experts urge 10% because it’s a target people can understand, one that doesn’t seem too intimidating. It’s a convenient financial rule of thumb. My own opinion — and I’m sure the experts would agree — is that you should save as much as possible for retirement. Columnist Liz Weston has a great suggestion:
Save 10% for basics, 15% for comfort, 20% to escape. This rule of thumb works pretty well if you start to save for retirement by your early 30s. Saving at least 10% of your income ensures you won’t be eating pet food. Fifteen percent should get you a more comfortable living, while 20% gives you a shot at an early retirement (and yes, you get to count employer contributions as part of your percentage). Wait just a decade to start, though, and you’ll need 15% for basics and 20% for comfort; an early retirement may not be in the cards.
Tonight I asked my wife how much she’s setting aside for retirement. Her salary is nearly $60,000 a year. She’s setting aside $18,000 herself, and her employer is contributing $3,600. In other words, Kris is saving nearly a third of her gross income. But Kris hasn’t always saved this much. She didn’t save much at first, but has increased the amount she saves as her income has increased.
When you’re 25 like Carla, you’re probably near the low point of your earning potential. This is a huge reason that I’m advocate of banking your raises into savings accounts. In general, people earn more as they get older. Don’t use salary increases to fund lifestyle inflation, but instead use that money to save. It may take a few years, but eventually you can set aside 25% or more, just like my wife.
Figuring Out How Much to Save
According to the National Foundation for Credit Counseling’s 2016 Financial Literacy Survey, “When it comes to retirement savings, about 1 in 4 U.S. adults (26%) do not save any portion of their household’s annual income for retirement, which, while a significant decrease from 2015 (29%) is still a large percent not funding this important life event.”
Because you can’t see the future, there’s no way to know exactly how much you’ll need to save for retirement. All you can do is make your best guess, taking these variables into account:
- When will you retire?
- How long will you live? (You can get an estimate at Living to 100.)
- How much will you spend?
- What will your health be like?
- How much will you save and how aggressively will you invest?
- What will the inflation rate be between now and the time you retire?
Because there’s so much uncertainty, financial planners use Monte Carlo simulations, which analyze tons of historical data to estimate, based on your current savings and planned retirement date, how likely you are to run out of money in retirement. The results can help you plan how much money to save.
Monte Carlo simulations are great but complicated; you’ll probably need to consult a financial planner if you want one run for you. But you can get started by making some rough estimates by hand — and with the help of web-based retirement calculators.
Tip: Delaying retirement can only help your financial situation. The longer you work, contribute to your retirement savings, and go without tapping Social Security and retirement accounts, the more money you’ll have later.
A Better Way
If you’re going to base your savings goals on how much you’ll spend in retirement, you’ve got to have a way to gauge your future spending. Will your expenses increase or decrease? That depends in large part on your health and your plans. If you get sick or travel a lot in retirement, for example, your expenses may go up. In general, though, your expenses will likely stay about the same. According to the Employee Benefit Research Institute’s Retirement Confidence Survey:
- 49% of retirees spend less in retirement than before (26% spend much less)
- 35% spend about the same as before retirement
- 14% spend more in retirement (though 7% say their expenses are only “a little higher”)
Overall, 65% of Americans spend about the same or only slightly more or less in retirement. That means their pre-retirement expenses are a good predictor of their post-retirement expenses.
Expenses often drop in retirement because your kids are out of the house; your mortgage is gone—or nearly so (one of the surest steps toward retirement security is to pay off your mortgage); you have no commuting costs or other work-related expenses; and, ironically enough, you no longer have to save for retirement. Sure, you’ll have other expenses — especially health care — but if you’ve been smart and planned ahead, you should be in good shape.
Make no mistake: You will need a sizable nest egg for retirement — especially if you have ambitions to travel or want to golf every day. In fact, you should save as much as you can. But don’t be snookered by the constant refrain that you need 70% of your pre-retirement income. That’s nonsense—base your savings goals on your projected expenses instead.
The moral here? Don’t panic — you can save enough for retirement. In Retire Well on Less Than You Think, Fred Brock writes:
Most people can retire from wage slavery sooner than they think if they are willing to pay a relatively painless price for their freedom: a simpler, downsized life and, perhaps, a move to a less expensive part of the country — and it doesn’t have to be remote or far away.
The key is to live within your means now, which lets you boost your cash flow so you can accumulate savings for later in life.
The Power of Compounding
Even if you set aside 25% of your income, though, how can that possibly be enough to cover your needs during retirement? If you’re worried about how much your investments can actually earn over time, take a look at two past articles:
Briefly, compounding can (and does) supply huge returns. These returns are magnified the longer your money generates the returns. That is, $1000 invested at 10% for twenty years doesn’t just earn double the amount you would earn if the money were invested for ten years.
Playing with this compound interest calculator, the first scenario generates $2593.74 while the second produces $6727.50. (And leaving the money there for 40 years would produce $45,259.26!) There’s a reason financial advisers urge people to begin investing early. Returns are magnified with time.
Are 10% returns realistic? Perhaps. Although even the best CD rates aren’t returning rates that high now, as the article above demonstrates, the average long-term return on U.S. stocks is roughly 10%. This is what stocks have returned in the past.
Making the Most of Your Money
Having said that, there are some important things to remember.
First, as mutual fund advertisements are eager to tell you, “Past returns are no guarantee of future results”. Just because the stock market has returned about 10% in the past doesn’t mean it will do so in the future. (Warren Buffett has said that he expects stocks to offer much more modest returns over the next century.)
Second, average is not normal. Yes, it’s true that the U.S. stock market has an average annual return of about 10%. But that doesn’t mean that it returns 10% every year. Some years — like 2008 — the market drops by 39%. Some years — like 2009 — the market grows by 18%.
Here are a few keys to obtaining steady returns from your investments.
Have a plan
Develop an investment plan built around your age, your goals, and your circumstances. Ask yourself how much risk you’re willing to take. Some people are willing to take on greater risk in order to have a chance at higher rewards. Whatever the case, take the time to draft a plan that makes sense. Refer to this plan whenever things become confusing. Reminding yourself of your plan can keep you from overreacting — in good times and in bad.
Don’t be an emotional investor
I’ve heard from a lot of people who invested near the top of the stock market in 2007 — and then sold last winter. This is buying high and selling low. It’s a sure way to lose your shirt. When the market tanks, don’t panic. When it’s riding high, don’t get caught up in the euphoria. Have a plan. Keep making your contributions. Thing long term and ignore the short-term noise — no matter how loud the noise might be.
Don’t raid your retirement
It can be very tempting to raid your retirement account to buy a new home or to take a trip to Europe — or even to put food on the table when you’re out of work. This is usually a bad idea. When you tap into retirement early, you’re subject to taxes and penalties — and you’re robbing from your future self. You’re robbing not just the money you take, but also the returns it might have generated over the years.
Make regular contributions
Get in the habit of saving for retirement by investing regularly. Make it automatic, if you can. The best way to do this is to enroll in an employer-sponsored program and have the money taken from your paycheck. This way the process is invisible to you. Regular contributions to a retirement plan allow you to take advantage of dollar-cost averaging.
Take advantage of free money
If you have access to an employer-sponsored retirement plan, use it. When your employer matches your retirement contributions, it’s like getting free money. There are few better deals in the financial world. (Are there any better deals?)
Each of these actions can help you obtain better long-term results from your retirement savings. But the real key is to start now. The sooner you begin, the more time you have to accomplish your goals.
Running the Numbers
Not every retirement calculator derives its numbers from pre-retirement income. During my research, I found several tools that let users project retirement needs based on other factors, including expenses. Some of these calculators are simple; others are more complex:
- T. Rowe Price: Retirement income calculator
- MoneyRates.com: What will my retirement savings be worth?
- Moneychimp: Simple retirement calculator
My favorite calculator, however, combines simplicity and complexity. FIRECalc 3.0 may seem overwhelming at first (there’s a lot of text to read there), but it’s actually fairly elegant. It asks for how much you have saved, how much you’ll spend every year, and how many years you expect to live. Then, using historical data, it produces a graph to show you how likely your planning is to succeed:
FIRECalc shows you the results of every starting point, since 1871. You can get a sense of just how safe or risky your retirement plan is, based on how it would have withstood every market condition we have ever faced.
If you want to make the FIRECalc model more complex, you can. But it’s possible to have fun with it — and to learn a lot — by just using the basic data fields on the main page.
“How much should I save for retirement?” is a complex question. There’s no magic answer because nobody can see the future. All you can do is make your best guess while taking into account historical rates of inflation and investment returns, future health-care costs, and your estimated life expectancy.
Have you attempted to calculate your retirement number? What method did you use and why? If you’re close to (or actually in) retirement, I’d love to hear your advice. How should those of us in the planning stages proceed?
How Much Should You Save?
Retirement planning is a complicated subject, and I’ve only scratched the surface here. There are a lot of variables I haven’t covered (taxes, inflation, etc.). Carla is way ahead of the game by asking these questions now.
When I started saving, I decided to embrace Elizabeth Warren’s balanced money formula, which says to set aside at least 20% of after-tax income for Savings, keep Needs below 50%, and use the rest for Wants. In other words, my target savings rate is 20% of my income. My wife tried to save 25% of her income.
So, how much of your income do you save for retirement? Do you save 10% like Carla? Do you save 25% like my wife? How have you arrived at this amount? Do you plan to save more in the future? I’m especially interested to hear from those who are in or near retirement. Do you wish you had saved more when you were younger? What would you do differently? What advice can you offer folks like Carla who are just starting out?
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There are 348 comments to "Traditional advice is wrong: Here’s how much you actually need to save for retirement".
My goal is to just try to save as much as I can now that I’m young in as many different ways as possible (401k, Roth, etc.).
Once I get older (maybe in my mid 30s or 40s) I’ll start to really break down the math. The way I see, too much can change between now and my retirement for me to make assumptions.
USAA has an EXCELLENT retirement planner, but I think you have to be a member to use it. It asks you what kind of lifestyle you want as a retiree as a starting point and breaks it into categories (with questions such as I want to travel several times a year and such)… The other assumption that really changes the equation is how long you expect to live!
The most likely reason that most calculators base their assumptions on income and not spending is because they want to further propagate the ideal that it is normal and acceptable for most people’s spending to equal their income. It’s a disservice IMO. Thanks for the article and links.
How much you spend depends on what you plan to do. I plan to spend a few decades riding around the planet on a motorcycle. This has a different cost structure than for example, staying inside your subdivision and eating boiled hot dogs. The FIRECalc seems useful because you put your spending amount and horizon.
P.S. FIRECalc says I have a 34.9% chance of success retiring today.
I try not to worry about getting to a certain magical number. Instead I’m interested in just stashing away as much as possible. When I reach an amount that makes me feel comfortable I’ll retire.
I’ve used the calculator at choosetosave.org It is a program of the Employee Benefit Research Institute. It gives you a “ballpark” figure of what you need in retirement by taking into consideration what you’ve saved, what plans you have (pension/no pension), whether you plan to work in retirement, etc. Here is the link:
http://www.choosetosave.org/ballpark/
For me, it said I need to save $10,000 annually based on what I have already saved, which seems a bit low to me, even though I have saved a lot. It does take into account Social Security Benefits, which you can input “$0” if you prefer. I did a post on this recently, too:
http://savingmoneyirl.blogspot.com/2008/11/are-you-ready-for-retirement.html
I am a baby boomer not yet retired but in the home stretch. I agree that using current income as a baseline metric for estimating retirement income needs is a mistake. In addition to the calculators you listed, I recommend that readers take a look at “Financial Fate” (currently a free download) and “Financial Engines” (requires a subscription but well worth it.) These take more time and effort to use but provide a superior output for real world retirement scenarios.
I look strictly at future expenses when determining how much I need. Basically I look at my current expenses – subtract some obvious temporary costs such as mortgage, kid costs etc and then add in some travel costs.
The actual process is fairly involved but my suggestion is that unless you are pretty close to retirement – don’t sweat the details. If you are 30 years old then your assumed rate of inflation will have a far greater impact on your retirement predictions than a small error on your Social Security payment prediction.
Alternatively – if you are fairly young and have obvious financial situations to take care of (ie start saving, pay off debt) then do what Weakonomist does and just work on those.
I don’t have a number. I did go to a financial planner once for a look-over and they said things looked fine.
What I’d really like to do is to take some time off to travel BEFORE I get old and have to worry about falling down and pay someone to carry my bags for me and all that. I did one round in grad school, so if worst comes to worst I have that, but I’d like to do some more. I don’t think I’d really mind working when I’m actually old, just for the social contact, although preferably only part-time.
Many don’t know what their retirement will look like (or want it to look like)till they are about 40 years old and by than if you havent saved chances are you will not reach your “dream retirement”
As couple others said I just save up as much as I can right now and in about 20 years I will have to start looking at the details of my retirement. Right now I have no idea what I will do or if I even want to retire.
Stash as much as you can away when you are young and single and healthy. life does come fast, and you will be forever grateful that you have that cushion in your life, no matter if you use it for retirement, healthcare, or fertility treatments. You never really know how you’ll need cash, but at some point, most of us do.
When I think about how much I will need for retirement, I base it on how much money I currently spend, and think I will spend in the future. I’m just about to hit 30, so I’m sure my number will change, but right now I figure I’ll be able to live on roughly $40k a year (holding no debt) and would like to “retire” by 55. If I plan to live to 85, my total number needed would be $1.2 million. That doesn’t take into account inflation or interest earned on investments, but it also doesn’t take into account that I plan on setting up some minimal effort streams of revenue. Another consideration is that the house we are in right now is perfect for growing old in since everything that we need (including the master bedroom and bathroom) is on the first floor.
If you’ve seen my blog, you’ll notice that my goal is to build a net worth of $4 million by age 55, but if need be I think I can retire at 55 with $1.2 million. These numbers may seem grossly out of whack, but they’re something to shoot for.
$70,000 required income
-$10,000 pension benefit
-$12,000 social security
$48,000 net income from portfolio
you need to save 25 x $48,000 or $1,200,000.
The last step is to structure a diversified low-cost portfolio based on your own ability, need and willingness to take risk. I do this for clients and also run a monte-carlo simulation that will give the investor an idea of how successful they might be given their goals and the portfolio I design.
Great site, keep up the good work.
Regards, Anthony
An additional benefit of spending less than you make when contemplating your retirement needs is that any money you’re saving while you work immediately comes off of your cash-flow needs during retirement. After all, there’s no reason to save for retirement when you’ve already reached retirement!
As you’re probably aware, there’s a whole book, “The Number” by Lee Eisenberg, devoted to this very topic. A good read.
I like your unconventional approach. Let’s get even more unconventional: Create your own definition of retirement before quantifying it with monetary measures!
If one’s definition of retirement is simple and based upon contentment, then the anxiety and processes to reach a seemingly unobtainable financial goal may be obtained… NOW!
Why would someone want to base retirement solely on monetary measures? Is money really what provides our “freedom?” Well-being and true freedom can not be quantified or obtained by monetary means.
What’s more, it does not always require money to do what you want to do.
Define terms, such as retirement, or they will define you…
“Man acts as though he were the shaper and master of language, while in fact language remains the master of man.” ~ Martin Heidegger
Agreed that expenses is the way to go.
Another good calculator I use is, Vanguard’s Managed Payout Fund Calculator…https://personal.vanguard.com/us/funds/vanguard/ManagedPayoutList
These funds are managed just like a pension fund, they’re not your typical retirement income fund. Your payout can change dramatically from year to year.
They help me decide how much portfolio income I would have if I put all my after-tax savings into one of these funds.
What infuriates me is that with everyone harping on you to start saving early, you’d think the calculators would start younger. So many of the ones I’ve tried don’t even let you use them younger than 35 or 30.
Frugal Bachelor’s point is on the money. For most people, it’s a mistake to assume that you’re going to maintain your current spending habits and lifestyle when you retire. It’s a lot more useful to spend some time thinking about what you want to do when you retire, and then figure out how much money you need (factoring in inflation) to sustain that lifestyle. Retirement is all about changing the way you live now. It’s not about living the same life you live now without working. What are you going to do for the 8 or more hours a day that you spend working now? If you can develop a vision of what you want your life to be like when you retire, that will help you figure out how much money you need.
Goal: $750k in real estate and $1 MM in cash*. Even if I live to 90, I should be okay.
So far: $400k in real estate and $100k in cash. (Cash will increase dramatically when the primary residence is paid off on Dec 15, 2009.)
Years to go: 25 (Freedom 55, baby! It was Freedom 45 until I realized I will be supplementing my parents’ retirement. Now I just have to convince them to let me help…)
* Note: Cash amount is cash from savings, not investment growth. I don’t need double digit investment returns, just to beat inflation.
ETA: I don’t use government or company pensions when I calculate my retirement because those are iffy.
Before this post I had never heard of FIRECalc, but I am starting to see what you like about it. I’ve only had a chance to mess around with it a little, however it seems like a well-rounded tool.
I’m glad you able to shed some light on using expenses as a basis for retirement. A lot of financially successful people I know have spent year living on a fraction of their income and are perfectly fine retiring earlier and simply maintaining their current lifestyle. Of course if they used income in the projections they would have many, many more years of saving to go!
Remember that when you’re looking at your spending dollars that these are after-tax dollars. When you figure out your annual spending, you’ll need to figure out what your pre-tax dollars will be if you’re withdrawing from traditional IRAs.
If you are making $50,000 a year and spending $75,000 a year you’ve likely got some bigger immediate issues to take care of before even thinking about retirement planning.
The idea of multiplying by 25 seems great. I should sit and work the numbers.
FIRECalc looks like an excellent tool. I think using any CAGR calculator can be a helpful planning tool, even though it’s much simpler and more basic than many of the tools mentioned. I would suggest being very conservative when entering the interest rate you expect to get on your money over the long haul. I would go with around 5%. Plan conservatively so your money will last. Best of luck to anyone close to retirement.
What worries me is that people are planning their retirement based on today’s lifespan. For example, if you are 30 years old right now, chances are you’re not planning on living past 100.
But at the rate medical science is going, what do you think is going to happen in the next thirty years before you retire? If you read any of the research from experts like Michael Rose or Aubrey de Grey, you’ll see that there are technologies coming in the next couple of decades that will greatly extend not only our lifespans but the years of good health we’ll enjoy. (Of course, taking advantage of these technologies will require costs too).
So if you’re planning to retire at sixty, do you plan for thirty years of retirement? Fifty? Sixty? If you have more years of health, can you consider retiring at 80 instead? (if 80 become the new sixty?)
I don’t know where all of this research is headed, but it’s quite provocative. Our idea of “old” is changing, but I’m worried that retirement planning is still based on models that will be out of date before long.
Appreciate your thoughts on using future spending as a better measure than current income. While I agree this makes sense in theory, I think the reason most calculators use income is because it’s a much more objective number. Most people (unfortunately) don’t have a good understanding of how much they spend each year. More importantly, most people drastically underestimate this amount (it’s easy to plan to save money in future and the nobody ever factors in the inevitable emergencies that come up). So I wouldn’t be too hard on the conventional wisdom, at least as a starting point for the general population.
Since I’m relatively young (24), I haven’t started thinking about a specific retirement number. Instead I’m socking away whatever I can until I can knock out the last $1500 on my credit card (looking at June or July for that, since my 0% interest deal ends in August); once that’s done I’ll start looking at starting an IRA and, if the gods love me and my company hires me on full-time, a 401k.
@ #19 ANN:
You are 30 and own 400k in real estate and have 100K in cash? Would you mind expounding on that a bit?
My goals are in line with yours and we are the same age and I’m nowhere near those numbers. I’d love to get a fresh perspective.
Cheers,
Chris
Great post and comments! Would love to hear others thoughts on whether the value of your primary residence should be considered when making this projection? Does assuming a 4% withdrawal rate from your portfolio in retirement also assume you ‘cash out’ your home equity at some point and invest it? Our home currently represents about 1/3 of our net worth.
Thanks!!
Thank you to all who have provided calculator sites, I intend to make the search for the best software my quest over the next few years. Any other pointers to calculators – even those you have to buy or subscribe to – will be appreciated. Now if only I could find a NAPFA advisor who has also been trained by Ed Slott…
I think the question of how much you need for retirement is linked to how well your retirement investments perform over the long term. I’m particularly interested in this since (as luck has it) I JUST finished uploading my new e-book onto Lulu titled “Investing for the Long Term,” and it focuses on getting you the best return for retirement with low yearly contributions.
In more detail, the book is about how to outperform all these money managers, financial advisers, and other “professionals” by using simple math (moving averages and other simple concepts) and in it I discuss the rolling 20 year returns of the market since 1872 and show how applying a simple moving average improves not only return but risk over buy and hold. The first few pages of Chapter 1 are free and I’m hoping to get some feedback on it. Great post.
I agree with using expenses to calculate retirement needs, especially in this current economy.
My husband and I are in our late 30s, a couple of years ago we worked with a financial advisor to come up with a plan for our financial future and retirement – using then current due income as basis of course. A year later I was laid-off so all calculations went out the window.
Fortunately I am a firm believer in saving portions of my income, I started with $200 and later on $1000 a month, I just stash them in a local bank that pays high interest and not look back. We also are debt free, we have no outstanding balance on our credit cards and all cars are paid off. The only big ticket item is our mortgage. To make a long story short, I was able to use my savings to get through the laid-off even with a newborn baby (I was 8 months pregnant when I was laid-off, which contributed to my situation for not pursuing another employment).
I have been off from work for a year and my annual spending while staying at home with the baby is approximately $12,000 (this includes grocery for the household, baby expenses, and personal expenses). My husband’s income covers all the expenses related to the household (mortgage, utility, gas) but no extra left for savings. We have a little over $100K remaining.
I’m about to go back to the workforce because our 401(K)s are more like “201”. Relying solely on my husband’s income have no rooms for savings, which we need. We also have to save for our baby’s college.
A few points I’d like to make:
1) Year-End Summary from your credit card – The year-end summary is very helpful to me to make me understand my spending patterns over the year; that’s how I get the $12,000 figure for my annual expense while out of work. I charge everything – of course it also comes with a self-imposed habit of paying it off monthly. I never carry balances – I either pay them off or forget to pay that month (which is very bad!)
2) Please don’t underestimate the power of stashing a portion of your paycheck everytime when you get paid. I always set up 2 accounts for direct deposit – I set aside an amount (like $200 per paycheck) to automatically go to my savings account; the rest goes to the checking account for spending. I never look at the savings account so mentally, they are “out of sight, out of mind”. I don’t touch this account unless is emergency, like my laid-off. I was pleased to see the balance when I needed them. I use http://www.Presidential.com and INGDirect.com by the way.
3) We also set up a 3rd savings account to buy things that we like, but not necessary. We set up a goal to put in $200 a month into this account. Once I get back to work I will be able to contribute more, we’ll probably get the TV he wants by Christmas 2009.
The more you save, the less you are spending. The less you are spending, the smaller nest egg you need to retire. So saving more both increases the size of your nest egg faster and decreases the size it needs to get to – a double whammy!
As a very (very) rough rule of thumb, shifting one percent of your net income from spending to saving could let you retire almost a year earlier.
For us Canadians there’s an excellent book titled “Smoke and Mirrors” by David Trahair. It points out many of the fallacies in the “You need $X for retirement” wherein the $X is north of $1M.
At least in Canada he points out you can have a very comfortable retirement with $400k – $500k in the bank plus the pension plans provided by the Federal Government. He also provides spreadsheets to use to calculate how much you’ll actually need.
A friend of mine put me onto the book. He was in in his 50s and watching TV and worrying about his retirement. He picked up this book and realized he didn’t need as much as he’s been led to believe. He’s since semi-retired pulling in just enough money to not touch his nest egg, and he’s the happier for it.
Trahair points out a series of fallacies used by retirement investment advisors — of which he was one in the past. The primary point is that a slew of expenses simply disappear as you age. He points out:
– RRSP payments (retirement savings plans)
– RESP payments (education savings plans)
– Mortgage payments (you should have paid off the house by 65
– Vacation, etc. costs diminish if you have kids as you’ll foot bills only for you and the spouse for trips
– Clothing bills drop as you’ll probably not be buying as much as when you have a family or need a fresh wardrobe for work
– Utility bills will diminish somewhat simply by having fewer people in the house
He says savings can be had further by driving cars for longer periods of time, instead of trading in every 3 or 4 years (something this site espouses). And, if the house the family grew up in is too large, to downsize/rightsize.
Canadians have the further advantage that we don’t need money for healthcare costs.
I think that book nicely aligns with the thinking espoused on this site.
BTW, CPP (Canada Pension Plan) + OAS (Old Age Security) provides about $15k/person annually so an elderly couple will pull in about $30k.
Obviously, if you’re sans kids the formula changes, but as my childless friends point out their expenses are lower to start with so they can save more for longer.
@Elizabeth (#25):
While life spans may be increasing, I think the most conservative way to plan for retirement is to save up an amount that will never be depleted when you’re withdrawing 4% or less — if you maintain a relatively aggressive investment mix into retirement and can survive with somewhat less income in some years (And/or re-invest some of your excess in good years), this should be very doable, even with relatively conservative presumptions about future market returns.
@ Brian — thanks! I think I understand what you mean — So plan to withdraw an amount that will be replenished as you go along?
@Brian #33
I like the idea that in retirement you spend x% of your INCOME (interest from savings, income from pensions, social security, etc.) where x = total income minus the CPIx2. The CPI woefully understates actual inflation (to avoid paying true COLAs on social security) so you have to double inflation in your calculations. And, if you spend only what you take in, minus double inflation, then your future income will last forever! Yes I know that means you’ll have to save a lot, and yes I’ve heard that many people begin spending less around age 70 or so because they travel less (but spend more on healthcare?), so perhaps a formula like the Yale endowment formula would work best, which incorporates inflation and investment gains in an appropriate ratio. What does it all mean? It means you don’t retire until you’ve saved enough to have sufficient income – without ever drawing down principal – after double inflation. Will using this assumption cause you to save a LOT? Perhaps, but you can always retire earlier or spend more later if your intial savings assumptions are too harsh.
@The Weakonomist #5. If you don’t run the actual numbers to see how much to save while you’re young, you’ll never understand the approximation that a dollar saved in your 20s is worth 4 or 5 dollars saved in your 50s (due to compounding). Moral of the story is: Know what your actual number is, or be prepared for an “approximation” of retirement later. 🙂
I’ve posted my method before, but here it is again. It’s based entirely off your expenses, not your income, like JD recommended.
Start with your current total monthly expenses.
Subtract expenses that you’ll no longer have upon retirement (mortgage, saving for retirement, life/disability insurance, saving for kids’ college funds, maybe only need one car instead of two, that sort of thing).
Add expenses you’ll have in retirement that you don’t currently have. This would be things like a travel fund (if you hope to travel once or twice a year), golf club membership, private health care, etc. Use current dollars, not inflation-adjusted (we’ll do that at the end).
Multiply this (monthly) amount by 12 to get an annual amount.
Figure out how much pre-tax income you’d have to earn to be left with this sum after taxes. That is, figure out the gross income that will leave you with enough to cover all the expenses you just calculated. Note that if you’re married (and expect you still will be upon retirement), you can split the total between you and your spouse and reduce your total tax burden.
Subtract any taxable annual retirement benefits you expect to receive (Social Security, private pension, etc.).
Now, finally, adjust upwards for inflation depending on how long you have until retirement. I typically use a relatively pessimistic inflation value of 3.5%. Since I hope to retire in 22 years, I multiply my total by (1.035)^23. Note that doing it this way simplifies things, as it assumes the tax brackets will adjust upwards at the same rate as inflation.
Lastly, multiply the result by 25. This will produce the grand total you need to save in order to comfortably retire, assuming you withdraw 4% per year and increase it each year to match inflation.
Gene, thanks for mentioning that book — I’ll be sure to look that up!
I do beg to differ about health care costs being completely covered! I currently see an alternative healthcare practitioner, and until integrative medicine takes off up here, those are significant costs I bear myself. (I see a regular doctor too, and I use the therapies that work for me). My company health plan, which I pay into, doesn’t completely cover costs for eye, dental, physio, etc.
Also, I’ve seen what my grandparents went through in the years and months before they passed away, so I’ve seen a lot of the costs that aren’t covered. Even if our healthcare system survives the next 50 years, I think we still have to plan for those unexpected costs — like home care, care giving, etc.
J.D.,
Thank you for drawing attention to the difference between income and outgo! This is an important one, and one that I think tends to get glossed over by a lot of people, both average folks and the supposed “experts”. I think the default assumption is that most people will spend as much as they make, in which case the distinction is moot, but the truth is, a lot of financial advice works differently if your expenses are noticeably lower than your income. I’ll be writing a post soon about why I find it more beneficial to pay myself LAST, rather than first, when I’m in that situation.
Thank you!
-David Safar
$400,000 is my target. I plan to live on $16,000 or less a year, as I have for many years quite happily. The only big possible problem with my plan will be if there is no fix to our health care system within the next 15 years, but I’m betting there will be, and if there isn’t I’ll move to Mexico.
BTW, I’m not saying I will never work for money again after hitting my target, just that I won’t have to. All my basic budget expenses will be met.
For those who are unhappy calculating the millions they believe they need to retire, consider the modest amounts that most people in the U.S. live on. As I admit, health care is the big big question mark, but there are lots of lifestyle options out there.
Right now I am saving over 50% of my income, which I don’t find onerous because I’ve been able to do this simply through avoiding lifestyle inflation rather than cutting out things I was used to.
@ Gene:
I believe you have made very valid points…and I used to think the exact same way. But, the game has changed. I saw my own parents struggle when they had hopes of ‘downsizing’, only to find that the home prices had skyrocketed. And of course, here in the U.S., we are simply not able to depend on a SS check since the gov’t can’t sustain it for too much longer. My husband is vested in a gov’t pension, but now we’ve been seeing pensions disappear- how any company or gov’t can justify taking away something that has been counted on by so many people for retirement is beyond me. So, I think with these uncertainties (as well as whether or not we’ll still be solvent in our later years what w/today’s atronomical costs of healthcare and elder-care), we’d be better off to be prepared than not.
@ #25, 35, 36 Elizabeth and Brian:
That’s excellent thinking–I’m an estate planning/probate attorney, and see plenty of people living into their 90s and low 100s now, which can only be more common in the next few decades. Planning to live to 100 if you’re in your 30s to 50s now makes sense, especially because costs of outside care when you’re older, like assisted living or home health care, can get pricey.
I’m going to have to disagree. I think income is a good measure because it is the pool from which you are allocating your funds. If you are currently spending only 50% of your (after-tax) income you are putting the other 50% away for retirement. In that case you will have significantly better lifestyle after you retire than before. On the other hand, if you were to base your retirement needs on your current (low) spending you will need to save less now and can therefore spend more creating an odd feedback loop. I think the percent of income calculations are (or at least should be) designed to maximize both pre and post retirement.
One problem I see with most investing advise is that money is seen as the goal rather than a means to an end. The concept of saving up $2M so that you can only take out 4% per year and have it last forever is horrible advise in my view. What good is that $2M in the bank when your (and your spouse’s) time is up? There is no prize for dieing rich. Obviously you should live within your means, but you are not helping yourself by living significantly under them!
i agree with other young commenters (i’m 23) that it’s hard to know what we’ll need lifestyle-wise 40-50 years from now. i don’t think i want to live like a 23-year-old after i retire 🙂 so at the moment i’m saving as much as i can and will try to work out the numbers a little later. i have no mortgage, i’m not paying for life insurance, my medical expenses are really low, and i have no kids…but all of that will change!
I have to admit I envy commenters planning into their 90s and 100s. Nice problem to have! My husband’s family is lucky to hit 60. Unfortunately, we are planning for a long widowhood for me.
Financial Peace University, lesson 9 “Of Mice and Mutual Funds” has a chart that shows how monthly debt payments rob retirement.
Last I heard (couple months ago), the average car payment in America according to the National Auto Dealers Association was $484 per month over 84 months. Lets round that up to $500 just for sake of using the chart.
Invested in a good growth stock mutual fund, over 40 years (working life time) that car payment could instead be $5.8 million dollars.
Hope you like the car.
Free up your income by getting out of debt. Stop playing the games that Middle Class America plays thinking they’re being prosperous. Driving a car with a $500/mo car payment is not the path to prosperity.
If you ignore the status quo and cut expenses way back, you can retire extremely early:
http://earlyretirementextreme.com/2008/08/how-much-do-i-need-to-save-for-extreme-early-retiremen.html
This is one of the main ideas in “Your Money or Your Life” by Dominguez and Robin.
I understand why people try to do this calculation, because it would be a really useful number to know, but there is *so* much guesswork involved, that I’ve just given up.
I am 27 years old. The soonest I could retire and use my 401K is 32 years from now. My entire lifespan so far is still shorter than the time I have left until retirement, even if I retire early at 59.5.
Given the number of changes that have happened in my life over even the past five years, trying to predict my salary or expenses over 30 years from now seems completely pointless. Predicting average market returns seems only slightly less pointless.
For now, I’m just going to make healthy 401k contributions, realizing that anything saved is better than nothing, and recognizing that too much saving is safer than the opposite, and I’ll revisit actual numbers when I’m 50.
I have an overdue thank you for you. I’ve been reading your blog for about two years now. You were the impetus for me to take charge of my finances. My husband and I have now paid off $12,000 of debt that we accumulated over eight years. We have over $5000 in our savings account. Once we reach six months worth of expenses in savings, we will switch to saving for retirement and college for our kids (I already have a great retirement plan through work). I’m in the best financial shape of my life now. It was arduous and not fun at the beginning, but now it is incredibly fun for both my husband and me. We are splurging on a Disneyland vacation with the kids this fall, but only because we can pay cash and still meet our financial goals.
If you ever find yourself wondering if you’ve made an impact, you have. Thank you.
Mathias Stearn says: “What good is that $2M in the bank when your (and your spouse’s) time is up? There is no prize for dieing rich. Obviously you should live within your means, but you are not helping yourself by living significantly under them!”
The good is, you’re prepared for a sharp increase in medical expenses or anything else that may come up – including unforeseen opportunities for travel or living situation. So you ARE helping yourself by living below your means. Also, there’s nothing wrong with dying rich – I hope to be able to leave something behind for causes I care about. And I expect to live a loooong time.
Beth,
Yes, alternative medicine is not covered. I didn’t mention them as I personally don’t believe in them, thus they don’t cross my mind. However , dentistry and some other costs (eye glasses) aren’t covered either, so my comment was not fully correct. But up here it is a sight better than in the US but not as good as places in Europe, esp. France.
How our governments finally fix healthcare will determine what level of care we’ll get long term. I’m hoping they can manage to do that and not destroy something we all cherish.
Holly,
We have the advantage that more than a decade ago our government opted to fully fund the CPP as well as address the massive debt. Today, with a fully funded CPP it means we don’t have to worry about it going away, which is a good thing. And, overall, our economy is in much better shape than during any other recession because of the reasonable amount of fiscal prudence and our having the lowest Debt-to-GDP ration in the G8. It could have been better, but it also could have been much much worse.
As to downsizing, that is something you want to do on your own terms and timetable. If forced into it, at any age, you end up at the short end of the stick. I’ve seen this all too often, esp. after divorce.
As to pensions, my employer eliminated them years ago, grandfathering individuals who were with the firm prior to a given date. I don’t see government employee pensions going away nor do I see CPP or OAS going away, though I could see the age of retirement set by the government being set by age and not by years of service.
I don’t have a pension as I’ve been self employed most of my life, until recently. Thus, I’ve had to save and then restart saving after a serious dot com implosion of my firm in the early 2000s resulted in major losses. Thus, the book Smoke and Mirrors allowed me to take a good step back and calculate how much my wife and I would truly need. It was substantially less, or so it seemed. And when I ran the numbers, it was substantially less than I was ever led to believe. In fact, I could live better than I do now, with annual vacations, on about $45k/year once retired. The cost of running the home and familial obligations (RESP, RRSP, clothing, etc.) all require substantial outlays that will disappear once my wife and I retire.
And thanks for the comments Beth and Holly. In a short post it’s hard to put forward detail, and I apologize if my glossing over certain costs. Of course, this comment may simply be too long now. Oh well.
@JD, you’ve done something right when the Scottrade folks are trolling your site. Congratulations!
As an insurance side note, there are ways to insure all or part of your income. But using insurance as a retirement tool might not be the right path for everyone. I would recommend most people do this kind of calculation with a fee-only financial planner before looking at specific solutions.
Based on family history, I expect to live to 90+. I expect to not “retire,” i.e. stop working full-time, until age 70+. I expect that SS will still be available at that point (it *will* be reformed in the next few years), but that Medicare may not.
I expect, therefore, to be 100% responsible for my own healthcare costs. I look at the aging women in my own family to project those.
I expect to own a residence by the time I stop working full-time. Therefore, my current housing costs are not relevant. I project 1000/mo will cover home insurance, taxes, and utilities in the area where I want to live after “retirement.” I further project that an additional 1000/mo will cover food, pet care, and healthcare. (I consider pets a necessity, not a luxury! They are proven to have health benefits!) That means I need retirement income of 2000/mo, plus 25% to cover income taxes, so $2500/mo. That’s 30,000/yr.
My time line is 30 years. Certain planners say you can multiply your projected required retirement income by 15 to arrive at the amount you need to have in retirement savings (investments) in order to provide that income. So 15 x 30,000 = 450,000. I already have 100K, or will as soon as the market picks back up. That means over 30 years I need to save 350K. 350K divided by 30 = 11,666/yr to save, = 972/mo to save. This looks like an awful lot until you realize that until last year, my DH and I were paying over 2000/mo to credit card companies. It is do-able. And the above calculations leave out SS entirely, which as I mentioned I do expect to still be available by 2050 – so if it is, my retirement standard of living will be significantly higher.
Retirement expenses will be higher, of course, if I’m not living alone, but really only in the areas of food & healthcare. I hope to retire to an area where we can have a proper garden & some chickens. I’m looking forward to more from J.D. on his home farm!
I’m 24 and I’ve had a difficult time finding a good retirement calculator for young people. A lot of them I’ve seen are for a minimum age of 35.
Also, basing things off my current salary seem misleading, because I expect to make more money in the future as my career blossoms.
Does anyone know any good ones for us young folks just starting out?
If you’re making $50k and speding $75k annually…you’re not gonna retire!
@E #51:
Mathias Stearn says: “What good is that $2M in the bank when your (and your spouse’s) time is up? There is no prize for dying rich.”
E says: “The good is, you’re prepared for a sharp increase in medical expenses or anything else that may come up – including unforeseen opportunities for travel or living situation. So you ARE helping yourself by living below your means. Also, there’s nothing wrong with dying rich – I hope to be able to leave something behind for causes I care about.”
I agree with E. The prize is you’re becoming self-sufficient for life – regardless of how long you live, and, in the end you’re able to leave your capital to family or charity. Capitalism is great!
I am partially in agreement with Tyler (#49). I just turned 34 and like him, so much has changed for me in the past 5 years financially, I can only imagine how much I’ll be able to save over the next 25-30 years. I’d like to retire early, so we’ve really cut the fat out of our spending and will likely buy less house this summer than we planned on even a year ago at this time.
The scary thing I foresee is healthcare costs. Who knows what system we’ll have by then? Also putting our son through college along with any other kids we have.
Note: by retiring early I mean to not work 45 hours a week – I can’t see myself completely without a job or some money making venture.
I truly think the best way to plan for retirement is controlling your spending during your pre-retirement life so it’s not a huge shock when you get there. Like someone earlier said, the less you spend now, the less you’ll need to save to spend in retirement. Now that’s compounding.
Great post but I would like to hear more from people who had a savings plan/retirement goal for 20-40 years and are now retired and living that plan. I always hear you should do this or that but never someone say… it worked for me!
Cause life happens and where I think I would be when I was 25 can be totally different by 65. I don’t want to be filthy rich but I would love to pay for my own health care and etc…
Email me if you have answers: [email protected]
The big question that I haven’t seen discussed here is the cost of insurance. With very few employers paying for insurance during retirement and the need for health care, prescription drugs increasing as you age, that is the biggest unknown factor I can see in determining how much is needed for retirement.
A lot of people are paying $400 and up for health insurance during retirement today. Many teachers I work with have a great pension, but substitute once or twice a week to offest the cost of purchasing insurance. What will that look like 30 years from now? I don’t want this to digress to government health care or the problems of health care, but it is a very real factor to consider when thinking about retirement.
I’m in aviation. We tend to take our safety factors and risks serious in this industry, and an engineer by the name of Bud Heebler retired from Boeing and started addressing the rules of thumbs and assumptions in the press. He’s got another spreadsheet (free) and a I felt it did real scrutizing to come up with my number. I like his articles too.
http://www.analyzenow.com/
Elizabeth I haven’t read those particular researchers but the available literature suggest that there are limits to lifespan in humans, and we are probably pretty close to it. To give an example the calorie restriction diet while almost doubling lifespan for other animals does not seem to be as great of benefit to humans (perhaps because it is only started during adulthood). For whatever evolutionary quirks we have combined with modern medicine we already have an outsized lifespan for a mammal our size. The “in” thing is squaring the curve, that is increasing the amount of healthy non-debilitated life for our life span.
For those of you having trouble with the calculators, could you get tricky with the numbers? Like if you’re 20 and want to retire at 65, could you claim you’re 35 and want to retire at 80? And claim that you plan to live 35 years after that?
I am six years from retiring (maybe). Here’s my plan.
To calculate how much I need, I started with my current after tax income. Then I made adjustments on things I plan to change. For example, I will quit saving for retirement and I will have my house paid off, so I can subtract the P&I part of my mortgage payment. I will also want to increase my savings for health costs and my savings for fun (because I will have more time to have fun during). Some people can also make adjustments based on not having to buy fancy clothes for work or commute to work or having more time to cook at home.
Then, I calculate everything in today’s dollars. So I pretend I’ll never get a raise, but then I pretend there’s no inflation, either. That makes the math easier. When I do want to forecast things, I try to be conservative: I estimate 4% inflation, 3% raises, and 8% stock returns.
In my case, I have an awesome pension that will be about 60% of my pay and thus will cover just about everything (assuming that I quit saving for retirement and have my house paid off). It also includes health insurance.
However, because rules can change at any time and you shouldn’t have all your eggs in one basket, etc., I’m also contributing to a other retirement accounts.
I’m trying to diversify as much as I can. Ideally I’d like to know that if any one of my baskets completely disappeared, I’d be fine. My current “baskets” are: company pension, paying off the house, IRA, Social Security, and 403(b) plan. But if my pension tanks, I’m in trouble. If anything else tanks, I’m still golden.
If I didn’t have a pension, I’d want to have 15 times the total amount I need. If my house is paid off, I’d need about $1650/month after taxes, and since all my retirement stuff is in Roth (after-tax) accounts, that’s about a third of a million. Then I could withdraw 7% per year. People say that it’s safe to withdraw 4% per year, but that’s if you calculate the 4% the first year and then increase that each year because of inflation. I would recalculate the 7% every year. If I got more than I needed (during stock bubbles), I’d buy bonds or treasury bills with the excess. If I got less than I needed (like I would have this year), I’d get even more frugal and/or sell bonds or treasury bills.
I assume my money needs to last forever. That’s sort of like assuming I’ll live forever, but since I’m planning to retire at 52 and I might very well live to be 100, that may as well be forever.
I also assume I won’t need a nursing home, at least not for long. That is not a safe assumption, but on my income, I could never afford long-term care insurance. Actually, I could, if it were an extremely high priority, but it just costs too much, so I’m not going to.
And how am I doing so far? My house will be paid off in five years. And I started contributing to a Roth IRA as soon as there were Roth IRAs 9 years ago and was able to contribute the maximum ($2000, back then). I have been able to continue contributing the maximum as that increased, and last year also started contributing to a 403b plan (just an additional $100/month).
The bad news is that half my net worth is in my (small) house, half the remainder is in my pension, and I have only $43,000 in my other retirement accounts. Add $37,000 in contributions plus interest and additions over the next six years and that’s still nothing. So I don’t have a good back-up plan at all if my pension is ruined except to keep working. At least that is quite likely to still be possible at the age of 52.
Note: I make the same as a first-year teacher, so that’s way more than minimum wage, but way less than all my programmer friends make.
We know we’ll have our house paid off 10 years before we retire so we make sure to calculate a little lower. Without the expense of paying a mortgage and having $200,000+ in a house, we’ll have much lower income needs!!!
@ Elizabeth # 25
As you point out science is pushing the boundries of the human health system we will probably see a slight increase in the average lifespan. These technologies also grant us a more fullfilling golden years, allowing for more involvement in physical and social activities. What is lacking in your argument and impossible for science to correct is the will to live. Thousands of people every year do not so much die, as just fade away. One can find fault in this slow and steady self infliceted demis, but on the other hand can we not understand a person who has just tired of living? If an elderly person has lost their partner of 50 some years, their children live in a far off location, and the highlight of the day is reruns then I do not think I would have much will to live either.
Old age is not some new phenomenon of the current century. We have had centurians for thousands of years. What has changed is the mortality rate under the age of 5, this has raised our numbers for life expectancy. Yes we are as a whole living longer (in the US), but we will still have a ceiling in which the general public can expect to live. Now this is taking into account smoking, drinking, obesity, and general accidents. Science can only do so much for a person run over by a bus.
I do though take your position that we need to be weary of the number of years we need to save for in retirement. This is especially true for those (and there are many who read this site) who’s goal is to retire early. This may be a grand and noble goal but there are huge downsides to leaving the workforce before you qualify for SS and Medicare. The federal government set full retirement at 69 and 1/2 for people born the same year as me. This is a probably a starting point to work from and one that I will be using to base my retirement asumptions on.
Hi JD,
I guess I’ve changed my perspective quite a bit when it comes to saving.
Don’t get me wrong, I do have an investment plan and manage my money responsibly, but even with these pieces in place I can’t see that this strategy alone will provide enough income to maintain my ideal lifestyle during retirement.
So, I’ve taken it a step further to build and grow my business. Nowadays, having a job is not enough.
Maybe it’s just me, but who wants to settle for just the status quo?
Great site and article. I’ve been a long time reader, first time commenter. I feel well prepared in my financial wisdom and future savings. However, my parents are well behind the curve. I imagine i’m not the only one. Their conventional thinking and poor financial wisdom has left them very ill prepared for their upcoming retirements. Any chance on an article how we Generation X folks can help our Baby Boomer parents?
Keep up the good work!
@Chris (#28)-
I don’t know what’s there to explain, really.
I’m very aggressive when it comes to debt and always have been. I have $400k of equity in my primary residence and will be repaying the remainder of the mortgage this year. I have a rental property, but I don’t include it in any calculations because the mortgage on it still makes me gasp a little. However, I should have that mortgage licked by 2015, if not earlier.
I have $100k in my RRSP and non-RRSP accounts through diligent saving.
I started my first business at 13 and have been saving ever since. While other kids dreamed of being doctors and engineers, I dreamed of early retirement.
Of course, I lost a whole whack of money in the stock market at 19, so I have been conservative with my investments ever since. Financial advisers berate me for it, but I sleep easier at night with my conservative strategy: I work hard so my money doesn’t have to.
@Ben (#67)-
“Mom, Dad, you two can live with me.”
They sheltered, clothed, and fed you. It’s the least you can do in return.
You’re right- it’s hard to base what you need for retirement off of your net income. Doesn’t make sense- what if I save a ton of money right now? What if I spend too much money right now? Look at the spending.
@Chris (#28)-
I guess I should add I have a full-time job that pays a decent salary; a part-time, income-generating hobby writing fiction; and a small business, which I use to buy and rent out residential real estate.
I don’t see too many people talking about medication and medical costs. Which can be brutal. Medical care can be sub par with no extra insurance. Sad but true. And what happens if your partner develops some disease that does not kill but destroys quality of life? How much do you save for with that picture in mind?
Also @Chris (#28):
I know a guy who sold a start-up company at age 30 for about $18 million. I don’t own a company I could sell, so comparing myself to him financially doesn’t do me any good. It’s not a fair comparison to yourself unless you know the other person’s background, and it’s similar to yours.
I personally don’t think people need as much as those retirement calculators say, at least I hope not! Because unless my husband and I get some really nice inheritances, it is not very likely we will sock away anywhere near the money the retirement experts say we should. And since I figure his mom and my mom (my dad passed away in August) will probably be around for another 20 years – I am not counting on them having a lot of their nest egg left.
Then again, I am one of those people who see no problem with moving in with my kids if necessary. As a matter of fact, I think it is sad how our society has gotten this attitude that the worst thing in the world that could happen is for you to move in with your kids, or to have your parents move in with you. For thousands of years that was the NORM.
I have sacrificed so that my kids could have a better education than I do (my daughter has a Master’s degree; my oldest son a Bachelor’s; and my two younger kids know that not getting a college degree is not even an option). I have also sacrificed so that my kids could pursue their interests in a way that my husband and I never did (because it wasn’t a part of the blue-collar lifestyle we grew up in) – as a result, my son is working towards being a professional golfer. If he makes it, I am set! But even if he doesn’t, I completely expect that if I and/or my husband should need it, our children will welcome us into their homes. And if you asked them, I am sure they would agree, because that is the way we have raised them.
(I should maybe add that my two oldest, ages 24 and 21, still live at home because it is just cheaper that way, and I love having them here. Again, so many people can’t wait for their kids to move out. I can’t understand their hurry. My children are wonderful people; we love spending time together; and they will be out on their own, having their own families soon enough! This is just the way we have raised our kids, we our our OWN safety net.)
In my opinion, the target savings/investment rate should be at least 10% of annual income, but my goal is 20% . . .
My husband retired this year and I am retiring next year- he is 67 and I will be 56 this year. Gross numbers don’t work- I fully funded my Federal TSP plus a Roth IRA for myself each year(well, not always but in more recent years) and partial ones for my kids. So in a sense, that money was already out of my salary-so what % of my salary do I need- based on the standard numbers? No mortgage anymore, no car payments, no other debt. I have a good pension- and don’t plan to use any retirement funds for some time(with what the market has done to them). The “standard” just doesn’t mean anything – how you live, how you save, how you can accommodate life changes while still relatively healthy and mobile, and what you will do in retirement(whatever that means) requires you to figure it out
@ Ann #71
Congrats if what you are saying is true. Amassing approx 40K of wealth every year since you were 13 is truly amazing.. All on your own? Tough to swallow, I’m afraid.
Sorry, I’m a cynic.
Health care costs are the wild card.
I agree with those above who feel like health care is unlikely to be fully covered for us (those under 40-50, say)… and I worry that it can be astronomically expensive to pay for health care on your own when you’re older. Even given medicare, co-pays and drug costs and such are a cost equivalent to housing for my grandparents. And it’s only likely to go up.
I feel like the most realistic estimate I can do now is to estimate my expenses aside from health care… and then triple it. But I’d love to see a full post devoted to how to handle this issue…!
@ Chris #77
Well she did say she writes fiction as a hobby…Ha ha!
I agree it has to do more with your spending than income. After all if your house is paid off you don’t need a lot of money for that. Also if you are retiring on a modest income you also have a much lower tax bill.
The whole question can be hard to figure out. I don’t trust most calculators because they make it too simple. Also making it more complex doesn’t make it right either.
In the end, all you can do is take an educated guess on what you need. You won’t know for sure until after you retire.
Tim
@Chris (#77) –
Yes, all on my own. I learned the value of hard work because I was born in a third-world country, immigrated to Canada at an early age, and decided I didn’t like being poor. I watched my parents go from being nearly penniless to amassing over a $1 MM in net worth in 20 years. (Of course, they made numerous bad investments and their retirement will be rocky. However, since I don’t want to see my parents on the streets, I’ll be helping them out.)
As of right now, my networth increases by $55k-60k per annum. Just because you can’t do it doesn’t mean someone else can’t either.
@Gene #52-
I was wondering if you know how the “clawback” will be affecting our CPP payments if we are going to be in a high tax bracket? Does it make sense to stop saving at some point in order not to be “clawed”?
It was a year or so before the last (not this current) downturn that my husband and I went to a “retirement seminar” course (I think it was 4-6 weeks) that my husband’s company sponsored. At the end, the seminar leader gave each person the opportunity for a private appointment. No real surprise for us — he said we had “too much” (477% too much in fact) in savings and “not enough” in investments (which of course his company would be happy to handle for us). Well, we didn’t take his advice, and so while we “lost” money in the succeeding upturn (including not moving up to a larger house), we also didn’t lose as much when the corrections came. I am quite cynical about all advice/analysis from financial firms about retirement funds/funding –it’t in their best interest to make people feel that they need more more more and can only get it with the help of a broker!
When I retired in July 2008, I gave myself a budget of how much I could spend each month and have enough to not touch my “real” retirememnt money until I’m at least 62 (the earliest I could tap social security). So far, I have spent at least $500.00 less than the budget each month and yet I’m still buying clothes, books, fresh flowers, and art/hobby materials and contributing to household expenses in the same way I did before I retired. Lifestyle really is the key (I’m sure it helps that I didn’t retire “to travel”) but so is having a great partner, who has also been saving/frugal forever, and we have been lucky: we have not had to help support any aging parents and since we are childless, don’t have those expenses/expectations, either. Of course, friends who are also childless do wonder/worry with me what will happen if we become incapacitated….
@Aperson (#82)
There is no such thing as a CPP “clawback.” You’re thinking of Old Age Security (OAS), which is clawed back starting at around $65,000.
CPP is not means-tested. Your payments are based solely on your contributions and the age at which you start to collect it (60, at the earliest, with a 30% penalty, 65 for full CPP, or if you delay it till age 70, you get a 30% bonus). You’ve paid into the system, you’re entitled to your benefits, regardless of how much you have in other investments.
On the other hand, OAS is clawed back, starting at about $65,000. Also, you can’t even start to claim OAS until age 65. Keep in mind that that income “clawback” level will adjust with inflation, so it will be higher by the time you’re actually ready to retire.
Fortunately, Harper’s Conservative government gave us a handy tool to dodge the OAS clawback limit – the Tax Free Savings Account (TFSA). If you’re married, and you and your spouse both max out your TFSAs for the next 20 years or so, and earn about an 8% rate of return, you should have about $750,000 in them by the time you retire. The trick is to withdraw just enough from your RRSP to make your combined CPP + RRSP income equal to the OAS clawback. That way you’ll still get the maximum OAS benefit. If you want more income, then you can “top yourself up” from your TFSA, and it won’t count towards your taxable income, thus it won’t affect your OAS clawback. With $750,000 in your TFSAs, you could add another $50,000 in income to your coffers every year for the next 15 years, tax-free, without raising your income into OAS-clawback-range.
Kevin:
Just show me a TFSA with an 8% interest rate.
@John (#85)
I think you’re making the common mistake of assuming that a TFSA is just like any other “Savings” account, that pays a paltry 2-3% interest, tops. In fact, a TFSA is just like an RRSP. It can hold cash, bonds, stocks, mutual funds, whatever. All the same kind of things an RRSP can hold. I’m holding S&P 500 index funds in mine, which over the long term, should average roughly 8%.
Hope this helps.
@ Ann #81
Fair enough.. I still don’t believe you, though. 🙂
@ Chris (#87) –
Good thing your belief is not required to validate myself or my net worth.
If it makes you feel better, I’ll lie and tell you I won the lottery or snagged a sugar daddy.
Ann, if it makes you feel better, Chris isn’t your only doubter. I also don’t believe you’re being completely honest. It’s simply not possible for an lone individual to amass a net worth of $500,000 by age 30 without some serious outside help. You yourself admitted that your parents were millionaires, even if they’re not anymore. I just find it hard to believe that they weren’t somehow involved in your miraculous accumulation of wealth.
What’s the catch? What are you leaving out? Is that $400k in real estate mortgaged? Maybe from your millionaire parents, at 0%? You’re leaving something out, and it’s hurting your credibility. Sorry, I don’t mean to hurt your feelings, I’m just too good at math to take your story at face value.
@ Kevin (#89) –
It’s called having a university degree. Seriously, where are you guys from that it’s supposedly impossible to be at 500k by 29 (birthday’s in November)? Detroit?
BTW, the definition of net worth is assets minus liabilities. So, um, I would calculate the real estate amount as fair value minus remaining mortgage principle.
@Ann (#90):
University degree? Check. I’ve got a Bachelor of Computer Science with Honours degree. My wife’s degree is as an Industrial Engineer. 2 university degrees, no children, and very aggressive saving (around $3,000/month), and our net worth is “only” around half of yours. We’re 33.
People keep asking you for details, but you still haven’t provided them. You’ve got a university degree – great, what field is it in? When did you graduate university? Are you married? Do you have children? Did you inherit any money? What did your budget look like when you started out, and how has it changed over the years? People have asked you several times for specifics. We’re not trying to be confrontational – we’re sincerely interested! Tell us! 🙂
@Kevin (#91) –
Oh, dear. DINKs (dual income, no kids) and you guys only save $3k per month!?! And one of you is a ‘geer! You guys are either grossly underpaid or your spending is out of control.
At this point, I’m not going to provide more details because no matter what I say, y’all will assume I’m lying. So, what’s the point? The mind-set here seems to be: If you can’t do it, no one can.
ETA: Do you have any idea what I can do with a combined annual income of at least $250k? Oh, man. (Of course, $250k/a is what a programmer and an engineer in my age group would make in my area.)
Ann, I’ve given you every opportunity to explain, but you keep refusing to do so. I really can’t help you any more. OF COURSE people are going to doubt you if all you offer is a fantastic result and refuse to provide details, even when pressed repeatedly. Can you really blame people? Try and see it from our point of view.
Ann (regarding your edited comment): I think I see part of the discrepancy. $250k may be what a programmer + an engineer make in your neck of the woods, but where I am, it’s “only” about $75k each. We have a pre-tax household income of around $150,000. Saving 24% of our GROSS income (34% of net) is well above average – yet we’re still far behind you. Are you starting to understand why we’re hungry for more details regarding your story?
Hi believe Ann,
B/c it sounds like she owns a home, and lives in a more expensive city.
I’m 31, and my net worth is a little over $2 million after the crash of 2008.
Stats: $375K average income over the past 4 years, and I’ve worked for 9.5 years right out of school. I’ve saved/invested my bonus every year. Some good, some bad like my vacation property in Tahoe. I have 3 properties: My house in SF (bought 5 years ago), my rental property in Pac heights (bought 7 years ago and is net income generating), and my Tahoe property bought 2 years ago for 13% less than what they paid for it, but now it’s down another 30%++!!
Total property assets AFTER a downturn is $3million. Total mortgage debt is $2million. Total cash in the bank is $340,000, 401K $165,000 (was $230,000!), and total company stock is $185,000 (was $275,000!).
I drive a 9 year old car that I bought 2 years ago for $8,000. I’ve got about $20,000 worth of high end collectors watches. Also have 30K in graduate school debt at 2.6%, so I’m hesitant to pay it off since my 340K in savings makes 3.5% on average right now. I got my MBA part-time with my employer paying 70% of it, so i didn’t miss a beat in my promotion process. They actually promoted me quicker b/c they were amazed i could juggle two things at once. Took 3 years, and i used some of the refund money to invest instead of pay off the tuition btw.
I got caught up in the property market, but chose to buy my place at The Resort at Squaw Creek (www.squawcreek.com) b/c it was a lifestyle choice. I love to ski, golf, hike, and mountain bike. This is a 4 Diamond Resort and I told myself that this was all i needed to complete my real estate portfolio. It has $35,000/yr in rental income (based off 50% occupancy), which isn’t enough to cover the mortgage. This is my biggest drain and mistake, my vacation property. But, I look back on it, and say i’ve learned something, and that at least i no longer need to look for a vacation property haha.
When I was 30, I made $740,000 after a $600,000 bonus, and I thought I was on top of the world. 2008 happened, and my bonus was cut to $290,000, but at least i got a bonus and I’m NOT complaining. In my retirement spreadhseet, i was going to put in a “conservative” $500,000 yearly bonus from now until i want to quit the finance industry in 8 years (40 years old). Now i lowered the number to 250K (another18% below what i got recently).
In 8 years, at age 40, I will have a $6 million networth, $2.2 million of which is cash and liquid stock (based off no appreciation).
So that’s me. A 31, soon to be 32 year old finance guy, who’s worked almost 10 years out of school, got his MBA part-time over 3 years, lives off his $140,000 base, and saves/invests all his bonus. I’ve had some wins, and some big time multiple $100K losses, and I’m still here. I was a little depressed for a while about overextending myself, but figure, shoot, just work until 43 in finance to build your goal.
The best advice really is to pay yourself first, make things automatic, and get as much education as possible (formal, reading) etc. “Betting BIG” has also helped, but has also hurt, so watchout.
RSC
I forgot to mention what my retirement $ amount was. It WAS $3 million cash by age 40, but now i’ll have to work til 43 or 44 to save up $3mil b/c at age 40-41, I’ll be 800K short as mentioned.
Why $3mil? I figure I could get 4% taxable interest risk free in some 5 year CD at that level by then (you can get it now at First Republic Bank in this environment where rates are at record lows). So, that would be $120,000/yr in income which is not too far off my current $140,000 based, and my AVERAGE $120,000 base over the past 5 years (before promotions). Furthermore, I hope by age 43-44 now, I’ll have my rental property paid off in full, so a net $300/month return now becomes a net $3,000/month or more return w/ rental inflation.
I could live in my house, which currently has a 6.1K/month mortgaqe, on it, or by that time, I could perhaps sell the house and extract 1 mil (purely based on paying down the mortgage, and only assuming a 5% increase in the value 11-12 years from now after already assuming a 15% decline from the peak). Who the heck knows the value, but this is a prime property in a city that didn’t go bonkers in the first place.
So that’s that. $3mil cash is my goal, which I hoped to have achieved by age 40, but now have to work another 3-4 years to get that. I DON’T want to work til 50 just to get another $1million or more. I’d rather do something else with my life, live service my country via the Foreign Service.
Best
sorry, from my post #95, my networth calculation is wrong, should be $4 mil, not 6mil. I double counted a subtotal in my spreadsheet. oops. Everything else makes sense. Frankly, I can’t count on anything (value of stocks, property etc). The only think i’m aiming for is cash, and the perpetual interest income i can receive off that cash, which is 120k at a 4% interest rate off of 3mil.
The guy in the finance industry double counted the subtotal in his balance sheet. Does anybody else worry about the accuracy of Q1 bank earnings?
Jesse – I caught that mistake instantly. The difference is just gravy for me b/c what I care about is cash money, and to a lesser extent stocks. You can snicker all you want about people in finance. I’m 31, and I’ve managed to save up $335,000 in cash earning 4% interest between two banks. My company stock has now rebounded to $205,000 with this market comeback, and my 401K is also back up to about $165,000.
If the market can stabilize at this level for the rest of the year, my $250,000 bonus assumption could be literally $100,000 too low. However, I’m going to remain conservative and say I only make $390,000 all in /year for the next 4-5 years.
How about you Jessie? How old are you, and how much have you saved? My goal is to not have to work at 41 if I don’t want to, and definitely finish up before 45, the age which i will have $3million in cash, and $2million in equity with my rental property paid off and providing me $3,500/month in income.
RSC
Right now I’m investing about 17% of my gross income into my retirement accounts. This is probably a high percentage for a 24 year old but I feel that it’s important to save and invest early to ensure I reasonable retirement. Thinking that you’ll save later is dangerous b/c you never know what could pop up and prevent you from doing so in the future.
-Gen Y Investor
The key to the 10% rule of thumb is that, as you mentioned, you have to start early. If you start saving at age 40, 10% isn’t going to be close to enough.
Regardless, people have different goals for what they want retirement to look like. Some will spend less during retirement than they did while working. Others will spend a lot more.
For me personally, from ages 17-23 I saved approximately 50% of my earnings. Since then, a much bigger portion has gone to funding my fledgling business, so it’s been closer to 10%. (Though that varies by year.)
Yep, I agree… you should save as much as you possibly can. It is only prudent. One WILL need the money as he or she gets older. Start now, don’t delay!!
In layman terms: Sooner you start, the less you need to save! If your nest egg is invested wisely, you’ll eventually make more in the market than by going to work every day.
We’re saving more than 10%, although I can’t actually give you a precise number. I have a defined-benefit pension, which I’m not exactly sure how to count. On top of that, we save 10% of our gross income each year. I estimate that this represents somewhere between 15-20% of our income.
We’re doing this amount because we can, and because it gives us options later. I wouldn’t be saving quite this aggressively if money was tighter. For us, we still get to enjoy a few luxuries like eating out once in a while, cable TV, small vacations, etc. Personally, I think anything past 10% should be balanced against enjoying life NOW, because you never know if you will be around to enjoy your retirement.
We’re currently saving approx 16% of gross income in a fund specifically for retirement. We decided to not aim for the 20% and instead pay down the house faster (and at 3 years in to our mortgage we owe what they said we would at the end of 5).
We’re in our early 30s, so mathematically it probably would have made more sense to put that against retirement and get the compounding, but psychologically it made sense. I’ve seen too many people downsized in their 50s and if you still have a mortgage, that can made a tough job search even harder.
Also, keep in mind that the 10% will only be your own portion of funds, you will also get things like social security (or CPP/OAS in Canada). In Canada the CPP/OAS plus the tax credits you get end up making it so that you won’t starve/freeze to death. Your 10% that you put away your whole life is for the extras.
I’m currently saving 12% of my income for retirement, and I purchased a house which will hopefully be paid off when I’m 45 . . . I turn 30 this year. Here’s hoping that the universe plays nice with my plans.
The stock market dropping 40% should have very little effect on someone who is about to retire. By that time, they should be heavily into “safer” territory. They might still have some things in stocks, but most of the funds should be in CD’s, savings, bonds, etc — not big returners but much safer than the market.
Of course, “should” is the big key word there. It’s critical to understand what kind if risk your funds are exposed to and re-evaluate periodically. We rebalance our funds once a year.
We — 48 and 41, one income — try to max out our available retirement accounts every year, so that’s $15,500 for me + some corporate match, and $5k in each of our IRAs. Let’s round the numbers to about 25% of gross total annual income.
That’s a misleading number, though, because some years, we’ve simply moved regular taxable savings into tax-advantaged retirement accounts.
We fully expect to have years between now and retirement when we save less money overall, because of lower incomes (job market and career changes) and higher expenses (kids). I’m grateful my dad encouraged me to put retirement savings away from a relatively young age — mid 20s.
We have a diversified portfolio, and we changed nothing during the recent roller-coaster rides. After reading this article, I just asked DH (MBA, former financial planner) to look at rebalancing the portfolio; we’re due. We lost a lot of money the free fall, but most of it was passive earnings, not our principle, so . . . it’s been ugly but hasn’t made saving seem pointless.
We probably won’t retire with pensions, and we don’t have wealthy relatives, so what we save and invest will be what we have when we retire. That’s a sobering thought, no matter how much money we put away.
I’m 25. Currently, I think I’m at about 9%, but that will change as soon as my employer match kicks in. After that, between contributions and match, I’ll be just under 20%. In addition, I also have an HSA that brings my “untouchable” gross income to 25%.
We save around 15-20% of gross income. That’s quite a bit but I’d like to retire earlier rather than later.
As the Piper (#2) said – the percentage is heavily dependent on when you start saving. When you plan to retire is also important as is the retirement lifestyle you are shooting for. There are a lot of important variables.
@Jason (6):
You’re absolutely right – plus, it’s not like people need to sell ALL their stock portfolio the day they retire. When I reach retirement age I expect to have a hefty sum in stable investments, but will still have 20%-30% in stocks. If I happen to retire in at the bottom of the next crash, the fact that my stocks are low shouldn’t make a difference. They can sit there regrowing during my retirement just like they grew during my working life.
I am so happy for all of you young savers! What a great start in life! I wish I had done that well in my youth, and I am working to train my child so that she won’t be in my shoes.
I just turned 40. My employer (I’ve been with them for over a decade) has a very generous 403(b) program, which it funds at 10% of my income. Unfortunately, my wages were pretty low for several years, and I was not good at living within my income, so I often did not save much myself (the good news is that I didn’t borrow against the little I saved at any time). I am now setting some money aside in the 403(b) myself in addition to what my employer is doing, but honestly, when I look at how little has been saved over the years, it looks like I will never retire.
I’m one of the people who started saving late–I went to grad school, so in my 20s my annual income maxed at about $8K, and then I got what I thought was just a temporary job while I looked for something better, so I didn’t start with the 401(k) right away. So right now I’m putting 20% into that, plus I have a retirement plan at work into which I put something over 6% and my employer puts about the same (that, at least, I’ve been in since the beginning, because it’s not optional). And I’m making maximum contributions to a Roth IRA using some money from my parents.
I’m basically trying to save as much as I can now, because I really DON’T want to be doing this job until I’m old and gray, and everything I can think of that I’d rather do pays a lot less.
15% to 401(k) + 3% match + 2% to Roth IRA = 20%
I’ve found this to be easily sustainable. What’s been difficult is the saving outside of this for more immediate goals like a home, car, and making sure my emergency fund is well stocked.
I’m currently living on about 45% of my salary and it does hurt a little, but it’s become a lot easier as I’ve begun to enjoy a life a minimalism that does not require a lot of ‘stuff’ to glean happiness.
I hear more and more comments from some pretty savvy people lately that some financial advisors are pushing their clients to oversave. Although I don’t mind erring on the side of caution and having more at retirement, these pundits do have an important point to consider.
Right now my paycheque is allocated in the following manner: 29% goes towards various retirement strategies, 17% goes to my nanny (crazy expensive right now, but not for long), and 17% goes towards my mortgage. Thats 63% of every paycheque – but when I retire, none of these expenses will exist anymore!!
That means that to live as comfortably as I do now, all I need to save for is a target income of only 37% of what I am making right now as a 35 year-old. If you read most calculators, they tell you to save enough to make about 80% of your income each year in retirement.
And this doesn’t even take into consideration the government pension plans (here in Canada it’s CPP and OAS), plus we get free healthcare. Plus, there is no way I want to live in my 3-bedroom house when I retire, so downsizing will likely put another chunk of change in my pocket. And though this will not affect my own retirement numbers, some people may have an inheritance – a windfall that can significantly impact their retirement figures.
The amount of money you think you need to retire comfortably on plays a HUGE role in the calculations that determine what you need to save each year to retire on.
I read an amazing article comparing two men – one retired and one not, which illustrated my points above. Basically the retired guy was living way more comfortably than the working one on a fraction of the income, because most of his expenses were gone. I’ll see if I can dig up that link – it was pretty illuminating.
Anyway, my point is that we may not actually have to save as much as many of the financial calculators suggest. The magic retirement number is a tricky one, but may not be as hard to reach as you might think. So if you’re not there yet, don’t panic ;-).
I’m 29 and max out my 401k (16,500), roth IRA (5,000) and my employer kicks in a generous 6% (5,300). That amount equals about 30% of my gross income. However, I’m not vested in any of my employer contributions for another 6 months.
While I have done some calculations for the future, I decided to max out since I’m fortunate to be in such a position to do so and still have funds left over for meeting other goals (vacations, etc…).
How much (the %) you should save is highly dependent on your age, your retirement age, your life expectancy, your current savings, how your savings are broken up across accounts, exactly how much income you’ll need in retirement, and the income sources you’ll have in retirement. Your retirement savings shouldn’t be dependent on what you’re making before retirement – it should depend on how much income you’ll need in retirement.
I put a lot of work into the calculator. You won’t see it because it’s behind the scenes, but it was a long process of hundreds of thousands of Monte Carlo simulations. Using that method takes the variability of stock market returns into account.
You shouldn’t base your retirement on a simple rule of thumb (like saving 10% of your income). It’s much more involved than that. And depending on your situation, it probably won’t be enough. For example, if I ignore Social Security in my own retirement calculation, I should be saving 20% of my income right now. That 10% rule could be devastating depending on what you really need in retirement.
I found the link to the article I mentioned in my comment. Keep in mind, this is a Canadian situation so the government pension numbers are likely different, but still comparible.
http://www.cyberclass.net/hardworking.htm
I think it’s worth a read.
Rules of thumb in personal finances are often rules of “dumb.” In this situation I would run a spending budget based on a retirement lifestyle that you would accept, using today’s dollars. Then run present and future calculations to determine how much you need to save and invest each year to provide that income when you retire. If you use inflation protected investments, you can take inflation out of those equations. The answer you get may not be 100% accurate, but it will be a lot more accurate than a 10% rule of thumb. FYI- There are tools that will run these numbers for you.
I just re-read that article and realized that it is a little bit political. Sorry about that – I didn’t mean to inject politics into a financial forum. I just think it highlights the differences between retirement and working expenses well using a real-life example.
What I want to ask is, why would anybody want to retire anyway? What’s the big deal about saving up to “live” when you’re old and decrepit?
I’m 41, a small business owner, and working in a job that I love so much, surrounded by such lovely people, that I firmly hope to keel over at work. I hope I never retire. If I did, I would probably die of boredom in a matter of months, if not weeks.
I’m sorry, I just don’t understand this whole “retirement” concept at all. As far as I’m concerned, I’ll be working until the day I die. And that’s great!
(For what it’s worth, I do have substantial savings.)
Rika: I agree completely. I don’t intend to retire, per se. That said, I’m sure a time will come when I won’t be able to work a full work week. And at some point, I probably won’t be able to work at all.
That’s a big part of why I save.
I think that the experts urge 10% because it’s a target people can understand, one that doesn’t seem too intimidating. It’s a convenient financial rule of thumb.
I think that’s right. I also think it’s horrible advice. Oversimplified rules of thumb do more harm than good. Someone earning $30,000 will struggle to save 10 percent. Someone earning $100,000 should be able to do it in his or her sleep. It is absurd for people in these greatly varying circumstances to be advised to pursue the same saving goal. This is an outdated rule of thumb (it was adopted at a time when the idea of middle-class retirement was a new concept).
My own opinion – and I’m sure the experts would agree – is that you should save as much as possible for retirement.
My take is that you should aim to maximize the value you obtain from the money you earn. There are circumstances in which spending offers a greater value proposition than saving and there are circumstances in which saving offers a better value proposition than spending. I was saving 80 percent of post-tax income when my wife and I were both bringing in solid incomes and we had a paid-off mortgage and no kids. Today, when I am trying to get an internet writing business off the ground, I think it makes perfect sense to save zero. My most important “investment” is my business and that is where the money should be going.
Rob
JD-
I hate to get off topic, but this quote stood out to me: “Tonight I asked my wife how much she’s setting aside for retirement.”
I know you and your wife have separate finances and it works for you but it still baffles me. You’re supposed to be a team, a partnership with common goals. How in the heck can common goals be achieved if you don’t even know what she’s saving for retirement (and vice versa)? Again, not an attack on you or your relationship but I really do believe separate finances for lifelong partners is futile. In the end, it’s all both of your anyways, might as well plan along the way with that mindset.
I’d love to see a more in-depth post on this issue that includes tax and legal implications. Couples like yourself, while having separate finances, really don’t under the law. For the most part, from what I understand, all of your assets including retirement accounts are jointly yours.
I am 29 and my husband is 28. Both of us just finished our PhD’s. We had enough savings during Grad school but no saving towards retirement until a month back.
My husband works as a Scientist at a start-up that does not have a 401k match. I work as a Postdoc at a University for 6 months. Again, I am not eligible for a 401k option. Together our income (pretax) is ~110K
My husband started investing in Vanguard Star Fund Roth IRA as well as unmatched 401k with his company. I do not have any contribution and most of my income goes into saving for a downpayment.
This is the question I have. Should I start an IRA of my own since I cannot invest in a 401k? Can we contribute seperately towards the same Start fund that my husband contributes to? The usual 10%–does it apply for an individual or to a family?We do not have kids as of now
JD or anyone can help me answer that.
Thanks!!
Right now my husband and I are saving around 30% (not including any comany matches) of our total income, but it is not all for retirement. Just for reference, I am 25 and he is 26.
We save 10% to my company’s 401K/profit sharing plan and my employer matches 3% (the profit sharing portion I received last year was worth an additional 2-3% of my salary). After graduating with a master’s degree my husband was unable to find a job so he went back to school. We currently save about 10% of our income every month so we can pay cash for his tuition (he works around 12 hours a week outside of going to school). The other 8-10% is spread over our EF, mission trip fund, and miscellaneous savings.
Paying cash for his third degree has been a great idea for us. It means that by the time we turn 40 (and possibly before), we will be completely debt free (including our mortgage).
SunandShine, you cannot contribute to your husband’s IRA.
You certainly could open up your own Vanguard IRA though, and–should you want to–invest in the same fund.
The general assumption on the 10% rule is that each earner is saving 10% of their income. That said, as we’ve been discussing, the 10% number is just a rough guideline in the first place.
I have a question that I have never seen answers to (or even asked I suppose) in all of the finance blogs and books I have read through:
Both my wife and I are in public education, and have retirement pensions set up, so that when we each retire, we’ll be taking home roughly 70% of our ending salaries (with cost of living adjustments annually) for as long as we live… We are still many years away from retirement (I’m 30, she’s 29).
Does the suggestion of 10% savings for retirement hold true in our case, or the case of anyone with a similar pension? We are currently saving nothing towards retirement, and are paying down debt like crazy (with great success so far). Once we’re down to only our mortgage for debt, we intend to add money in for retirement.
Any thoughts or suggestions from someone in a similar boat?
Thanks!
Mike
I’m 32 and currently am saving:
14% to 403(b) + 5% match + 15% to savings acct + 3% to Roth IRA = 39%
I’ve never really added that up like that before, and am thrilled to see the final tally! My husband is saving in pretty much the same ratios, though a bit different investment mix. Funny to think that I’m saving almost 40% of my income, and still don’t feel like it’s enough for retirement. I guess partly because I work in non-profit, so my salary is a bit lower than the marketplace (and that of friends), but I do enjoy my work, and that is worth the salary trade-off.
Like Rika, I don’t expect to fully retire as our parents are doing…their lives look a little boring to me. What I do hope to do is eventually pare my work week down to 2-3 days, and spend the rest of the time how I choose – volunteering, long walks on the beach – whatever.
I save 15% of my income which I started at age 22. My aim for retirement was the point at which my interest made per year would equal or slightly exceed my salary at that time.
Inputs I used were 4% avg increase in salary, 7% average portfolio return and 15% of salary saved over a 40 year time frame.
Once you add all ours up and account for hubby’s company match, we’re currently saving about 17% of our income for retirement (one 401K and two Roth IRAs; I don’t currently have access to an employer retirement account but I’m hoping that will change in the next year). We’re both 28 and also just started saving nearly as much (a little over 14%) towards the down payment on our next house.
I am currently saving 31.68% of my gross into a non-matching 401K(Which is very close to the maximum IRS allowed yearly contribution of $22K for age 50 +)…plus $300 a month into a mutual fund.
I started late even thinking about retirement…and I’m extremely anxious to the point of actually wishing
I would conform to family history of the men mostly dying between 60-65…I just don’t think I will have enough to live with dignity if I live much longer than that(I’m 52 now).
Being alone with no family adds to that anxiety,plus
the fact that unlike common beliefs that expenses will
tend to go down in retirement..I’m living so ”LBYM ” that
my expenses can only go up…not down.
Because I’m sprinting to the finish line, I’m currently saving the minimum to get my company’s match and maxing out the government retirement plans. However, once the primary residence mortgage is paid off at the end of this year, 40 to 50% of my gross income will go into various savings and retirement accounts.
I’m not a fan of rules-of-thumbs and averages and all that because many of them aren’t clearly enough, yet people think they’re all set if they follow them. That false sense of security is dangerous. For instance, the rule of thumb is to have 3 months’ of living expenses set aside as an emergency fund. Currently, the average unemployment length is almost double at 25 weeks.
MrP and I have been saving approximately 20% of gross since we were 30. I saved around 8% in my 20s, when I was going to grad school. At some point I’d like to increase our retirement savings, but right now the remainder of our savings is allocated to college funds for our children’s education.
@ Rika #17 – Retirement doesn’t necessarily mean doing nothing all day but playing chess in the park with other senior citizens. For some, retirement means the financial freedom to pursue other goals.
One thing financial planners never seem to mention is the potential need for long term care. My father-in-law worked until he was almost 80 and was in good health. But he was diagnosed with cancer several years into his “retirement” and while his mind was sharp, his body deteriorated to the point that he needed nursing home care. Home care for the nine months that he waited for a bed to become available was ten thousand dollars a month. That doesn’t include the cost of home visits from a nurse and an occupational therapist plus the cost to renovate the bathroom to make it more accessible for him.
Luckily my father-in-law had saved for retirement and could afford everything he needed.
I am 24, married, with 2 kids, and own a modest home. My husband is finishing his MBA, so his income is low, but we expect it to increase quite a bit when he’s finished. We have a decent emergency fund (3+ months), and our only debt is our mortgage, which we are prepaying ~350/mo. We save 8% plus a 4% match in my husband’s 401k. I stay at home with our boys. We are only able to do this because we live very simply — old cars, house repairs ourself, eat at home, etc.
After my husband finishes school and gets a better paying job, we intend to pre-pay our mortgage quite a bit more, finish up several lingering house projects (like adding a floor to the concrete, and walls in our master bath), and increase our 401k contributions.
We’re all different – different salaries, different debt levels, different expenses. Like you said – make your savings regular – that’s important – save something every month. But I’d also add – don’t save til it hurts. Make sure you have a little cushion in there for fun. Some people over save for retirement and can’t enjoy the moment.
My 90 year old grandmother died a few months ago. My dad and I were discussing her expenses. Basically she received Social Security and a small window’s pension that was linked to my grandfather’s pension (he died 20 years ago). But my grandmother had such low expenses. She had a nice home – paid for since the mid-70s. She just had to keep up taxes and maintenance (much of which my dad took care of). She paid for basic cable, power, water, and maybe eating out once a week. She never bought clothes and she no longer drove. In other words her expenses were ridiculously low. Of course when she and my grandfather were retired in their 60s they traveled a lot and lived it up – which meant a bigger monthly budget. But as they aged expenses got less and less.
Peter (23) beat me to it, but I also was surprised by the sentence about asking Kris what she’s saving. I don’t remember a post in the past year or two of you explaining why you keep your finances separate. Maybe you could do a post on that sometime? I too would like to know more about the tax implications, etc. (I’m genuinely curious about why and how it works for you both.)
In answer to how much we’re saving… I didn’t have any PF education or role-models growing up, so a.) I didn’t start saving until I graduated from college and b.) I got into debt in college. Right now, at 23, I’m digging myself out of that debt slowly but surely, and while I’m at it I’m contributing about 5% of my income, plus a 3% employer match for a total of around 8% or so. (Total 6% in SIMPLE IRA, ~2% in a Roth) The rest is spent between bills, debt, short-term savings and sanity spending money. Once I hit a certain milestone in debt reduction (this Dec, I hope!), I’m planning on upping it to a 10% total, and then continuing to go from there as more debt gets paid off.
He, at 27 with just very low car and student loans saves closer to 20% or so. No employer match however. We graduated a semester apart, so we’ve both been saving for about a year and a half or so now.
And I guess that is why I’m curious about you and Kris keeping your finances apart/you having to ask how much she’s saving. We’ve found (not even married yet) that at least being aware of where both incomes are going works great for us. We don’t have combined accounts at this point (considering one for household stuff), but are very often discussing progress of shared and personal financial goals, spending, saving, etc.
I’m 43 years old & make $47,500/year and have 10% go into a 403B and 6% (plus 3% matched) going into a TIACREFF here at work. I also contribute $5000/year into a ROTH IRA. My monthly expsenses are fairly low (single and not looking to get married), house is paid for, car in good running order, a $5000 Emergency Fund and I have no debt at all. I feel pretty good about this, but always feel like I could/can do more. What I DON’T have is a good beefy ‘regluar’ savings account. So what I am actively doing now is beefing that up, spreading them out in CD ladders on ING. Not much so far, but I’m trying. But — I feel that you can ALWAYS do more than what you are currently doing. If anyone has any other advice for me, I’d love to hear it!
I sooo disagree with this comment “Don’t raid your retirement.. even to put food on the table when you’re out of work.” This is about the ONLY reason you would want to touch your retirement savings.
NEVER feel bad or guilty when you HAVE to do to put FOOD on the table for you or your family, do what you NEED to do.
I currently invest 7% of my gross income. With my employer match of 5% that puts me at 12% total. This figure has fluxuated over the last five years, but I’m pretty much set on 7% until I can become debt free. Once that happens I will bump my contribution to the max and probably open up a roth IRA.
I’m 29, I started saving for retirement at 24. I don’t count on getting any money from anyone else, so I don’t think about social security or my government pension.
@Peter and Rae
Though Kris and I do keep separate finances, I had a fairly good idea of what she was saving even before I asked her. I knew that she saved at least 25% of her income. But I also knew that she’d been crowing lately that she was saving even more. Last night over dinner, we worked exactly how much that meant.
As for why we keep separate finances, I’ll point to this oldie from the archives: Which should you choose: Joint or Separate finances? Perhaps this is a topic I should revisit. Our finances are still very much separate, but there has been a sort of strange merging over the past couple years, but just in certain corners of our finances.
I know that separate finances can seem baffling to some folks. Trust me, though, that it’s perfectly possible to save for common goals and all that other stuff even without joint accounts. In fact, to us the notion of joint finances seems strange. 🙂
As I always say: Do what works for you.
We’re at about 15% for retirement savings, but we also “save” in other ways like paying down our mortgage early, learning to live well below our means and trying to come up with alternate sources of income.
I think those issues are also important, possibly more so than listening to the old conventional wisdom of 10%, especially considering that is probably from the “good old days” when people expected 12% annual returns from the stock market.
I ran a rough excel calculation, and 10% starting at age 25 is exactly enough to retire at 67. But there are a lot of assumptions in there.
My vision is to retire when the last of my (as yet unborn) children head off to college. My wife and I save about half of our income.
Retirement can be anything you want it to be. All of my parents have retired and none is bored or sitting at home. My Moms retired at 65, my Dads waited until their 70s (there are step-parents). Mom and step-Dad have two houses that they travel between each year. Mom worked the unpaid equivalent of a full-time job the first three years of her “retirement” at the charity in which she’s been involved for 40+ years. My step-Dad the banker stays active in Rotary (District Governor level) and advises start-up banks he admires pro bono. They’ve taken multiple trips abroad and now mostly bring the grand-kids to the lake house for their fun (plus all the Rotary entertaining at both houses). Dad and step-Mom just retired this Spring and are starting to increase their travel but are mostly relaxing for the first times in their lives. They seem happier than I’ve ever seen them.
The retirement I’m planning will have little resemblence to theirs but it won’t be boring. How I prepare will be different from their plans, but the key is to have a plan. Have a plan for how you will spend your time and have a plan for how you will pay for it. If you love your work and want to do it until you drop, have a plan for when you drop. If you want to retire at 40 have a plan for the next 45 years. Save, invest, work – just have a plan and execute it.
We save 12% for retirement, not including matching. I have been saving for retirement since I was 21, and have been saving for 10 years now. We did save more, but that dropped since my husband left his job to be a SAHD.
We have over the years come to the belief that due to our high medical bills retirement for us will be used to cover the increased cost of medical care and give us a bit of financial freedom. In my field I have found there is discrimination against older workers. I am anticipating this for both of us, so our retirement fund will allow us to keep working, but at lower pay.
I believe these “rules of thumb” are hogwash and most articles on the topic will have you believe even if you were saving 100% of your income it still isn’t enough. I also believe in this day and age to be able to retire and not draw in any money is just not feasible.
Perhaps I read Rob Bennett’s website too much.
@J.D. Thanks for the link – that’s a great breakdown of why you do it and a simple–but good!–list of pros and cons to consider. Guess I didn’t search the site enough.
We fall into a very similar situation as the two of you. I think our current issue is working out a good system of how to split the shared expenses. We generally swap the major bills every month, and then keep track of food and household stuff and even it out at the end of the month (usually one or the other of us will have purchased most of the groceries so the other will transfer some $). I’m starting to think that a joint account that we both dump the monthly expenses into (but keeping everything else separate) would help streamline that process though – and help us stick to the budget a little better. Then there’s the argument of too many accounts though. *shrug* Something to keep working on/thinking about.
No matter what amount of money is saved for retirement, one must know for your money to out live you, one can not withdraw more then 4%-5% annually during retirement. So, if one desires $110k(5%) annually during retirement, then there needs to be $2.2 million saved. Assuming annual growth rates of 10% during retirement. I don’t think $110k is far fetched for living cost 35-50 years from now…
Now how do we get there? For example lets say you start with an IRA of $10,000, your 25 and plan to work untill your 65, assuming you never get a raise, and you make 100,000k.
$10,000 intitial investment at 10% annual return for 40 years would yield?
$1,490,000
now deduct 5% a year in retirement. Question is can you live on $74,500 forty years from now?
Note: most retirees spend more annually in retiremnt than they ever earned in a year. We all have grandparents, they are hte best reference we have, so talk with them and ask them how much they spend?
Here is a perspective for you, somewhere there is someone living on 80% of what you make yearly, and they are living just as comfortably as you are – Save as much as possible – post debt of course!
I’m 30, earn just under $100k / year, and am saving 45% of my gross pay for retirement (very difficult after taxes!). Until last year, I drove a 13 year old car, have little furniture, no television service, etc. Some people might find this to be an unbalanced approach, with not enough money spent enjoying life, but I would contend that I have different priorities — in fact, financial independence is my very highest priority. I spend around $3-4k / year on travel and buy excellent groceries (I love to cook), play music and games regularly for entertainment, and live like many of my friends who earn ~ $35-40k / year.
Using a 4% annual withdrawal rate, I could probably retire on a shoestring in about 3-5 more years (depending on investment performance), but I plan to continue on until I’m around 45 to have more financial flexibility in the event of unforeseen medical conditions, etc.
I’m disappointed to see this blog entry make the same fear-based mistakes that so many have made regarding this recession and the drop in the stock market. It DOES NOT MATTER if the stock market “drops nearly 40 percent in the year you choose to retire.” Aren’t we all witnessing right now that such fast drops also lead to relatively fast recoveries? But the main points is that it doesn’t matter what your retirement is worth in any single year. The funds are meant to last and be withdrawn over 20, 30, 40, 50 years. So, who cares if it goes down 40% is one year?! That year a financially intelligent person would just keep drawing out the same 1/20th or 1/50th of the total (or whatever the person had budgeted) and within some number of years the stock market would return (and grow) and the person would be fine.
We are currently saving 11% for retirement but plan to bump it up to 15% at the beginning of the year. (We have saved 15% in the past, but stopped to beef up our emergency fund.) Our employer has discontinued 401k matching for the time being, but if/when that gets reinstated, it would mean another 3% or so, for a total of 18%. We are in our late 30s.
right now I’m maxing out my 401K at age 25. That is without my employer’s profit sharing which kicks in a couple months from now. Between my savings goals(short and long term) and retirement I probably live on 40% of my income. It seems like a lot right now, but I want to have the flexibility to either retire early or reduce my savings later when life catches up with me.
I think when you are young its important to take that longer look. Most of my friends can’t even imagine saving for retirement. There are bars to go to, women to chase, and new cars to drive.
The best retirement advice is to take care of your health and work as long as you are healthy. Yes, your living expenses will be less then, so you can work less, too. (Pay off your house, for crying out loud – that gets rid of your biggest monthly expense.) But it doesn’t have to be an “all or nothing” decision.
Granted, I am in a field that lends itself well to temporary and/or seasonal work. And I don’t have to lift heavy stuff. But I take care of myself and see no reason why I can’t still be doing some side accounting work when I’m in my 80s. Not all year, maybe just for a few months when companies do their year-end closes. But I should make enough money doing that that I wouldn’t have to tap into my savings much, or even at all.
The worst retirement advice is to live on a fixed income. Investing in your own health and job skills is a far better place to invest than in the stock market.
Hyperinflation is almost assured in our economy’s future, not unlikely.
The whole save/invest thing seems like a giant hamster wheel to me. You scrimp, struggle, and save, but then the stock market crashes, thanks to our idiot government and its inappropriate meddling in financial markets. So you struggle even harder to make up for it. Then inflation starts to wipe out the power of your savings. So you struggle even harder.
Then, maybe, when you’re old, if you’ve withstood all this, you have enough saved up to sit around and not work? No thanks. Forget about having a 25-year retirement and enjoy life now, while it’s happening.
I’ve only been saving about 5% of my income towards retirement for the past year or so, because I’ve been putting over 20% into paying off my car and building a down payment fund for a house. Even in the current real estate market, I’m targeting $100,000 as a goal for a 20% down payment on a relatively modest home around here. I can’t save that money in any reasonable length of time without putting a lot of money towards it, and though I *could* save more in total than the 25-30% I currently am, it seems unnecessary.
In a way, saving for a home *is* saving for retirement. I plan on getting a short 10 or 15 year mortgage when I do buy a place, and then as soon as it’s paid off, I can increase my retirement contribution by my old monthly mortgage payment. Also, as soon as it’s paid off, my monthly income during retirement falls by the amount of my mortgage payment, which makes it much more affordable.
I’m currently 28.
This may seem a bit radical, but I’ve withdrawn nearly every dime from the stock market. I converted my traditional IRA to a Roth IRA and took all the money out.. CRAZY YOU SAY? Nay.. I’ve invested for a decade with less than zero returns. I am done passively hoping other make me rich. I have taken ALL my money and have bought a small business. I enjoy cash flow, business appreciation, AND tremendous tax benefits.
Why do we trust criminals, hedge funds, and the ponzi scheme we call a stock market with our retirement dreams? I will invest in the stock market again when I have exhausted all possibilities to invest and build equity in MYSELF and my OWN business.
Disclosure: I am a former financial advisor with one of the largest wealth management firms in the world.. Be VERY wary of what people in suits tell you.
I am 25, saving 15% of my income, with a 5% match from my employer. Every raise I have gotten so far I have cranked up my contributions. I started of only contributing 5%, then 6 months later it was 10%, then a year later it now stands at 15%. This winter I will crank it up to 20%, or maybe even make the plunge and max out my retirement account and start seriously thinking about a Roth.
I was extremely lucky in that my parents let me live at home for my first year and a half out of college and my “rent” was the requirement that I contribute the max amount possible to my 401K since my Dad always regretted not doing that.
When I moved out I budgeted on that amount and since I’ve never seen what my paycheck would be like with that 15% in it I don’t feel deprived. I *won’t* say I don’t miss it because there’s times I really do. At this time I’m choosing to not fund my Roth IRA in order to fund my MBA debt free while I work (well only 8500 in loans). Once school finishes next September I plan to fully contribute to my Roth IRA as well. Adding in my company’s 100% match for my first 3% and a 50% match for 4-5%, I get close to 20% gross savings while paying for an MBA at a good public school in my state all on my ~40,000 salary.
As a note, due to an article on Frugal Dad I recently did some leg work on actually figuring out what my taxes were likely to be next year and adjusted my withholding and it will stay adjusted next year so I just basically gave myself a raise that will go straight into savings :).
1. Save the most you can AFTER you max out on the 401(k) per the allowed maximum. Some companies have 10%, 15%, 25% and all the way to 85%!
2. Invest it in a nicely asset allocated model. This will save you from the ups and downs, but stay the course. Do not be aggressive, nor passive.
3. 10% over 40years is what I have been doing, and I am in year 25 of that plan. Got a good sum collected, but 401(k) ONLY will NOT do the job for a great retirement life, considering all the challenges the $ currency is going to face over the next 10 years.
4. Put the savings BEYOND 401(k) into Retirement, College Education, Major Goals (vacation), and STOP BORROWING money beyond house and possibly a car (not two).
5. Learn to ‘sacrifice’ and ‘give-up’, even though we only have one life-time to live. Doing so, will make the years from 40 to 85 really smooth.
6. Around 45 to 50 start plugging your assets and debts into a Retirement Planning tool that can be saved and updated on an on-going basis. There are some cool Excel file tools out there for FREE (search with Google or AltaVista).
7. Retirement does NOT need 70% of your final year salary, since that is TOO MUCH money, unless you have not paid off the house. If you have paid off the home the day you retire (that was the plan when you bought your 1st house), then you should need 25% to 40% of the final year salary.
8. Finally, fear not retirement, fear the Bushnomics and Obamanomics (democrats or republicans) since taxes and inflation eat away more than anything in your life, and even then they need to print more money on blank paper without putting gold as collateral!!!!!
9. Start putting more money into dividends/income as you get close to 50. Also make the banks around you a friendly place to start opening CDs. I have done this since Oct’2004 and it has made me look like to champ to myself!
10. Finally, INCOME CREATION is everything and of primary importance. Managing money is tertiary. What is in between is SAVING MONEY. If you have these three as your main objectives, then Wealth Creation and Achievement of Goals will be a piece of cake.
I am doing ALL of the above, and enjoying every minute of it. We take $10K vacations now every year, and save one whole paycheck, and live off the other. The 2nd paycheck we live off, is a paycheck that puts the max 401(k) allowed, but putting in over 20%+ of the paycheck. So, this is a small paycheck (if you reverse engineered), but we do not need more since Debt = $0.00
Kenny
We do separate budgets. Basically we sat down and came up with a budget for all joint necessities – mortgage (before mortgage, it was rent and savings for down payment, now we include some prepayment $), food, utilities, home taxes. We added a little safety factor on top of that too. We opened a separate account, and each month deposit into that account. It works beautifully for us, we never question each others other expenses bc we know everything we need is covered.
@KF (#50)
I’m not trying to give into fear-based arguments when citing the 40% drop. Well, maybe I am a little. I guess maybe I should have been more clear in my post.
First of all, it is essential that those who are approaching retirement age make sure their asset allocation is correct. A 25-year-old might have 75% or 80% of her retirement investments in stocks. That’s not appropriate for a 65-year-old. But too many people choose not to rebalance, and so put their savings at greater risk.
Second, if I recall correctly (and I think I do), I believe there are studies that demonstrate that a market decline as you enter retirement can be damaging to your long-term financial prospects. Because you’re drawing down the principle, you have even less money to produce the compound returns to let your stash grow.
I agree that one ought not be in a position that a 40% drop causes panic. But I also think that such a drop has some very real consequences to many folks approaching retirement. A lot of these people pull their money out of the market (afraid to lose more), thus realizing the actual decline.
Yet another reason to pay less attention to the hysterical headlines of the financial media.
JD: You’re absolutely right. When you’re in retirement (or, more specifically, when you’re selling your investments) the order of bull and bear markets makes a huge difference.
You can try it out with simple numbers. It’s just the same “order of operations” that we all learned in grade school–where you put the parenthesis in an equation makes a difference.
“5. Learn to ‘sacrifice’ and ‘give-up’, even though we only have one life-time to live. Doing so, will make the years from 40 to 85 really smooth. …”
well, that is, until you are 40, get downsized, finally get reemployed in an underemployed type of positions, that is..
Sorry, Kenny, your rules don’t necessarily work that great..
My husband and I are 31 and (almost) 29, respectively. My husband came into the marriage (2+ years ago) with about $15k in retirement savings, but stopped contributing after the wedding because he went back to school. I don’t remember how much I had in my 401(k) when we got married, but I was contributing about 11% at the time (we were also saving to pay for our wedding in cash, so I needed to keep contributions relatively low). However, I started increasing that over the next year and I’m now at about 20%, plus a 6% employer match. This is on top of an approximate 25% of my gross pay that goes into short-term savings. So, overall, my husband and I save about 32% of our combined gross income.
I know this isn’t the topic of your post, but I, too, am curious how the day-to-day stuff functions when couples keep their finances separate (not from a standpoint of judgement, but just because in my head it seems extremely complicated and I wonder what makes it worth it?). My husband and I have separate accounts because we liked the bank/credit union we had, and it was easier than closing accounts, etc., but we’re both named on each other’s accounts and the ING account we set up after the wedding is a joint account. His income is just enough to cover our mortgage payment and his incidental spending, so I pay all the other bills (including our joint credit card), buy groceries, clothes, etc. and make the contributions to savings. I guess the reason separate finances seems so complicated is that it seems like, in order to keep things “fair,” you’d have to be constantly tracking who paid which bills, who last paid for dinner or the sodas at the gas station, etc. Again, I’m not judging – it obviously works for a lot of people, but I’m curious about it.
Perhaps you could do an article where you interview various couples and their different money management styles? That way you don’t necessarily have to put you and Kris up for display (and public comment), but those of us (maybe it’s just me?!?) with the curiosity of how others live their lives will be sated 🙂
Because of the risk of substantial market losses that can occur at any time, money that you will need to live on (not thrive) in retirement should not be invested in the stock market – ever. For an expert’s take on this, read the interview of Zvi Bodie in the October issue of Money Magazine.
I’m 28, and I’m saving about 4% right now because my employer has suspended matching contributions for this fiscal year. Before that, I was saving 10%!
I expect to be out of credit card debt in 12-15 months, after which I’m planning to fund a Roth IRA.
I currently contribute 12% to a 401k and about 3% to a Roth IRA. My employer also contributes 3% to the 401k. I am 35; women in my family are generally very long-lived, and I can’t count on social security to still be around when I need it. Add in the fact that my 51-yr-old husband has no savings, and I am clearly not saving enough. I am trying to build an emergency fund, and I will need some other non-retirement savings as my husband will need the money before my retirement accounts become accessible.
I put away everything I can, and try not to worry too much.
It’s hard to have a number, especially in early 20’s. Just the starting point and learning the basics is a curve for me so I don’t have a number.
“I’ve withdrawn nearly every dime from the stock market. I converted my traditional IRA to a Roth IRA and took all the money out.. CRAZY YOU SAY? Nay.. I’ve invested for a decade with less than zero returns. I am done passively hoping other make me rich.”
Chris, can you share how you did this? I would like to do the same thing. How do you convert your traditional IRA to a Roth without paying a 10% penalty and taxes that sap away a huge chunk? I agree 100% with your post. Those people in suits are the same people who always said the stock market returns 10% and your house will always appreciate in value. They are trying to sell something!
Bubbles happen when people mindlessly overpay for something. It already happened in the housing market, and it’s happening with credit card debt and student loans. People overinvest in the stock market too, because everyone is always telling them they should, and they trust others to manage their money for them.
My husband and I keep separate finances, but we do have shared financial goals, and work toward our individual and shared goals, and review our progress a couple times each year. He has his favored methods of investing/saving, and I have mine – so long as we’re both moving in the same direction, it’s simple.
We each have separate checking accounts, one joint account for mortgage, utilities and other bills, and then we have our individual savings and investment vehicles. Once a month, we each transfer our portion of the total household expenses into the joint account, and we’re done. I’m in charge of actually managing the finances because I enjoy it. It does mean sticking to a budget for the variable expenses like food. And in 14 years together, we’ve never fought about money once. I call that a success!
Call me crazy. I am 31 and
12% Silver and Gold Coinage
10% Savings
5% 401K & IRA
Will invest more in 401K & IRA when US debt and dollar stabalize.
I know that we’re mostly talking about retirement here, but I wonder about other savings as well. You say that Kris is saving 25% for retirement, what about regular savings on top of that? I ask because right now I’m saving 12% for retirement (I’m 40) and another 25% in regular savings – mostly for an emergency fund. I’m sure that seems backwards to most folks, but 5 years ago I was living in New Orleans when Katrina hit and basically I had to start all over (with the exception of what was in retirement at that point that I didn’t touch). If it hadn’t been for the regular savings, I’d have been in much worse shape, but literally, I started over from scratch and still struggled even with the savings. Think about everything you have in your house at the moment and imagine having to replace it all – even with insurance it’s an expensive deal. I chose not to stay in NOLA and needed to rent a place in my new city (I’d had a home in NOLA), buy furniture, clothes, basic supplies, etc., while still keeping up car payments, and other bills, and I had to find a job. I guess my point is (sorry if I’m rambling) don’t forget to save for the rainy day too. How much would it cost you to completely start over… and what is it that you really need? Once I get back to having that fully stocked emergency fund, I’ll reverse those savings numbers and hope it’s enough for retirement while still giving me peace of mind today…
Pirate Jo: You can avoid the 10% penalty, but you cannot avoid paying regular income taxes on the conversion.
An excellent post on the topic can be found here: http://www.goodfinancialcents.com/2010-traditional-ira-to-roth-ira-conversion-tax-rules/
my husband and I weren’t married for the first 26 years we were together (we were waiting for marriage equality — I didn’t feel right about being married when gays couldn’t), and have always (still) kept separate accounts. We didn’t worry about “fairness” at any time — he/she who had the most money paid the most bills. But, it worked because we have the same attitude about spending — we don’t take on debt (except our mortgage and we paid it off at record speed), but we buy what we need and some of what we want.
I’ve never understood why there’s that idea that you should be sure to outlive your income — why not die broke? We have been to retirement seminars (one put on by my husband’s company) and it felt like a total sales job. The benefit of most investment strategies seems to be for the agent/company, and it is to their benefit to tell you to put more and more money into managed investments (we had one fellow tell us we had “too much money in savings” — surprise, we still have every penny of those savings, even as our investments were reduced a lot, like many other peoples’ in the recent crash).
I think everyone one should save at least 10%
There are years I save 20%, some years I save 25%. But I never go below 10%
I guess I don’t understand how the concept of separate retirements works. I get that IRAs and 401Ks technically belong to the individual, but to us it’s one big pool of money in separate pots, and it all belongs to both of us (we have all our finances joint except a few credit cards). If one half of the couple saves $200K and the other saves $2M for retirement, does one person have to eat ramen noodles for dinner while the other is enjoying a steak, and stay home watching basic cable while the other is out on a cruise? How do you envision retirement if it turns out that you have wildly different account balances when you get there?
Also, to the question about outliving your investments versus dying broke – the problem is you don’t know when you’ll die. You can plan to die broke at 95, but what happens if you live to 98…or 100…or 104? Better to plan to outlive your investments no matter what.
As for the retirement question, I am in the camp of hoping to continue working as long as possible. Not because I expect to *need* to do it, but b/c I’d prefer to remain involved in the world, even if it’s just a part time job.
I’m always surprised at how vehemently some people disagree with having separate financial accounts. My husband and I–married for almost 12 years with one kid–have always had separate accounts, and it works great for us. I have never seen a compelling reason for us to change a system that gives each of us clear responsibilities towards the household and yet allows us each a certain independence in handling those demands.
I will freely admit that we have made some financial mistakes, and spent recklessly and unwisely at times. But we would have made those same mistakes regardless of what system we used to pay our bills, as we made the choice to live that way as a couple. In the same way, we’ve both put a lot of energy into reforming our spending habits, and we both worked hard as a couple to make sound financial decisions for the future. Neither our mistakes nor our successes have any connection to the specific banking system we use.
#75 read post #48
I’m 39 and have around 12% going into a 401k with variable company matching (up to 4%). In past few years, I did the max IRS 401K amount. I buy a bit of stock each month (just $150 or so through drip direct plans), just for fun extra savings. Also I am trying to save another 10% per month in savings, and usually do a Roth IRA each year, so my total savings is likely around 20-25%. I do not feel like 10% is enough, but you start out with what you can do and move the percentage up as time goes on.
After a divorce this last year, I am regrouping financially; bought a much smaller house than we had together. That is my advice – don’t upgrade houses. I bought a very nice house more similar in size to the first house we had (as opposed to the almost double in size one that we “upgraded” to. If I had stayed in the first house originally bought 10 yrs ago, it would’ve been paid off now due to its (relatively) lower price, along with savings and pay increases since then.
I am fortunate to have a high income, but am planning on being able to live on half (expense-wise) in case I am downsized and have to find other work. You really don’t miss it if you get used to living on less (though it is definitely easier with a higher income, since I can just live like my friends who make a bit less and I don’t feel any pain). My future goal is freedom to work fewer hours or at a different type of job (which is lower paying but more satisfying).
“How much should you save for retirement?”–A lot more than most of us think!
Given the affects of inflation over time, especially in regard to healthcare, the most a retirement plan may end up being is a nice, fat emergency fund. No joke here–include a realistic inflation adjuster into your retirement projections and the amount of money you’ll need becomes mindboggling. A $2 million retirement stash may seem like a lot now, but won’t be so impressive in 20-30 years.
Part of retirement planning needs to focus on what kind of WORK you will do that you won’t mind doing. It may take some time and training to get there, so there’s no time like the present to start working on that sideline business or 2nd career that may be needed to keep us going well into our golden years.
24 year old here. I’m saving 35% of my salary ( 72K salary ) I don’t want to be working full time until 65. Wish rent was cheaper so I can save more. Plan to partially retire at 50… if the market allows me to. 🙂
I contribute the maximum to my 401(k) ($16,500) and the maximum to my Roth IRA ($5,000) and I make $67,750. I currently do not get a match in my 401(k). So I contribute about 31.7%. I’m 31, have a wife and 2 kids, we are quite frugal and hope to retire comfortably and early.
Just a point of clarification – I currently save 20%. Gotta take advantage of that compound interest while I’m young! =D Since I keep my expenses low and have my fiancial picture in order I don’t find it burdensome, so why not, right? Plus it gives me breathing room later when I’ll (presumably) have other financial goals.
@ Traciatim – I’m also Canadian so hopefully I’ll get some juicy benifits when I retire as well! But…I just feel like who knows what will happen to CPP in the next 40 years. First the baby boom will ravage it, and if there’s anything left I’m sure gen X (another big generation) will do some damage too. I prefer not to depend on it, just to think of it as gravy when I (hopefully) end up getting my share. I’ll certainly have paid in plenty by then! On top of that, 40 years from now I may not even live in Canada. Who knows what life will bring (hope my RRSPs and TFSA can follow me…hmm…)
@ Alexandra – I’m too financially conservative to assume that none of my expenses will increase in retirment. Anyway, I’m WAY to far from retirement to have any idea of what my expenses will be! Who knows, maybe I’ll still be supporting deadbeat kids! =D
@ Rika – I’m jealous! I wish I that I loved my job so much that I never wanted to retire! Unfortuanately at this point that’s not the case but maybe one day.
@ Rob Bennett – that’s my point exactly! I think the 10% number gives people a false sense of security and therefore is somewhat dangerous.
Well, we’re starting over at age 45.
We sold a profitable business two years ago and both have been unemployed since that time, almost exhausting our savings.
DH just started a new, great job about two months ago and I’ll start mine in another couple of weeks.
It’s been a tough two years, I tell ya, even though we were as “prepared” as we could be. I’ve never been unemployed in my life, much less TWO YEARS!
Our plan is to pay off some debt we incurred these last two years (health bills, etc) then save 50% of our gross income (about $5000 per month) in various savings/retirement vehicles. We need to play catch up. No kids, we have a mortgage of about $600K.
We are both going to receive inheritances but I *try* not to think about that. Though in my darkest hours it was a source of comfort.
correction: 50% of NET income
I’m 29 years old and have been contributing to a 401K from the time I was eligable at 23-24. I started out contributeing 10% and have slowly increased so I am now contributeing 20% (plus 4% company match).
I’m the saver; DH allows me to direct him so I’m more comfortable. 😀 As a result, I save a lot more of my income than he does his.
I’m saving 19.5% of my gross salary in retirement investments; no matching, but I will also have a pension. I’m also putting away an additional 7% in non-retirement savings.
DH is saving 11% of his gross income in retirement investments.
Our current estimates are that our house will be paid off in 2019, when I’m 54 and he’s 56. If I retire at 60, I will have medical care from work, and he’ll be covered too.
For those wondering about separate vs. joint – we too have “separate” accounts, but we also have a joint account for bills and expenses.
We have ~ $160K in investments right now, and DH recently inherited some funds from his grandmother. I am planning that half of the inheritance will be invested for his retirement, and the other half will go into liquid savings.
For those of you who claim that you will never retire – keep in mind that you might not have a choice. All it takes is one accident or disease, and you might be unable to work when older.
That is my situation – I have a spinal disease that means it’s unlikely I’ll be wanting or able to work past 60. I had planned all my finances on working to 62-65, and now I find that even having saved since my 20’s, and currently at 20% of gross going to retirement – it still might not be enough. So don’t be so short-sighted or arrogant to think you don’t have to plan for the worst.
As someone who is graduating college this year, with the possibility of either working or going to school another 3-4 years, this is particularly interesting to me. I personally am prepared to aggressively save for my retirement. I want to sock away as much as I possibly can. If I could go 40% I will!
My goal is to retire earlier rather than later, though. If I saved and invested enough to retire at 50 and live at my same standard of living, I would take a hard look at what I want to accomplish in life. I also know how important it is to start early. In response to Carla, if you think 10% is way too low, I challenge her to go 25%…or more! You can’t save too much!
I am 26 and my husband is 28. I’m a stay-at-home mom, so we are living on one salary. Currently, out of each paycheck, 10% goes toward retirement and 10% goes toward paying down debt. All bonuses and found money are also going towards paying down debt. However, once we have paid down our debt, we do plan to contribute much more towards retirement.
BIGMIKE #27 – I was in your circumstances. I recently retired at 57 with a pension of about 70% with a COLA in future years. The last few years I saved about 20% of salary. Over the years I saved varying % depending on circumstances…Less when I stretched to buy a new house and more when I got a raise I didn’t *need*.
In my situation 70% really = 100% because I am no longer saving for retirement or paying medicare taxes. I have more saved that I will likely ever spend. Taking yearly 4% distribution cut of savings/investments funds the fun things…big trip, new car for cash, home solar energy system.
I suggest saving 10% of your salary once any debt is paid. Not more than that if it requires too much scrimping. After all, you may not work for that employer you entire career. Also saving 10% is good discipline.
Carla – don’t worry about the CPP. It is rock solid and there is no chance of it not being there for you. If you want to worry about something then worry about OAS – I suspect it will be there but it is far more likely to be cut than CPP.
As for all the people who think Social Security won’t be there when you retire – do you really think it will be completely eliminated? Is it not more likely that the benefits will be reduced and/or retirement age moved? It’s also possible that it will be exactly the same as it is now. (I know, very hard to imagine for some people).
#27 Mike – we are in a similar situation with my husband an Ohio teacher. I do believe he will get a pension, but just remember they can change the rules on you midstream. We just found out a month ago that my husband won’t be able to retire after 30 years of service like we thought, they are changing the rules to 35 years of service. They are raising his mandatory contribution from 10% to 12.5%, reducing cost of living adjustments and making other changes because the fund is insolvent. Don’t trust someone else to take care of your future. There are retirement calculators out there that will include pensions and tell you how much you need to save on top of that.
I just turned 28 last month and I max out my 401(k) to the legal limit and get the employer match of 1.5% (I’m jealous of all of your companies who give 5% match!). Beyond that I usually put about 10k-15k a year into an assortment of indiv. stocks, funds, bonds, REIT. I have 2 rental properties with my brother that have slightly positive cash flow. I stopped contributing to my emergency fund after it got to 6 months worth and I have about 30k saved up for a down payment that I add $500 to every month. My income prices me out of the Roth IRA range, but a few years right out of college I was eligible and so I have a Roth that has about 11k in it, but will only grow by returns.
This may be off topic a little, but do you ever write articles for those on the higher end of the income spectrum? Obviously the point of a blog is to tailor it to the most people possible, but I thought it could be helpful if every once in a while you could weigh in on a topic for the higher earners.
Love the site!
“Also, to the question about outliving your investments versus dying broke – the problem is you don’t know when you’ll die. You can plan to die broke at 95, but what happens if you live to 98…or 100…or 104? Better to plan to outlive your investments no matter what.”
At 98 or 100 or 104, who cares? I probably won’t even know what’s going on around me at that point, much less care. I can go ahead and die when I’m that old – so what? I’ll be someone else’s problem. My plan is absolutely to die broke.
@Kevin (79)
Yeah, I wonder about that (inflation) too… but when I do the “how much do I need to save to get what I need” calculations, I assume no increase in salary, and no increase in IRA maximums. This way, assuming that my salary and IRA maximums increase with inflation, I’m covered.
FWIW, 15% of my salary gets saved toward retirement. At least next year when my credit card debt (from unemployment) is paid off.
@ Four Pillars – it’s nice to have a vote of confidence for Canada Pension! As I said though, I don’t *worry* about it at all. I just choose to plan to depend on myself and will treat it like a nice bonus when that time comes.
My personal philosophy is to spend my energy on things that I can control – CPP will probably be fine, but I really have no control over whether it will be or not so why even think about it, right?
My opinion on this is to use a good retirement calculator and make sure that you error on the side of too much money in retirement. I don’t think too many people would mind having extra money at a time when they can do whatever they want without having to worry about a job.
Here is a link to my favorite Retirement calculator at INGdirect.com:
http://retirement.ingdirect.com/Plan/Default.htm
Why do some people feel the need to spell out their entire net worth when the question was % towards retirement? Who care if you make a million dollars a year and have ten rental properties or how much you have saved for a down payment. What does this have to do with the question that is the point of topic today?
I think that when you get your first job, you sign up to put 10% into your 401k and THEN go and do the calculations, figure out your budget and how much you can afford to save etc.
The point is that 10% is better than 0%, which is what people in general will do while they dither amongst all the choices, advice and calculators out there. That’s the value of having this “rule of thumb” out there.
I’m in my 40’s. I started at 5%. Over the years I’ve used promotions and other salary increases to pump that up to 14%. When I retire I plan on eating into my principle, since I’m projecting I won’t make it past 95 and I feel my kids should be helping me if I need it at that age, not the other way around. I’m also planning on replacing 80% of my last year’s salary, but am figuring I won’t need anywhere near that and the actual replacement figure will be in the 60-65% range even with long term care and health insurance bump ups (I won’t be saving for college anymore, mortgage paid off, social security and medicare no longer being deducted from salary, won’t need life insurance, etc.). So, if things go well, I’ll have extra. If things don’t go so well, I’ll still be fine.
I think ten percent of your salary will get you there if you have 40 years to accumulate it and invest it sensibly. If you only have 30, you need at least 15% of your salary. I really feel that this is a lot like saving for your kids college, don’t destroy your present by killing yourself for your future. Ten to fifteen percent should accomplish that without paupering you now.
As a 20-something, retirement seems a long, long way off. But I guess it’s never too early to begin planning.
My wife and I are saving about 85-90% of our income. Although our income is probably 5 times the national average, we live on less than what others might consider the ‘poverty line’ (without any discomfort, as we have pretty simple tastes). As Jacob posts about at ERE, when you change the equation to this extent (which is obviously much easier with a highish salary) it changes retirement calculations enormously. We were both raised to live frugally, and we like it (one car, cook everything ourselves, keep it pretty basic at the grocery store, no cable – but nothing too extreme IMHO!).
I can’t get my head around the split finances thing either, but I guess different strokes for different folks. We each get a little bit of discretionary cash every week, so that we can ‘waste’ money without having to justify it. I think it’s the perfect solution to marital finances, as the only discussion you have to have about that sort of spending is the level at which to set the ‘allowance’.
Like others here, the fact that you had to ask your wife about her retirement savings surprised me.
Thanks for the posts – keep them coming.
@Four Pillars (#90):
I don’t know what will happen to Social Security by the time I might need to retire. Maybe benefits will be reduced, maybe the retirement age will be delayed, or maybe it will be eliminated. Given the state of our government and economy and the problems we face in the future, I have no idea.
But, I can try to plan around not having it. If I’m right, then I’m OK. If I’m wrong, then I’ll be just fine as well. If I depend on Social Security (as it is now) and I’m wrong, I’ll be up a creek (not even in a boat…I’ll be floatin’ on a tube). I can’t possibly plan for all the possible changes to the Social Security system – too many variables. That’s why it’s easier to plan on not getting it at all.
As other people here have said, I think it helps to stop thinking about percentages and begin by thinking hard about your retirement and what you want it to look like. Also try as best you can to gauge what your financial situation will be: e.g., no more mortgage to pay, for example, assuming you can pay off your home by the time you’re retired.
From that you can work back to figure out how much you’d need in today’s dollars to live the kind of lifestyle you want, and then factor in inflation. That calculation can give you a rough annual figure that you can aim for, and from there you can figure out how much you’d need to save between now and your retirement years in order to get close to that amount.
That’s the best way to figure out how much to save for retirement, although in practice hardly anyone does it that way, we just save as much as we can and hope for the best 😉
Screw rules of thumb…! 🙂 I earn about $110k a year, max the 401(k), max the roth ira.
I’m 30, live modestly, and save the rest in a more conservatively balanced taxable portfolio that includes my emergency cash as well as foreign and domestic equity positions. The big ticket goal for that taxable portfolio is really a down payment on a house and then some.
I generally spend money more on things that increase skills (technical books, training material, classes.) These things are actually a perverted form of cheap entertainment that also act as an investment in self.
I tend to ignore the percentages and focus on what I can do right now, and what I want in the long run. It’s hard to juggle financial goals like saving for retirement, paying down my student loan, padding my emergency fund and saving for a home.
I save a certain amount for retirement each year, but I’ve also got my TFSA which could be retirement or something else. (I haven’t decided — for now, I’m just trying to dodge the taxes).
Historically, pensions have had to allocate 15% of salary in order to be self-sustaining. This is why many pensions are in trouble — they went for less than the required amount hoping for bailout from the stock market — and now retirees depending on pensions will see their payouts drop dramatically.
If you don’t have a pension, you should be putting at least that same 15% into your 401K (employer matching included). The nebulous part is the “at least”. The 15% historic pension number also went hand-in-hand with social security benefits. While SS probably will be around, it may not pay as much as in the past. So depending on how confident you are in SS, you should be putting 15%-25% of your money away.
I decided on $4K a month and spend whatever is left over…the $48K a year is just over half of my income but compounds into millions rather quickly 🙂
“I don’t know what will happen to Social Security by the time I might need to retire. Maybe benefits will be reduced, maybe the retirement age will be delayed, or maybe it will be eliminated. Given the state of our government and economy and the problems we face in the future, I have no idea”
What makes anyone think that their investments will save them if the problems with our economy reach a point where we can’t afford to pay anyone social security benefits? Social Security is by far the least risky part of most people’s retirement income. Its downside, if there is no replacement of money from the trust fund, is probably 25% less benefits in 30 years than currently anticipated.
If you assume the standard 4% withdrawal rate, you would need $500,000 in savings, if you were retiring right now, to replace even a very modest $20,000 in social security benefits. And that assumes the savings are not in taxable accounts. If you have to pay 25% income taxes on those withdrawals, you will need closer to $650,000 dollars.
Of course, 30 years from now inflation will mean a lot more than that is required. And, like percentage increases on investments, percentages have the same compounding effect on inflation. You will need 45 times as much in 40 years in the highly unlikely event inflation averages 10% per year.
If inflation is limited to 2% per year, you will still need 9 times as much in 40 years. That $650,000 becomes $5,850,000 needed to provide the equivalent of a modest social security benefit.
@J, we are the same way. Although we were saving 90% of our income, we now have dropped to around 80% due to living in two different areas and in higher cost areas. This equates to living on about $48k/yr with the rest going into “savings” whether it be specific retirement accounts or general accounts.
The % savings is a rather useless number. you should be working backwards, calculating how much you can and should save based on your timeline for retirement and what retirement means for you. however, we all have sort of been programed the other way: save x% until 65. that makes no sense.
the inflation fears don’t manage to scare me — I look around at my parents, and my husband’s parents and the rest of their generation, and it appears they were able to retire and manage to live without having saved millions, or without their savings being swallowed up by inflation. now, it is true that they, mostly, didn’t expect a lavish lifestyle, but my parents, and dear husbands parents both did some foreign travel, didn’t have to eat cat food, and managed to afford assisted living care — and his father even left us some money! granted, the inflated housing market helped, but I just think it’s not worth thinking “there won’t be enough money.” If you’re saving and not going into debt, you may just be fine, especially if we get a more rational health care system.
@Ross Williams (#108):
I’m not so sure it will be problems with the economy that will hurt Social Security. I’m not predicting the doom of the economy or Social Security or anything else. I’m just saying that with the uncertainty that surrounds exactly how much I might get in benefits, I prefer to plan on not receiving any at all.
Even without including Social Security benefits, it’s no problem for me to save for retirement – and I’m not sacrificing enjoyment now either. I live frugally and I’m content – leaving me with plenty to give and save.
I guess for myself at least, I can give away whatever I get in Social Security during retirement if I’m able to cover my needs with my own savings.
I’m saving 30%, plus a company match of 5%, for a total of 35%. I’m comfortable with that.
Congrats to all who are saving so diligently. 🙂
DH (49) and I (43) are still in the paying-off-debt phase and with my layoff this year, are saving a grand total of $50 a month. At least we have some funds in 401(k) and IRA, which have completely recovered from the market bottom, and a one-month’s-worth EF (not enough).
My temp income pays for groceries, insurance and my debt repayment. Meanwhile, his income covers rent, car maintenance, and utilities – and *his* debt repayment. When my debt repayment is done, that money goes to his debt (if any is left) and then ALL the money previously flushed away on debt can go to savings.
We obviously have separate finances like J.D. and Kris, and this caused some trouble early on because we weren’t on the same page about our financial future. There is nothing like a layoff to focus your discussions.
We figure we have twenty years to solidify our financial position before DH wants to stop working full-time, and another 5-10 years after that before I’ll want to stop working full-time.
Essentially, living on one income while we are both working will make it possible for us to own a retirement residence and live comfortably.
How much you should save depends on many things — including how long you expect to work, how long you expect to live, how much you expect to spend in retirement, how aggressively you plan to invest, etc. A critical factor is when you start to save and invest. See http://observationsandnotes.blogspot.com/2009/08/importance-of-starting-to-invest-early.html for some interesting graphs demonstrating the importance of starting early.
Maybe most important of all is that you start. To me, that’s the benefit of the 10% guideline. I think it’s just a simple rule of thumb to get you started.
I started saving 10% as soon as I started my career. Over time that percentage increased to about 33% as I was better able to calculate my retirement needs. I’m happy with what I did since it allowed me to retire early when my mother became ill.
A late savings bloomer, became enlightened at 30 with savings at just under 20%.
There was a day 10% might have worked. If so it could only have been for someone that started early.
In the U.S. you can’t rely on Social Security or traditional pensions. If you don’t do it for yourself no one else will.
I’ve looked deeply at this. There is a great documentary by PBS with experts that say 15% to 18% is closer to the right number…. again starting young!
How much you should save is my 4th Financial Principle. A link to the PBS show can be found below.
http://eliminatethemuda.com/2009/08/principles-of-financial-management-4/
I Just stumbled upon the article. At 55, I’d like to think saving 10 percent would help me retire comforably, but it won’t. I had 100k in myt 401k, but got hit hard in the 2001 recession and was out of work for three years. I had to burn through my 401k fund. (I couldn’t find any job at any wage.) Wiped out, I started over two years ago, but even if I saved 50 percent, I doubt traditional retirement is even possible. So I save about 8 percent, and I plan to retire at 62, either working part-time or living in a van down by the river. Maybe both!
Morale: You don’t know what will happen. Don’t suffer too much today for a tomorrow that may never come. (Just watch the news tonight and see all the people leaving money in their 401k for the probate system.) Save and invest, sure. I pack a lunch twice a week, drive a 7-year-old car but I also take two vacations a year and plan to continue to do that while I have the money and health. Carpe Diem!
Just one more comment about this:
Don’t raid your retirement. It can be very tempting to raid your retirement account to buy a new home or to take a trip to Europe – or even to put food on the table when you’re out of work. This is usually a bad idea. When you tap into retirement early, you’re subject to taxes and penalties – and you’re robbing from your future self. You’re robbing not just the money you take, but also the returns it might have generated over the years.
This common advice, while true for frivilous purposes, infuriates me. It is always written by people who have NEVER in their lives got to the point of having NO OTHER SOURCE of money. When you’ve run out of unemployment and savings, can get NO interviews, have maxed out the credit cards, what exatly do you live on? (I also love the idiots who say ‘just take any job’. Clueless, but thats another topic.
I think that there are far too many variables involved to set any percentages. It depends on at what age you start, your income level, whether or not you will have a pension, etc.
I am trying to save as much as I can, but I am more focused on trying to generate enough income in order to retire earlier than normal. If you focus more on moving this date a little closer to you, then you would be just as well off. As long as you are saving something, of course.
We put the max in my husband’s 401(k), which includes catch-up contributions and the max in two Roth IRAs (also includes catch-up) plus I put money in a taxable investment. The company said that they’d match when they could and luckily they were able to this year. The big thing for us at 56 and 58 is paying off our mortgage, which I plan to do before my husband retires in 8 years.
We cashed out some previous retirement accounts a number of years ago, and I certainly regret that. We also took a loan out one time, and I regret that, too. Just say no! I wish we would have started saving money earlier, but you never realize how quickly time goes by–you always think you have more time. The biggest thing for us was that I became disabled and no longer able to work. It can, unfortunately, happen to anyone, and it can really affect you financially as well as emotionally.
Begin with the end! 7 Steps to determine how much you need to save for retirement
For example, consider the following couple, the Robertson’s
– married
– 28 years old
– $75,000 combined after tax income
– mortgage of $1500 month
– no other debt
1. When do you want to retire? How many years until you want to retire?
The Robertson’s decide they would like to retire at age 65, so they have 37 years until retirement.
2. What lifestyle do you want in retirement? How much money is that today?
The Robertson’s sit down and decide that at time of retirement they would be perfectly happy living the same lifestyle as they are currently living at age 28. That means they want to live off of the equivalent of $75,000 at age 65.
3. How much money does it take at retirement to live this chosen lifestyle?
So we want to know, in 37 years what amount in is equivalent to $75,000 today. In other words, $75,000 is the same as what amount of money as what at age 65? To make this calculation we will use the average CPI (average inflation percentage per year) to determine what amount $75,000 is equivalent to at age 65. We are going to use 3% annual inflation, so we are going to adjust $75,000 for inflation each year until age 65 or for 37 years. This equates to $75,000 x (1.03)^37 = $213,370. So $213,370 is the same as $75,000 37 years from now.
4. How long do you think you will need this retirement income?
The Robertson’s decide their life expectancy is both age 85. So they need $213,370 a year until they are 85 or for 20 years.
5. How much money, as a lump sum, will it take at retirement to pay you your desired income for your retirement life?
So the question now is, how much money do the Robertson’s need at age 65 to pay them $213,370 a year for 20 years? (the length of time from day one of retirement to death) Note: to keep things simple we are considering $213,370 for 20 years not adjusting this $213,370 each year for inflation of 3%. This calculation may be difficult for many, but send me an email and I can help you. Doing this calculation it is determined that they need a lump sum of $2,308,268.
6. How much money do I need to save from now until retirement to acquire this lump sum?
The Robertson’s have 37 years until retirement at which they need $2,308,268 to pay them $213,370 for their retirement life of 20 years. So how much do they need to save monthly to have a lump sum of $2,308,268 when they are 65? Assuming they can earn an average 7% annual rate of return over the course of 444 months (37 yrs x 12 months), they will need to invest $1101 every month for 444 months to accumulate $2,308,268.
7. What percentage of annual income is this amount you need to save?
The Robertson’s need to save $13,212 a year ($1101 x 12) and they currently make $75,000, so they need to save ($13,212/$75,000) x 100 = 17.61% Finally!
What is something changes? What if you lose your job? What if one spouse becomes disabled? What if, what if, what if… as you can see there is a lot of value in finding and building a relationship with a great financial advisor. Hope this has helped!
I put 20% into my 401(k), although this year I will reach the limit and have to stop my contributions before the end of the year. My employer matches 3-6%, depending on the company’s financial performance. I also put $5,000/year into a Roth IRA.
As for how much to contribute, I think it’s a good idea to start high. When I started my job 4 years ago, I planned to contribute 6% to my 401(k) — just enough to get the full company match — but my brother encouraged me to contribute 20%. I figured that I could always reduce it if that didn’t leave me enough money, but since the money is deducted before it hits my bank account, I don’t really miss it.
For the past 3 years I have saved 20%, 67% (my income more than doubled that year, so it would have been more like 29% in a normal year), and 25% of my money. But that’s not all in retirement, and it puts together salary and interest income, etc. so it’s a fuzzy figure. The amount of the actual pre-tax salary that actually goes into retirement has been 46%, 21%, 36%, and will be about 35% this year. But that’s cheating too, because I use non-retirement savings to live off of so I can put that into retirement.
I currently save 10% of my gross salary (including an employer match). It doesn’t strike me as enough. However, I do not currently have the capability to save more.
~I pay 17.6% of my gross income for health insurance.
~I save 10% of my take home pay for an emergency fund and others savings goals (soon to include kids).
I already live a very frugal lifestyle, which includes little to no eating out, making my own laundry detergent, owning an old paid for car etc. We’re totally debt free, so there’s no money to be gathered from eliminating interest payments.
What my family could use is another steady income. When the economy gets better (well if it ever does), I plan to sock away much more for retirement. But right now, 10% is what’s feasible for us. It’s not easy, considering the massive contribution to health insurance premiums that I have to pay out of my salary, but at least it meets some basic pf “benchmark.”
I max out my 401(k) to get the 10% employer match and I fully fund my Roth IRA ($6k year). I also live on PB&J all year to do so.
Do I win a prize?
Maxing out my Roth 401k and a Roth IRA here at age 25. Use a Roth account whenever possible. Don’t let the government use you as a no risk investment vehicle!
I saved about 45% of my income for 22 years before I retired at 45. The amount came out to just under $3,500,000, generating about $140,000 in interest income every year given my conservative 4% yielding instruments. My 401K can’t be touched for 20 years, and I don’t count on it. It’s also not as big at $450,000 b/c I could only contribute on average $14,000/yr for the same time period.
If you’re serious about retirement, or early retirement, then simply save more and try and earn more through various income streams. I could have made more money working longer, but when is enough ever enough?
It is absolutely awesome so many younger readers are saving so much of their income. You guys will be happy you did 20 years from now!
Shogun
I saved almost zilch towards retirement until I was about 36 years old. I didn’t go into debt but I wasn’t thinking much about the future. I did build a little equity in a home.
In my later 30s I knew that I had to get smarter about things. No one was going to take care of me but myself and I began saving about 13% counting my employers portion. That was really all I could handle as I was a divorced mother with a modest job.
Now I save about 24% (I’m 56). To some extent I’ll be dependent on my husband who makes more than me. We’ll have our house paid for in the next two years and he’ll retire in about two years. I’ll have to wait awhile to retire, depending on how much I can hole away so I’m thinking of upping my savings some more.
Both my husband and I will get traditional pensions though mine will be a piddly amount as I wasn’t in the job that provided it for very long. That helps. And we also put extra towards our house – a kind of savings, I figure.
Do I wish I had saved more earlier? Yes and no. I wish I had saved more before I had a child as that money would have grown for all of these years and I could retire sooner.
I feel like I did a pretty good job of balancing future and current needs during my years of raising a child. In order to either make more money or save more money I would have lost time with my child and our home life would have been more stressful. I did work full time and saved about 13% – simply as much as I could do and provide a decent living stndard.
My advise – save as much as you can when you are young but don’t be obsessive about it. Catch up is tough but I wouldn’t have traded being able to take some simple vacations etc. with my son for an earlier retirement. In the end you have to balance current life with future life. Everyone has to find that level for themselves.
I’m a little bothered by the post by finance answers (#120). First, he’s assuming that the Robertson’s will not get any social security or any pension. Second, he’s ignoring the fact that the Robertsons will probably not need to be paying on a mortgage or saving for retirement once they retire – so they should be able to subtract those amounts from their $75,000 a year needed. While some of those things may not come through, assuming that none of them will seems like overkill.
@ Finance Answers (#120)… That’s a perfect representation of the drill people need to go through in order to prepare for retirement. The one thing I would mention is that you’re example doesn’t include S.S. so if you were to expect S.S. than the number you have to save is less.
(When I run through this exercise however I don’t count S.S. either b/c I’m so far away from retirement age benefits could be reduced and whatnot. I’d rather secure my own retirement and if S.S. is still there in some form when I’m older it’ll be a bonus)
-Gen Y Investor
I have tracked every income and expense in Quicken since I started earning income (about 10 years ago) My wife and I have a goal of having expenses equal 50% of our income earned over the long term.
I just rand the report right now and we’ve saved 28% of all (after tax) income earned. (and that includes income earned on investments) We have a ways to go in order to reach our goal of 50% saved but it’ll happen.
By saving such a large percentage of our income we’ll be free to retire early if we wish, work a low paying but rewarding job if we want, start new businesses, travel, etc… it will afford freedom for our family.
This is where most finance sites don’t walk the walk. They tell people to start early, start early, and the YOUNGEST I’ve ever seen a chart or calculator go is age 30. If they were serious about what they preached, they’d actually give us younger folks the information we need to make those decisions.
This is my pet peeve about financial advice media. Just typing it gets my blood boiling!
“In general, people earn more as they get older.”
What about those who don’t earn more (real income) as they get older?
I live on 98 percent of poverty level. How much should I be saving for retirement?
Where does the 10% recommendation come from??…I wondered the same thing myself and I would not be surprised for the answer to be that it comes from The Richest Man in Babylon book. As you all know that is a classic book on personal finance and creating wealth and the 10% rule is one of the key steps in the book.
Aside from that whether 10% is enough or not is really an individual choice but it definitely is a minimum for most of us.
What percentage one needs to save or what allocation/risk one needs, etc. are all meaningless without a reason behind why you’ve arrived at those numbers. You first need to figure out when you want to retire and how much your retirement is going to cost you. After you’ve done that, then you will have a net worth (should be after tax based) to target for and a date in time in which you’ll need it by. From there then you can back calculate how much money you need to put away each year and at what rate of return on your various assets will need to grow to get you there.
Now, until you’ve done that, you really don’t know whether you are putting away too much/too little or whether your asset allocation is on target with the rate of return you really need. The real reason to start shifting your asset allocation is not necessarily because you are getting older but because you may no longer need larger returns to reach your targets.
Marie: The calculator issue can be circumvented by adding 10-20 years to your life expectancy and target retirement date (20 years for a 20 year old using a calculator that begins at 40, for example).
I never know, is this rule of thumb for gross income or net?
I’m 26 years old, currently saving 15% of gross income for retirement. I could afford to to bring it up slightly, but I am also saving for a house down payment.
I am amazed how much some people are saving, it’s incredible!
Excellent advice on “banking your raises.” Unfortunately, most people spend whatever they have, and in a lot of cases, more than they have. If they would live below their means, and simply pretend that’s the best they could do, they could save enormous amounts of money.
My wife and I choose to live below our means. We save about 33% of our income and that number is rising as our business interests grow. As a result, we should be living off of passive income in our mid-40’s. As long as we maintain a reasonable standard of living, this shouldn’t be a daunting task.
Note: this is an Australian viewpoint so probably not relevant to much of your audience.
Actually, my husband and I do not contribute anything to our official retirement (“superannuation” in Aus) funds apart from the compulsory 10% employer contribution. We considered adding more as you do get some tax benefits, but my issue is you cannot access the funds *at all* before retirement so I would prefer not to lock up money we might need, plus the fac that in the last year our super funds dropped 18% value whereas our self-chosen stocks have made reasonable gains in the same period.
But, we do save about 20% of our salary every year and it goes either onto repaying our home mortgage (which is completely redrawable and earns us the equivalent of >8%pa in interest savings), or to buy shares.
We now have a modest ($30k) share portfolio which we didn’t begin until Oct 2007 but is still worth more than what we’ve paid for it, and we’ve just redrawn from our mortgage to buy our third house, giving us two investment properties. And we’re considering buying a fourth, but probably not just yet. (The jobs/real estate/investment market in Aus has taken a hit but is nowhere near as bad as the rest of the world.) These are our wealth fund.
I think we’re doing pretty well considering we didn’t start any of this until the end of 2007. In a couple of years I might consider making some superannuation contributions ourselves, but only once we are coasting along well on our own. I’m starting to look into managed funds, and we’re taking financial advice on how to better arrange our finances–there’s bound to be heaps we don’t know, plus discretionary spending fat to be trimmed.
I’m sure a lot of people wouldn’t agree with our approach, but you need to be aware of how the Australian superannuation/tax/economy works — it does sound much different to the US model — or the UK one for that matter. But the point is, we save at least 20% on top of the 10% employer superannuation, for investing/wealth creation.
I think 10% is easier to work with. If anyone has read the book ‘The Richest Man in Babylon’ you will find the message of compound savings as the main theme.
sorry if this is a silly question – how does one take advantage of compounding interest if my retirement savings plan is all stocks and passive things like ETF’s?
i understand how it works inside a basic savings account, however in the time that i have been saving for my retirement the savings accounts in canada are giving rates of 1-2%. therefore i have never even considered my bank account as a retirement savings vehicle as it won’t even keep up with inflation, it just holds my small emergency fund.
i am following the “sleepy” and “couch potato” portfolios that are often discussed on blogs. which mostly revolve around holding ETF’s and things….so what should i be investing in that will give me compound interest benefits?
thank you
I think you have to be honest with yourself about your idea of retirement before you set your savings goal. If you see yourself gardening and playing bridge in your already paid for home, you can probably be comfortable on the 10% rate. However, if the retirement you’ve always dreamed of includes cruises around the world, you’d better have a savings rate of 25% to reflect that.
In addition, being realistic about your retirement age, with respect to your health is important as well. For instance, if your health is below average now in your younger years, I wouldn’t plan on working (heck living in some cases) until you are 65 so you should be saving at a higher rate so you can enjoy an earlier retirement.
I’m 29 and I’m saving 10% for retirement. 3% is saved for me in my pension (I will vest in 7 more years) and 7% I saved in a 457 plan. My fiance saves 10% in his 401(k). My salary will increase a lot over the next few years but I plan to increase my cash savings and get rid of my extreme student loan debt before I increase my retirement savings. Not entirely sure what my fiance’s plan is (we do separate finances too).
I save 7% of my income + 3% match from my company into my 401K. Plus I save 17% to our savings account for our savings for a down payment for our house (20% down is our goal).
My husband is saving 12% + 6% match from his company into his 401K, he contributes to his companies stock purchase plan (he buys $7,000 and they match 50% = $3500 – he can only sell for big items like Marriage, Purchasing a Home and birth of 2nd child) and he is also saving towards our house down payment at 25% of his salary.
We already have an emergency fund that can support us for 5 months. Plus the $$ we are saving for the down payment is cash (as our CD has recently come to maturity).
After we have reached our goal of 20% down payment and purchase our home. We will continue to save the 42% of our income and break it up into different short/long term savings goals (children’s college funds, retirement, IRA’s, Home Improvements, pay down the mortgage, early retirement).
I don’t know the exact percantage. I’ll put $16,500 into my 403b this year (and an employer match which is… um, 3% maybe? I don’t remember) and $5000 into my Roth IRA. I also funnel about 5% to other long term investments in a normal investment account. That could end up being retirement savings. Or it could go to other expenses before then – a house, education, or something else. So… 35%? Probably slightly less than that. (That is not my emergency fund. The efund is in a normal savings account, not an investment account. It is currently at about 3 years of living expenses. Yes, I am just that paranoid. Also if housing prices drop just a bit more, 2/3 of the efund will magically turn into a house downpayment fund.)
Wow, J.D., I hope you or one of your associate writers summarize the comments above! I can’t read/remember all of them. I’ll contribute a comment in hopes the information gets pulled together somewhere.
I’m single, 38, and save 16% pre-tax. I get a company match of 4%, so (assuming I stay long enough to vest fully) that works out to 20%. My style is save it & forget it – I’m in some index funds, and try not to look at it too often.
I’ve been saving for retirement for the better part of the last 11 years, and I think I always have saved in the double digits, aiming for 15%. My salary has varied widely; I’m in the same general neighborhood as Kris now. My goal is to have 2x my salary in retirement accounts by the time I hit 40. I can’t tell yet if I’m going to make it!
I am also building my emergency fund, and might have a mortgage some day in the far distant future.
As I have looked over some of the responses of what others have written, it is a little confusing when you read the different percentage rates of their income that they are saving. So if the goal is to save 10% (pre-tax) of your income, but you can’t even afford that much, where do you start? I’ll be honest, when it came to choosing my percentage rate, I started out at 1%, however, there was one pay period where I changed it to 2%, and then changed it back to 1% after that.
Of course, I have other benefits in addition to the 401k, such as stock and profit sharing, however, I wasn’t considering the stock so much because I am able to access that before retirement age…
Joey…
@ Pirate Jo (#68)
The conversion is easy. Just talk to whomever you invest with and fill out the paperwork. You will get hit with additional income taxes, but there is no time like the present while my portfolio is still down and I am in a lower tax bracket due to lack of income for the time being. I will also have a lot of tax benefits from my business (start-up expenses, etc.) that will help offset the tax liability incurred from the conversion.
The 10% penalty is a little trickier. You can take distributions of contributions from a Roth IRA anytime AFTER 5 YEARS. Since the conversion just happened this doesn’t apply to us. How do we get around that? There are a few additional loopholes worth mentioning, such as a 1st time home purchase (10k, I believe), large medical expenses, and SCHOOL… AAAHHH, good old school. That’s my ticket. I’m going to grad school and will use that to mitigate the 10% penalty. These are times to be creative (as creative as you can within the law, of course).
Good luck!
I see a lot of these articles about saving for retirement and the general rules of thumb but REALLY would love to have you write one specifically for people who auto-contribute to state or federal government run pension plans.
Me and my wife BOTH are enrolled in plans that are legally obligated to pay regardless of the health of the fund at the time of our retirement. Can you write an article specifically on this topic?
Assume the standard federal 25/55 2% per year of final salary payout type fund.
Thanks
I have to admit, I’m a little depressed. All these 20-somethings with emergency funds and high percentage savings.
I’m 33. I was saving 8% for 401(k) but had to reduce it to 4% so we can pay our debts off faster. We went from $0 in credit card debt and no car loan 2 years ago to having to replace my 10 year old car, and racking up credit card debt to maintain our house and spoil our first born. We bought into the “American Dream” but in reality we should have kept renting and our son should have been dressed in consignment store clothes sooner.
My 401(k) just passed the $50k mark but we have $0 in savings.
I used to be the smartest kid in school, now I feel like the dunce who has to ask the teacher to repeat the question.
April
I’m jumping in late on this, but I’m 27 and I save 25% of my income for retirement. My husband is currently working only a little, so we don’t plan to contribute to his retirement at all this year, but at least he has one going. Our savings account is about 20% of our income, but it will be decreasing over the next year as we pay real estate taxes and his tuition. I feel that retirement savings is a priority, though!
I read an article in Kiplinger’s a few years ago that stated that if you can work even part time during your retirement years, that can help stretch your original savings significantly. My husband and I both plan to work part-time after retirement in order to do that. We view it as a good opportunity to try a fun job, rather than a career. For me, I might work at the library, because I love books, etc.
I agree with what “Golfing Girl” posted, that you have to decide what kind of retirement you want in order to help guide your savings. You have to be realistic. If you want to be a “snowbird” in retirement, start planning for that now! If you want a home in Europe to split the year between, start planning now!
I really enjoyed this discussion. In fact, it was a significant part of the motivation for a couple of my recent posts. As I suggested in my original comment (#114), there is no magic number — how much you should save depends on many factors. In my posts, I’ve attempted to identify those factors and provide tools to allow you to estimate 1) how much in savings you will need when you retire, and 2) what percent of your salary you’ll need to save to reach that target.
For those who are still following this discussion, the first of those posts is http://observationsandnotes.blogspot.com/2009/10/how-much-money-do-i-need-to-retire.html
Bottom line: saving enough for retirement is a challenge, but, as I hope you can tell from many of the comments, if you put your mind to it you can do it!
Best of luck.
Al
8% to retirement. Before I became specifically worried about the stability of my job it was 12%. I also put an additional 35% into my emergency fund/paying off my (many) educational loans early. I’m 30.
I think you left out a very important difference between those of us over fifty and the next generation- pension. My husband receives almost $4000 a month in pension. Many of our friends have double pensions (husband and wife) amounting to over $7000. a month. With a defined pension and pension backup from the government we need to save much less.
Don’t worry- we took much lower salaries for many years to make up for the pension we currently get. IRA’s did not even start until half way through our working years.
For those of us who don’t trust any retirement tool that doesn’t involve Monte Carlo simulations, there’s also flexibleretirementplanner.com.
in 25 years the stuff you pay for today will be twice more costly – due to inflation
Take what you think you need and triple it! Especially if the VAT goes through.
Medical Bills even with insurance are high. Tax increases take more and the company holding your pension going out of business is another risk. Do not keep your retirement all in one place.
Click on my name and check out my web site I have gone back to work!
Every retirement calculator I have seen (except for the one I developed myself!) gets the numbers wrong because it fails to account for the effect of the stock valuation level that applies on the day the retirement begins. The stock valuation level has a dramatic effect on the long-term return obtained from the portion of your portfolio invested in stocks. Unless you get that number at least roughly right, the entire plan is not likely to work.
Is there any reasonable person who would expect to obtain the same long-term return from stocks purchased at the prices at which they were selling in 1982 as he would expect to obtain from stocks purchased at the prices at which they were selling in 2000? FIRECalc and the other retirement calculators noted above do not consider this factor.
Rob
I never plan to retire in the sense that I would not produce income. For me it would be next to impossible. For many ( especially of an older generation) retirement implies working for 30-40 years ( or whatever it may me) performing some type of labor and then deciding to stop and collect a pension/S.S.
I could decide to nap 24 hours a day or go on permanent vacation, and I am sure I would still have some income other than “retirement” income. How much? Well that’s another question.
This is just one of many factors that is probably more present in the younger generation. While the older generation is more likely to have some predictable pension, I feel MORE optimistic ( as a younger person) because of the way I approach like/work/retirement.
Lots of good links here.
There are no guarantees no matter how you cut it. Kids with their families can move back into your home, your health can take a turn for the worse, you can be in an accident, etc. So while you should plan reasonably and adjust as your life changes or as things become more probable for you, don’t kill your today worrying about your tomorrow. It’s like when the media drums up the cost of college being $250K for four years. Do you know anyone who actually paid that much out of pocket? Despite the horror stories, the bulk of people I know who’ve retired typically end up finding a way to live anywhere from very well to reasonably comfortable with very few horribly struggling and frankly, the few I know who are horribly struggling either had no plans or were run over by unplannable circumstances such that nothing they could have done would have helped. It may not be exactly what they all envisioned, but I suspect most people will find themselves in the boat of doing well to comfortable. The best part is that now we have many options of what retirement means, and hopefully they’ll be more for my kids when they take whatever version of “retirement” they choose.
I believe the best thing you can do for yourself is not have any debt when you retire. If you don’t owe anyone, you’ve got more choices of how and where you live. Additionally, if you’re only financially responsible for one or two people your necessary expenses with no debt are no where near what they were when you have kids in the house and debt.
I just did the T. Rowe Price one, and it was completely unhelpful at least for high percentage savers. It automatically estimates that we’ll need 75% of our income on retirement, even though I told it that we’re saving about 50% of our income for retirement right now! That would be a pretty sweet retirement, if we could ever actually get there. I much prefer the more complicated Motley Fool calcuators, which ask you how much money you think you will need during different periods of retirement.
I know plenty of retirees that have no savings. Most of them live off meager pensions and social security. Unless you have an extravagant lifestyle, you typically can get by on just those things if your housing is paid for and you are fortunate to not have a ton of medical maladies.
I was going to say, and #3 confirmed it, the difference in results is probably just that people misunderstood the survey and were thinking of retiring at age 65, but not TODAY. I know I had to read it a few times myself. #3’s comment is moot if you’re retiring today.
@Sarah (#10)
Yeah, I thought that might be part of the problem. This question is worded a little differently than most of these questions are. So it may be that this exciting statistical difference is nothing more than the result of a poorly worded question. 🙂
Still, I do think it’s interesting that, in general, young people are much more pessimistic about retirement than older people. What is this from? Is it from a constant bombardment of negative news? Are we more practical? Less practical? Or do the older folks just have insight into something we don’t have? Curious, whatever the case.
another point that is probably not very popular, but I have found to be true: young people tend to envision grander lifestyles and more money – another reason why the poll could show more $$ required.
I think there is also a difference in the expectations of those close to retirement now, and those who are under 45.
My mom just retired at 67. She has well under $1 million and no pension, but she has a very reasonable expectation that she will be able to collect social security and access Medicare for the duration of her retirement.
Her children need to plan for a future which may not include Social Security or Medicare, or may require means-testing. Thus, we will start with less income and more expenses. We really need to save much more in order to achieve the level of retirement our mother will have.
Young people are probably guessing high because we (I’m <30) are ‘forgetting’ about social security. I don’t know anyone my age who actually counts on it to be there (in any recognizable form, at least) when we retire. I know the poll is about “today” – but since we’ve been ignoring its future impact in our own lives, it’s not a stretch to think people ignored it on the poll, too.
My generation has been told for years that Social Security is going to run out of money before we reach retirement age. My guess is that this is the main reason we are pessimistic about retirement savings.
I think retirement savings are some kind of double-edged sword: if, like me, you are young, in your twenties, then you have plenty of time to save. on the other hand, how to estimate expenses? Sure, they are close to what you spent right before retirement, but they can’t possibly be similar to what a student spend on food on housing for instance, can they? So if you’re young, you will be able to save enough, but you probably won’t have any idea how much is going to be needed. So many things can change in all that time, the cost of living is bound to be drastically different, and so is your lifestyle.
On the other hand, if your closer to retirement, you will probably have a pretty good idea of what your expenses will be like, seeing as you will know what you want to do during your retirement, and how much things will probably cost. But you don’t have any time left to save up that money.
Of course you can also be in the middle, with some idea of how much you need to save, and some time left to do so.
Personally I find it daunting. I know I have plenty of time but there are so many factors. I don’t work right now for health reasons, if it ended up lasting, does that mean we should aim to save for two retirements on just one income? On the other hand, I might work again, have a high-paying job and be able to put much money aside, making it less important to save as much as possible right now – saving less and compound interest would be enough.
I don’t envy people who are close to retirement and haven’t saved anything, of course. But I find that estimated the expenses of a future me who is 40 years older or more, in a world I don’t know at all, is very, very hard. I don’t know if I will want to travel or if I will prefer a quiet retirement. I don’t know how much things will cost. I can’t even be sure my husband will still be my husband. So many things can change.
I think in cases like that, it might be more helpful to look at the average amount a person needs by the time they retire rather than try to calculate how much you will personally need – unless you’re sure your lifestyle won’t change at all. It will always be time to adjust the goal once you have a better idea of the amount you will need.
EDIT: I tried the first calculator, planning to spend more on retirement than I do know. The cost per month was shown at $2,000, adjusted for inflation as $6,000. Triple the price! I didn’t realise inflation could make such a big difference.
Yes, I agree with the last few comments. We don’t think SS will be around when we retire so we’ve planned accordingly.
Forecasting many years into the future using calculators is a tricky endeavor at best. Who knows what life events will change your needs as much as 30-40 years into the future? You may take on student loans for your kids, get a vacation home with a mortgage, be of ill health, battle rising inflation and taxes – any of which would increase your cost of living at retirement. Or you may downsize your home, live overseas in a low cost country, pay off all your debts, experience low inflation and taxes, do well in the stock exchange and be in good health for most of your life – any or all of which will increase your net worth.
I wouldn’t get fixated on a financial goal for myself to retire on even though at this rate I should have seven figures to retire on. I would instead plan to pay off the mortgage early, have little or no debt, exercise regularly to keep in good health (hopefully!), save for retirement through an appropriate mix of stocks, bonds and real estate, and spend some now to enjoy the present.
There is a wealth of knowledge available, and thank you for compiling this information! And just as you said, the important thing is to take action, no matter how small, and begin today.
I think it’s possible to get by on whatever retirement holds in the future. The question is, how do you want your retirement lifestyle to be, and focus on how to attain that.
Nice post, JD. I was one of the “over 2 mil” respondents. I am just about to turn 45 and I am furiously paying off debt (including the house) so that retirement can be a near-future possibility. I doubt I will need that much money — because I agree with you spending is a better indicator than income — but I would rather err on the safe side and leave money for the next generation (changing my family tree, as Dave Ramsey puts it).
That 2 million figure just gives me options for how I spend my days and that is what I want. I don’t think I’ll be a world traveler or play golf every day, but with 2 mil, I could travel when, where and IF I want, have a club membership and golf once a year, if I want. And that is (for me, anyway) the key.
Hm… I chose 2 million also. My reasoning:
1. There are two of us, and I’m hoping DH will still be around and kicking. If it were just me I might be ok with something between 1 and 2.
2. I have a DC plan, not a DB plan. This, I know from the HRS and other surveys is a major difference– 65 year olds today don’t know what their DB plans are worth! (probably more than 1 million! The private annuity market sucks– you can’t buy a DB plan like older folks have, well you can but it’ll be expensive and they’ve already paid in the form of a lifetime of lower wages.)
3. I have a pretty high income now. The boomers on average have lower age adjusted wages than we do– because there are so many of them they keep down wages (according to a Boston Fed study)… if younger folks are considering the recession a blip, then they’ll be expecting higher real wages than the current generation, and possibly want more replacement income.
4. Even if I hadn’t misread the question we’d still need 2 mil, but I think I did misinterpret the question when I first read it on the survey… thinking either I’d have a higher income when I hit 65 or in 35 years there’s going to be a lot of inflation.
5. We younger adults have longer life expectancies. Our children may not, but we do.
Other thoughts: women today are more likely to give birth later– some people will still be paying for their kids’ college at 65.
I don’t think it’s necessarily attributable to pessimism. It is true that younger folks don’t believe in social security being around for them, but as someone who works in that area, I 100% am faithful it will be around. I just hope to be wealthy enough that it’s not going to replace a whole lot of my income. That’s optimism, not pessimism.
Though it is true that for any given event, older folks are more likely to be optimistic (they just have more negative events each year). (That’s psychology research from Berkeley and Stanford.)
(Also… our generation should not be planning to retire at 65! With our improved morbidity and mortality we should be able to put in more productive years in the labor force and still enjoy a reasonable retirement. It’s difficult to make that out of optimality calculation… risk aversion suggests to estimating higher rather than lower.)
A few of your responses bring up a point that always puzzles me. Do these questions and calculators assume household finances or personal finances. Since Kris and I keep our money separate, should I be calculating retirement based on just my money? Or am I supposed to include hers? This may seem like a silly question, but it makes a huge difference…
Put me in the camp of those who think they can retire on less than a million. However, I’d still like to have more than a million! My approach is basically that we’ll be fine with significantly less, so long as a lack of affordable health insurance doesn’t throw a wrench into things. That is my biggest worry and fear.
Since Kris and I keep our money separate, should I be calculating retirement based on just my money?
J.D.:
I have found that lots of people experience lots of confusion over these basic questions. So it is a big plus if these things are openly discussed. I think your question is a very good one.
The way that it is done in FIRECalc (and probably the others too) is that a set amount of money is found to be supporting a specified annual take-out. So, for example, a $1 million portfolio is said to support a $40,000 per-year retirement.
If you and your wife can get by on $40,000 total, the calculator is saying that you need $1,000,000 saved. If you alone need $40,000 per year to live on, you alone need $1 million saved.
Rob
One infection and 500K in medical bills even with medicare you are left with 100k in medical bills! Hopefully you have a secondary medical insurance. You still have items not covered medical necessities considered over the counter, and years of follow up monthly visits.
Add in a natural disaster and you are up a creek. I advise on planning on a retirement plan 3 times what you think you need.
I am now working out of my home as a primary care giver I cannot work out of the house, even a trip to the grocery store has to be planned accordingly.
As I stated I am now learning to work on line. Click on Retired Enter Google code #1mom and save 25% this Mother’s Day!
“So, who’s right? Could a 65-year-old retire today with less than a million bucks? Or would she need much, much more?”
The post asks but never answers this question.
I think it’s prudent to assume just your own money – among other things, divorces happen. My mom’s second husband came into the marriage close to retirement age and with 0 assets (though he does get a pension – men my age generally aren’t in pension-earning jobs).
I’m not worried about Social Security disappearing – I’m worried about not being able to afford a decent nursing home int he last year or two of my life. I have seen the difference between the Medicaid-only nursing home my own grandmother was in, and the very nice multi-thousands-per-month (per person – for a short while both spouses were in the same facility) assisted living/hospice/memory care multi-need facility my partner’s grandparents ended up in. It’s huge.
A person can have a debilitating stroke in their mid-50s and end up in one of those hellholes for 10, 15 years – or, almost as bad, be dying of heart failure or fluid in the youngs and spend just a few weeks in terror and pain because of insufficient nursing care.
It’s not the day-to-day part I’m saving for, I’m resourceful – it’s the end, when we all end up weak, dependent, and needy.
@22 It shouldn’t matter so long as you’re clear going in which calculation you’re doing.
I would imagine that most people nearing retirement are doing a single calculation for the household because most wives of that age do not have the same lifetime earnings that the husband did, and thus are more likely to have joint finances out of necessity. (Numerically that would bias the numbers a different direction than what you see– the difference by age should be even larger factoring that out.)
I think it is safe to say that many people are now living in retirement on less money than most financial advisers will tell YOU that you need.
There are so many variables — will you in fact inherit any money or other valuables? Will the new health care reforms help with health care costs? Will inflation be low or high (and what will the rate of inflation be on what you spend money on — not what is the general rate of inflation…).
I think that retirement planning sometimes suffers from the same kind of thinking that we engage in as college students — planning a career that will be brilliant and a lifestyle that will be plush, only to find years later that we have been happy with a career that is not so brilliant, and a lifestyle that is not so plush. Similarly, the idea that “of course” you will want to be a world traveller who stays in great hotels during retirement may in fact turn out to be that you’re the happy grandmother who travels locally to see the grandkids and stays in the guest room.
It’s prudent and enjoyable to have a little more than “enough” in retirement, but I’m just not sure one needs to have as much as the financial advisers will tell you.
Young people are pessimistic for a number of reasons.
1. Two 50% market crashes in our formative investment years. We feel the game is rigged.
2. Complete lack of trust in our elected officials.
3. Complete lack of trust/loyalty to our employers (and it is reciprocated).
4. The realization that Social Security is the biggest Ponzi Scheme on earth (just don’t be the last one without a chair when the music stops!).
5. Very few have Direct Benefit retirement plans to help supplement income.
But there are reasons to be optimistic too!
1. We should live longer, healthier lives
2. We can continue to work, at least part time, doing something we enjoy.
3. We have a world of education at our fingertips. Knowledge is power and young people are arming themselves.
Retirement tips:
1. “retire” with no consumer debt
2. Try to live a healthy lifestyle
3. Minimize stress
4. Have a few income streams, rental property, dividends, social security, pension (if possible!)..
5. 70% of income is nonsense, a number derived by investment salesmen to sell their products.
My way of looking at retirement planning is probably backwards of all the “experts,” but I think (hope? pray?) it works for me.
Some like to look at percentages, such as “what percentage of my last year’s working income can I replace?” I try to keep up with what I would receive from Social Security were I to retire now(that amount goes up every month that I delay taking SS; I will be 65 in November, so I’m more than a year and a half away from full retirement age at 66), plus investment income.
If I took early, reduced SS now, plus what I am making from fixed-income, annual-increase investments (my self-designed “pension”) I could replace 75% of my present income immediately.
By all “expert” accounts, that means I should find a big cardboard box and a nice underpass to set it up because that’s where I’ll be living. But is that right?
In retirement, my income is not subject to certain deductions and expenses I have now. For instance, I am putting 25% into my 401(k). In retirement, no more of that; in fact, I’ll be taking the money out. My mortgage, recently paid off, equaled 24% of my gross income. (Principal and interest only; I’m still paying taxes and insurance, of course.)
Right there, I am using 49% of my gross income and living on 51% before all taxes and other deductable expenses. If I quit working altogether, I save the SS/Medicare taxes, also; part-time work means paying those, but the income goes up, too.
Yes, I expect health insurance costs to be higher than they are now because my employer picks up the lion’s share of my premium, but I still expect to come out ahead.
I am not counting income taxes because that’s a real crap shoot. We can’t know for sure where that will go, so I’m not figuring the future based on today’s figures.
Overall, that 75% looks less like a cardboard box and more like a raise in my take-home pay.
I really would welcome some feedback, especially from anyone who sees flaws in this. I am seriously looking for the holes in my thinking and planning before it’s too late.
Bill
I should have added to #31 above, I am in the “under 500K” category to set up this “pension” described above.
Bill
1. Know how much you currently *spend* (e.g. 75K) – use a tool like Quicken to know for sure (search “hubpages bruce benson” for how I do it).
2. Divide what you spend by 5% (75K/5% = 1.5 million) – this is a good number for your financial freedom. It should maintain your current standard of living for your lifetime Want a fancier tool? Try ESPlanner.
3. Get out of debt, including your mortgage. Save up to buy whatever you need.
4. Read “Stop Acting Rich and Start Living Like a Real Millionaire” by Thomas Stanley.
5. Build up your nest egg in a Vanguard/Fidelity index fund (e.g., S&P 500)
6. Once you hit your number, a salaried job is probably no longer needed. Go do something you are passionate about.
Worked for me.
I think much of the generational difference can be attributed to perspective.
When you are older, you have seen a lot of things that flavor how you view retirement:
* How and at what ages your parents died (and perhaps siblings)
* How others have used their retirements
* How health impacts spending at retirement
* Some of the non-as-obvious expenses that drop (government fees, taxes, no life insurance)
* How well positioned your kids are to help out if needed
* The reality of retirement spending (a big jump as you take the trips and then a drop as you get bored or your health interferes)
Another factor that younger folks forget is that your savings will continue to make money for you as long as you don’t spend it. With another 30 years to plan for, your portfolio can give you an extra year or two of income.
Thanks for the article and links! It’s about time I spent some time planning for the future in a little more detail than I have thus far.
It’s kinda hard to wrap one’s mind around “If I were 65 today.” It’s pretty straightforward to think about “If I were 30-something today” – then you can just take your current spending, make a few adjustments (+health insurance -mortgage?) and multiply by 25 (4% safe withdrawal rate.) Of course there are some assumptions there… but there always will be when looking decades into the future.
Studies have shown that it is really hard to predict what your future self will value. I prefer to front-load things, so my wife and I are saving a lot now. Later we can spend more money if we decide we have enough saved. Some people think we should spend more money but we are really quite happy with our lifestyle at its current level.
+1 to the social security comments – generally I don’t even think about it. If I did end up getting some SS, so be it, I will leave a bigger estate to my heirs. (Who themselves may or may not get SS.)
I think it’s actually illustrating optimism.
If I were about to retire, and I’ve worked the numbers and decided the amount that I have now (500K) is good enough, then that’s what I’ll put down on the survey.
However, as a young person, I don’t expect to have a lot of problems saving. This optimism steers me towards thinking I’m going to have 2Mi saved (inflation adjusted today dollars) to retire when I’m 65.
This just seems to fit better with my idea of young (naive) vs old (realistic). In general most people are optimistic, by a large margin. The older folks are optimistic that their ss, and pensions will support their retirement savings enough to be happy (and they might be right). The young are optimistic and think they are going to save a lot, and not have a serious financial issue in the future (like a substantial unemployment/underemployment period, or a seriously sickness to themselves or their children).
For the record, I’m in the young, naive, optimistic category, and I’m thinking I’ll save as much as possible, then give it all away and live on a canoe.
A general rule of thumb you can use – if you don’t want to do all the calculations – and just get a very roudh idea is to figure you will need 10x your annual salary to live at that standard of living. (this is assuming SS is in tact)
So, if I were making 50,000 per year, I would need $500,000 saved to maintain that level of lifestyle. It’s not exact but it will give you a target to shoot for.
I’m not sure it’s safe to say that younger people in general are represented by the survey either, since young people who are interested in personal finance are a completely different subset than people who are actually close to retirement and interested in retirement. I’m guessing the younger people interested in finance might be more the type to want to have lots of $ for retirement.
#39, Sarah, Very good point!
We’re all just planning to be wealthy. And we probably will be too.
My calcs have led me to believe $2 000 000 would not be nearly enough.
Good point, Sarah!
Yep, Sarah makes a great point.
I’m in my mid-late 20’s and think my husband and I will need 2 million plus my husband’s pension when we retire in 25 years. We currently have a 401k, Roth IRA, pension plan, and Scottrade account and a net worth around $130,000 even though my husband is a teacher on a 3 year salary freeze and I’m an office worker going on to 2 years with no raise…
The few friends I have that are our age aren’t even thinking about retirement yet and have saved nothing…in fact, they are racking up debt despite my oh-so-subtle advice (heavy sarcasm).
I’ll echo what others have said – of course young people are more pessimistic than older folks. The burden is falling all on our shoulders for retirement funding – we have no pensions (save for those in government jobs), probably no Social Security, and we constantly hear taxes are only going up. We’ll be paying for baby boomers high spending ways for a long time.
That being said, I’m personally optimistic for our own situation since we live a simple life and will have our home paid by the time I retire if things go as planned.
JD wrote: Since Kris and I keep our money separate, should I be calculating retirement based on just my money?
JD,
I would say no in your case because you are both working and technically your expenses are using both your incomes. Also you’re together now, you plan on being together in the future. If something happens to change that plan, then yes, change your assumptions. If you were curious, you could run both scenarios just to see how you would fair alone. Just keep in mind, you’re combined current living expenses and taxes have to be adjusted for paying all of it on alone, and while there may be some benefits, there are more downsides.
About the advice that one will need at least 75% or more of her current income to live well enough in retirement: is it mainly because inflation will devalue that 75% amount?
I know I will not need to live on 75% of our current income in retirement for EACH YEAR of retirement; after all, my kids will be grown, no mortgage, major discount on prop. taxes and fees (due to age), lower-cost healthcare in the form of Medicare, maybe move to a state that does not tax pensions, no need for two cars, etc., etc., as well as just a general slowing down.
After all, how many people are thinking they will be 65 year-old jet-setters eating caviar for breakfast and filet mignon for dinner every day? Especially if we don’t care to do it now while we are young!?
Comments, anyone?
Here’s a recent article over at Yahoo! that spews the same high retirement goals based on income replacement (in this case, 100% of income) instead of based on actual spending. Why is basing needs on income so damn popular? I don’t get it.
J.D: it’s because the average jo will base their “needs” on their income. When they earn more they’ll move into a bigger place, buy a bigger car, buy more stuff. Lifestyle inflation, you know all about that.
I remember talking to a colleague who frustrated me to no end. She was all pessimistic and explaining it was impossible to survive and put money aside. I pointed out how much I was living on at the time, and that if I got a raise I could put that much more into savings, she answered things like “but if you get a raise you have to buy a different place and then you don’t have any money left to save!”
She couldn’t wrap her mind around the concept of getting a raise and still living the same as before.
I think people are just assuming everyone is like that, spending based on income only, and that as a result when they retire they’ll want the same lifestyle as they had last (as it’s easier to go up than down).
But that’s one of the reasons we need more financial education. This thinking is fundamentally flawed.
@47 JD:
We do this in hardcore economics too. It fits nicely into the models (like the life cycle model, which we all know doesn’t really fit, but does kind of approximate depending on what you’re trying to do) and is based on average spending. We can easily measure income, but only a couple of big datasets have any spending information (and they don’t have all the other variables we would like), so it is much easier to talk about income than about spending.
I went to a neat talk a couple years ago where someone presented a different heuristic, saying that spending could go waaay down without loss of quality of life (suggesting people aren’t underspending as much as thought). It was memorable because the discussant, Bridgette Madrian at UChicago, took her own spending and estimated what she wouldn’t have to be spending on once she hit retirement, and hit pretty close to what the author of the paper suggested. (Of course, for most Americans, health expenditures will be going way up, even with medicare, so we need to be careful not to forget that expense.)
Obviously there are going to be big differences across demographic groups. Poor folks don’t need as much saving to maintain their current quality of life because Social security replaces a larger portion of their income. An additional dollar income is worth less to wealthy folks, so their incomes can be cut more in terms of dollar value with less loss of quality of life.
There’s a lot of active research trying to get at how much people really do spend and how spending changes at retirement– one of my colleagues is looking at food expenditures and the shift between eating in and eating out. It really isn’t a completely answered question yet, so we’re sticking with the 70-80 percent heuristics in general for policy questions until there’s a better answer. A small group of prominent maverick economists are convinced that Americans are not under-saving for retirement and they’re totally rational. (I disagree.)
And yes, some people spend more in retirement than they did while working, some people spend much less. There’s a lot of heterogeneity.
Chris (#30) – amen! It wouldn’t hurt to add sustained, grinding, high levels of unemployment to the list. I am doing the same work I was doing three years ago, but for half the pay. It’s a good thing my ego isn’t tied up in how much money I can make! I have always been frugal and am completely debt-free (yes, the mortgage is paid off, too) so I can live on half of what I used to make before. But accumulating a million dollars? Not so much.
One gripe I have with the way this topic is presented – Why are people still spouting the same old nonsense about retiring at 65? People got this dumb idea in their heads becaue of the Social Security Ponzi scheme, which set its payout age at 65. At the time, I should point out, the average lifespan was 62 for men and 63 for women. But for some reason, even though people are living to be 80 or 90 now, they still expect to retire at age 65 and be able to spend the last two decades of their lives sitting on their butts. If you are still healthy at 65, it probably won’t kill you to continue to earn some income, even if it is just part-time, and be productive. That certainly will make your savings last longer. I will probably retire closer to age 80.
Young people are absolutely right to not expect Social Security or pensions to be around. I expect them to both evaporate a lot sooner than we think.
Honestly I never focused on a number or a percentage in terms of wondering how much I will need in retirement. I just want to save as much of my income as possible so I don’t have to be a slave at a job forever. That said, I do want to retire with at least 1 million in the bank and I do want to retire from full-time work early (hopefully at 55) and only work part-time or own my own business. I am uncertain as to how my health will be and I do not want to only have 5-10 good years left after working for 40 years.
correction: suggesting that people aren’t underSAVING, not underspending as much as thought
At this point I’ll stick with my curernt plan–to save as much as I can possibly sock away.
I’ll figure it out later if I have too much.
What a great problem that would be!!
I am 39. I bought my first apartment ten years back and in the next 4 years cleared the mortgage loan with a vigor with all my variable income. I had taken loan based on my fixed income. I went for the second flat in 2007 and will come out of the loans before 2010. I am an entrepreneur and my business bought a office space. So I need to think about a retirement corpus starting 2011 after being completely debt free.
Whenever I am in a debt free state, my savings accumulate rapidly, paving way for next big investment.
Long way to go and I may work till 70.
Good article. I really liked this one, I felt its more realistic than most retirement planning books. I’m 27 and started to think of my retirement this year. I don’t find the 70-80% pre-income advice realistic either.
A lot of it depends on the individual, how much they make, their raises and bonuses over the years, their daily and monthly expenses over time, and expenses can increase or decrease on a number of things (paying off debt, paying off mortgage, paying off your car payment, etc).
I really hate the retirement calculators on most websites because they just assume things will stay the same for the most part until you retire.
Also if you don’t have kids, I have chosen not to have kids then you could probably retire much earlier than those who did have kids. And I don’t want to wait until I’m 65 to retire. I want to retire before I’m too old to enjoying doing anything. I want to do it while I’m young.
Its so unfair that you have to wait until you’re too old to really enjoy things and its why I’m very motivated to retire ASAP. If I can retire at 40 then that would be great. I would love that. I don’t know if SS will be there so I’m relying on myself to save up and invest for my own well being in retirement.
Thanks for this article, it makes me less depressed, when I was reading those other retirement planning books and articles online, I was just so overwhelmed about how much I would need for retirement. I also read about this couple, Billy and Akaisha who retired with $500,000 on their portfolio http://retireearlylifestyle.com if you want to check them out.
Just a comment for ResortAtSquawCreekTAHOE. It looks like if you are using just your base to live on and not your bonus you could not survive. You have 140K base take out taxes at a conservative 30% and you take home 98K/ year subtract out your 6.1K month home mortgage and you have 24.8K left for the year, or 2,066 per month for everything else. It’s livable, but I spend more than that a month. I’m not on the I don’t believe you band wagon, but sounds like you overbought on the house most people like to stay in the 30% of pay range on a house payment. Just a thought.
A lot of planing that is. Retirement should be a time we think we can just sit back and relax but due to the consistent financial crisis, it just seemed to be a time of frugality. We may calculate our futures need at this point but I think that still does not guaranty because of the uncertainties around.
I’ve read this kind of information, but it is very complete and comprehensive, so that I can better understand it. To be honest I never have a dilemma that is difficult to discover the solution.Thank you for this information.
I am a firm believer of using an accurate calculator to determine how much to save. I found this one that was pretty accurate and simple to use. http://www.mutualfundstore.com/planning-and-retirement/tools-and-calculators/retirement-calculator,I am not tech savvy so this was convenient
These are great tips. Another thing to keep in mind is that just $500 a year can turn into a great retirement nest egg down the line.
One of my greatest concerns is trying to take a wild stab in the dark at healthcare costs 40 years from now. I started saving young (23) and at a pretty healthy rate, but I think it’s difficult for anyone to try to make these forecasts.
Tell me about it! When I first started out getting interested in the nuances of personal finance (around 2 years ago), I made the mistake of looking up those retirement calculators you find everywhere. You know, the ones that ask for your current income and predict that you need millions in order to retire. That was such a dampener that for a long while I believed that working till 65 is the only way I will ever fund my retirement. It’s like they forget that money compounds in the long run. But then I came across Mr. Money Mustache and the financial independence movement, and I have not looked back since! Now my only goal : to make money work insanely hard for me. Now the journey seems exciting!
Agreed that spending should be used, not income. Most rules of thumb use the salary as the base because mostly everyone knows how much they make without having to think about it. But for expenses they have to sit down and spend some time figuring it out. Regardless, you can use salary as a starting point. If you spend everything you make, then your expenses are equal to your salary. If you save 10% each month/year, then your expenses are 90% of your salary, and so on.
That’s the thing about rules of thumb. They are orders of magnitude easier than figuring out something more accurate. It’s the Pareto Principle on steroids: 70% of the benefit for 1% of the work.
If anything, I’d say it’s to complex. “Save 20% of you income” is even simpler.
I agree 1000%. I think the people that make money off our savings, the 401k managers, put many of these “rules” out there. Also professional writers with no financial expertise, surf up and quote these “rules” all the time. Many also don’t allow for Soc Security income, as if you’ll only be living off your savings. Finally…sometimes they don’t allow for spending down the principle. They think you must die with the same savings balance you had at the beginning.
I recently read an article that says healthcare will greatly outpace CPI. I’m trying to save up more for that category. What are your thoughts on that?
I think saving more for healthcare is smart. All predictions of the future are speculation, of course, but I think that this one’s a pretty safe bet — unless something changes with the way the U.S. handles healthcare.
I have a spreadsheet where I project my expenses, investment returns, etc. My expenses are adjusted by +4% per year for inflation while my medical costs are adjusted by +8% per year as a precaution.
U.S. health care costs absolutely can not continue as they are indefinitely. However, no one can predict when something will actually be done about it.
Spot on J.D.!!! Using income to project retirement needs is a lazy man’s approach. Imagine what Mark Zuckerberg’s retirement needs must be based on this formula! The rule of thumb actually works most of the time because most people spend such a high percentage of their paychecks. Traditional financial advice is not written for people trying to get ahead. It’s written for the masses. As you said… this common rule is ludicrous.
Let’s win people. Save more. Have more options. Calculate retirement needs based on spending not earning.
I certainly get what JD is saying as regards to under spenders, but his example of someone who makes $50,000 a year but spends $60,000 is fairly puzzling. Since that is completely unsustainable, how could that person even plan for retirement, and would they have the sense to?
It’s on the far side of the bell curve, but it’s not implausible. Anyone with debt that is going up over time is in that state. You can end with a cycle like: raise = increased income = able to get higher credit limit. House goes up in price = cash out refinance. Change cars every few years and roll the negative equity into the new loan. None of these are advisable, of course, and of course it’s not sustainable in the long term. But that’s kind of JD’s point, am I right?
Terrific articl, and a reminder that ultimately you have to crunch your own numbers for your own situation. J.D., you are so right about not basing FI number on income, but rather on spending patterns. Exactly!
And just as investors are spread across the spectrum (risk-averse to aggressive), how much you will need in retirement depends a lot on your outlook.
What these silly one-size-fits-all “rules” don’t account for are details like: Is your mortgage paid off? Are you willing/able to shrink spending during a downturn in the market, and by how much? Have you planned for and can you handle the unexpected (bad health, disability, divorce, a child in need, etc.)? What if the market turns down for multiple years, do you have plans for that, and are you confident in your skills to handle it?
J.D.’s column is also a reminder of two concepts I try to remember:
1. MOST FINANCIAL WRITERS ARE PAID BY THE INCH. Like most fashion writers they recycle, rarely finding anything new to say. “Red lipstick is the new thing!” or “Red lipstick is out!” These are the same cyclical messages as: “Here comes the bear!” and “Here comes more bull!” The exceptions are writers on economics (like Krugman or Piketty) who contribute substantively about larger trends. So be careful who you read.
2. CONSULT A LOT OF EXPERTS, NOT JUST ONE. In figuring out my own personal FI number, I read a lot (many books, J.D.’s great site as well as the bogleheads forum), I crunched a lot of numbers, and yes I ran all the retirement calculators. FIRE CALC is the best, allowing you to test different scenarios that include anticipated SS income, various spending strategies, etc. But again, it’s only a tool, not a rule.
The bottom line: There is no rule that works for everybody. But, there are a lot of tools to help and encourage you to formulate your own path to FI.
I went to FIRE CALC, but it didn’t have a spot to include pensions…I have found that doing my own spread sheets, seem to be the best option. I’m retired from the military, with a couple streams of income, plus me and my wife work. I love this website and Mr. Money Mustache because I now realize that my paying off debt and saving money equal financial freedom. I used to think that I would work to 60,62, 65? Now I know that I can be FI/RE once my mortgage is paid off. Retiring by 55, if not sooner is my new reality! 🙂
Plus, having a military retirement takes away most of the fear of future medical expenses!!! What a blessing!
Great Jeff! Congratulations! Yes, you have to jigger FIRECALC a little if you have a pension or other complex situation, but it does give you a unique view (based on the historical performance of the market) into what might (emphasis on >might<) happen in your future.
I keep my own spreadsheets too, for different reasons, because I like keep some individual calculations that keep me on track. It's also helped me see how to consolidate my investments and simplify as the years pass.
Agreed—-J.D.'s GetRichSlowly as well as MMM are great sites for helping to set the compass to achieve FI, and to live a sane life of frugality and good values.
Your method also implicitly forces you to calculate your monthly expenses, and likely doing so in a methodical, budget-style format, for each month of the year (or what you might consider an average year). A very healthy side-effect!
Income-driven methods are easier, given that most employers do the calculations for you in a paystub, but wow, expense-driven budgeting is much more useful!
I believe the sad truth is that the ONLY financial number most people even know is there annual income. If these calculators used annual expenses (as I fully agree they should) people would just ignore them altogether.
I have a very good handle on my current expenses, but genuinely no handle at all on what I expect my expenses to be 35 years from now. Living below my means and saving for both the future and emergencies is something I’m accustomed to. But I’m not accustomed to facing health challenges, or my own changing needs and wants. And I have very little on which to base a forecast of healthcare and medical policies or trends (that will drive my costs), much less a forecast of my own specific future costs.
check out an article written by Ty Bernicke, CFP who has done some research to show that over time, a retiree’s spending actually decreases over time. I have used his model as one of the scenarios in my own retirement planning spreadsheet and the results indicate that I need far less savings to support a desired level of income versus the assumption that spending will increase by inflation each year. Is this the correct model to use in your scenario? Who knows? But, it is an additional piece of information to consider.
Doug
Worse, they would never get started. JD published an article just days after this one, extolling the virtues of getting started earlier.
I’ve had trouble even getting people to file the paperwork to get their 401(k) match. Tracking expenses for a year before you even get started? Forget about it!!
Ahh… I always wondered why financial advisors use 70% or 80%. It works for most people. That’s good to know.
I use expense as the guideline too. That works much better for me. It probably works much better for other people too. The financial advisors are probably reluctant to change something that’s proven.
Rules of Thumb aren’t real rules, in fact they’re the opposite. They are estimates for guidance when you don’t have all of the information or the ability to collect it, or when an estimate is all you really need.
The vast majority of people will be served by a 70% rule, for the reasons your critic outlined (taxes, expenses, etc). And the reality is that you are throwing that number on top of a whole lot of other guesses and estimates. What will taxes be in 5-30 years? What will returns be over that time? What major expenses will you have, not just healthcare? In fact what will your health be like? Will you need a nursing home or other living assistance? Will your kids have any ongoing health care needs or other expenses that you will pay toward?
Any one of those questions could make the question about income vs expenses inconsequential. Plus if you’re living at 50% of your income or less you’re PROBABLY aware of it and will know the rule of thumb doesn’t apply to you.
Honestly it’s not much different from the 25x your expenses rule, which some expand by 20% to 30x. That’s a huge shift from the rule of thumb, but it comes down to risk tolerance and specific situations.
I can say from working with lots of people and personal finance, only people who have a firm handle on their finances even can remotely tell you what their monthly or even yearly expenses are. I personally don’t budget that tightly so can give you between two large numbers what my spending is, but know when I take an average over several years, I get the picture and know what that number becomes to use for any calculations.
Yes, knowing this number makes more sense than using a percentage of your income, but so many people (greater than 50% according to several numbers) are living paycheck to paycheck and trying to make simple rules is what people do to help most the people.
Since I am in IT, I will give it to you in IT terms. Since Apple only has <10% of the mobile device (phone, tablets, mp3 players, laptops) market worldwide, advice on Mac OS, will benefit <10% of the possible readership. It maybe the best advice in the world, but ignoring the other 90% doesn't mean it is the end all-be all advice of everyone.
Wow! I am thrilled that I stand in the “firm handle on finances” camp. We figured out our expenditures about 15 years ago. Lived on pension and one salary while the kids finished high school. Realized that pension alone would not carry us through retirement. Both worked for five years more years. Saved about 60% of our income for nest egg. Paid off the house. Finished paying for college and weddings by 62 and 55.
Not early retirees, but we are very comfortable five years into full retirement living on pension and SS. We still do save, to fund big ticket items. The nest egg does not get touched. It is for living expenses when we are in our 80’s and 90’s. I want a self driving car and a fully robotic house down the road from my daughter!
Just like Jan, we also figured out our annual expenses a couple of years ago. We used an app on our phones and tracked every expenditure for a year (then repeated the next year). We were shocked to see we spent around $110,000. However this is only about 1/5 of our income, so for us the 70% rule would be a ridiculous target to try and hit. I now know that at age 54, I can retire and still maintain that rate of spending, adjusting to inflation, well into my 90s.
So my message would be that understanding your spending could be one of the most important pieces of information required to create a financial plan for your future.
Doug
First of all, I’d be hugely excited to know that Michael Kitces read my blog. Woot! 🙂
Second, you are so right – expenses matter much more than income. So I sat down a couple of years ago, and decided to write out a sample “retirement budget” now that we’re within 10 years of our hoped-for retirement date.
We found that there were a LOT of things we’re paying now that we won’t be paying in retirement:
– Mandatory retirement savings (yes, my work REQUIRES me to pay 8% of salary into a retirement plan).
– Voluntary retirement savings
– FICA taxes (~8% of each paycheck)
– Work parking fee
– Commuting expenses, such as gas in such quantity
– Professional clothing
Surprise, surprise – these add up to 30% of my paycheck. So the 70% “rule” seems to be in the ballpark. But hold up! Some of what we expect to spend MORE on in retirement needs to be accounted for:
– Travel
– Health care – IRMAA Medicare premiums, ACA plan coverage, medications
– Entertainment
– Household help – gardener, cleaner –> my mom has needed this as she aged, and struggled to keep up
Having a monthly estimated amount means we can estimate our annual expenses – which gives us a savings target. Specifics matter, even if they’re not 100% accurate. I highly recommend mapping out a sample “Retirement Budget.”
Well, 70% of your income is an easy shorthand for ‘current expenses, minus average current savings for retirement (& kid’s college)’ so it does work for a lot of people.
My current Oh $nap! fund savings is based on the largest car payment I can afford to make.
My current 403 +HSA savings is based on doubling that. (I wasn’t eligible for an HSA until just 2 years ago.)
I recently upped Oh $nap and I’ve decided to put all of the adjustment into my HSA this time around. What a fantastic vehicle for building a rainy day warchest! (Investopedia makes a great case here: https://www.investopedia.com/articles/personal-finance/091615/how-use-your-hsa-retirement.asp)
If that rule works for most people well then, good on ’em. They can use it, but I agree, it’s a weird way to do it.
And let’s face it, you and your readers are not “most people” 🙂
I wrote a piece about a year ago outlining how much one should save for retirement. My conclusion after writing it was that there isn’t really one overarching answer, but different variations of ways to go about doing it. I like this idea of using expenses, and I haven’t read that survey before, thanks for providing it! I think we have this desire to solve these issues using quantitative mathematical equations instead of qualitative decisions. It is tough to create a mathematical equation that works for everyone. Great article, thanks for the insight!
This is so true! It does not make any sense to consider income as the basis for retirement calculation. Most of these posts with this advice are simply avoiding to advice high savings rate because they prefer people to spend money…
Using current expenditures provides a minimum starting point … some folks may want to splurge on travel etc or a Harley and the like at the beginning …so they will need more …
I’m pretty crazy when it comes to spreadsheets as well.
Currently, I spend about $8,500 per month on average, including (some) income taxes, retirement savings, my mortgage ($3K), my fleet of 4 cars, 2 motorcycles, and 2 motor scooters, among other things.
When I retire, without income taxes, without retirement savings, without a mortgage, and with only 2 cars left, I would need about $1,820.45 cents, which is substantially less than my SS benefits will be, so I can actually save thousands of dollars every month or not touch my investments.
Doing the math, this will be about 21% of my spending.
I see where and how to save for retirement, but nowhere is there a discussion of the out of control and incredibly hard to plan for health care costs should you be so fortunate to retire before you can use Medicare (in the US. it’s only the US that has an abysmal, tied to employment, health INSURANCE…. like anybody isn’t going to NEED this service!).
I’d like to see more on that topic, please. Otherwise, to retire, I have to leave the country or work 5 more years.
Interesting to read about the thought behind the assumption that one needs 70% of ones pre-retirement income.
In general it might be a good rule of thumb. But it has so many variables that make it more complex and not per say more accurate.
Personally I still go by a graph from Jacob Lund Fisker (as presented in his book). I still find it to be the most elegant and simple graph one can use to get insight on ones financial position toward FI.
For myself I have made a digital version of the same graph.
The more I started to think about achieving FI and reduce consumption to what I need instead want the more I whish people would, at least, be aware of it and there tendency to over consume. Of course fed by the never deminising advert load we are subjecten to in the dayly life.
Yust remember that for every $400,- saved in a bank account at 3% you can spent $1,- every month the rest of you live. Or if one is confident enough of 4% interest rate the saving drops to $300,- for the same thing.
Last but not least I like to share a link to a digital version of the graph that I mentioned: https://graph-book-jacob-lund-fisker.netlify.app/.
It provides an insight to the question: “how many years (M) do you need to work and how many years can you retire (N) during a total period (M+N) given a surtain saving rate and return rate”.
I am willing to share the source code for the graph (HTML or Python).