Retirement: Saving enough? Opinions wanted

[Firebird]

Due to an unexpected raise, I was able to bump my 401k contributions up to 10% sooner than I expected. My ROTH constitutes an additional 7% of my new salary.

Current balances:

401k: $5,900 (as of now)
ROTH: $14,000 (as of April - my 2011 contribution is already set aside)

My EF is about $5,000. I plan to get it to $10,000 before diving into other financial goals, namely debt repayment. At my current savings rate, I should be at $10,000 by July.

So is 17% okay, or should I be planning to bump up my 401k even more? (There is no match.) If so, what's a good percentage to aim for? I want to be conservative, but not TOO conservative.

I'm 25 by the way.

[Plain Old Petunia]

Do you intend to work until age 65ish, or do you want to retire sooner?

You can use Excel to calculate what you will have assuming different rates of return. If you want to give a dollar amount for your current contributions, I will plug some in for you.

[Tiny]

Wow. You are doing a great job! I'd say 17% is good for now - you've got other fish to fry (EF, debt repayment). Why not put 'Review Retirement Savings % and Rebalancing" into the list of things you do every year? Pick a time when it makes sense to you to review your retirement plans and then do that. That frees you up to concentrate on your other goals. This also gives you alot of flexibility - when you Review you can re-evalutate your 401(k) and Roth options, where your money is invested, and your contribution %. You can then decide how that fits into your goals/plans - increase the contribution or decrease the contribution.

Your retirement financial stuff is now in "look at it every 6 months or a year" and adjust or not. That's not a bad place to be.

[Plain Old Petunia]

This message has been deleted.

[Firebird]

Do you have a favorite calculator, Petunia? The ones I've found force me to make a load of assumptions like that I'm going to get x from social security and I'll have x amount of debt and I'll have x expenses and I just don't get a lot out of them in terms of a guesstimate.

I would prefer to have the option of retiring earlier than 65. I don't know exactly what age I'm aiming for, though, or what's realistic in that respect. I'm currently saving 45% of my gross salary every month (70% of my net). Not sure how much higher I can go and still maintain my present lifestyle.

[Firebird]

Mar 16, 2011 16:12:03 GMT -5 Tiny said:

Wow. You are doing a great job! I'd say 17% is good for now - you've got other fish to fry (EF, debt repayment). Why not put 'Review Retirement Savings % and Rebalancing" into the list of things you do every year? Pick a time when it makes sense to you to review your retirement plans and then do that. That frees you up to concentrate on your other goals. This also gives you alot of flexibility - when you Review you can re-evalutate your 401(k) and Roth options, where your money is invested, and your contribution %. You can then decide how that fits into your goals/plans - increase the contribution or decrease the contribution.

Your retirement financial stuff is now in "look at it every 6 months or a year" and adjust or not. That's not a bad place to be.

Thanks :-) Once I am debt free (end of next year at the latest; possibly the end of this year), I will have an extra $550 per month to play with, so that would probably be a good time to revisit my goals.

My instinct, FWIW, is to shovel as much into savings right now as I can, before I start with the money-sucking life things such as having children ;D

But there's short-term savings to consider too. So... I don't know where the right sweet spot is. That's why I'm asking.

[Plain Old Petunia]

My favorite is plain old future value of money calculations. You can use a financial caluculator ($30 at Target), or find the tables published in a textbook or online, or use Excel. You type in =fv in a cell, then it prompts you for the pertinent information. Try playing around with it.

I like to calculate what my nest egg will look like at ages 65 and 67 if I realize an average return of 6%, 7%, 8%, and 9%. I save it on a spreadsheet and update it once a year. It gives me a pretty good idea of where I am, in my opinion.

I also think consistenly setting aside 17% starting at age 25 will put you in great shape by the time you hit your 60s.

[Firebird]

Oh right, I forgot about FV in Excel. That's one of my favorites too. I'll try your trick of experimenting with different percentages.

With the numbers I just gave the board, I get:

6% in 40 years: $2,007,917.45
8% in 40 years: $3,451,203.59
10% in 40 years: $6,059,175.42

If I increase my savings to 20%:

6% in 40 years: $2,325,953.39
8% in 40 years: $3,983,564.74
10% in 40 years: $6,968,703.12

Hmm, even at the lowest earnings, that gives me an income of ~$80k in 40 years (assuming a 4% withdrawal rate). Not bad (of course that doesn't account for inflation).

I still don't know what the magic number is but this is an interesting exercise

[Plain Old Petunia]

It doesn't count inflation, but hopefully your salary (and thus your contributions) will be inflating too.

[Firebird]

True enough.

Since the first number stays the same with each percentage whether I increase my contributions or not, I think I'll stick with 17% for now. I will revisit it once my debt is paid off which, according to the projections I just did, should be early 2012 at the latest. At least for my student loan, which is the only real debt I have.

But I'm still open to hearing the thoughts of others.

[schildi]

$80K annually will most likely not sound like much in 40 years. I think $16,500 is a good target to shoot for annually for a 401(k) if at all doable. Not sure about the percentage in your case.

Mar 16, 2011 17:15:14 GMT -5 Firebird said:

Since the first number stays the same with each percentage whether I increase my contributions or not, ...

I am not sure I understand ...

[Gardening Grandma]

My EF is about $5,000. I plan to get it to $10,000 before diving into other financial goals, namely debt repayment. At my current savings rate, I should be at $10,000 by July.

Since you asked for opinions, here's mine.
17% saving for retirement at the age of 25 is freakin awesome!
With an EF at $5000, I'd focus on debt repayment (esp if the interest rates are high) as my next goal rather than increasing either the EF or retirement contributions.
Do you mind posting the debt with the interest? That might change my mind.

[phil5185]

Great job & great planning!
The $20k that you already have will be almost a million of your fund (at 10%) in 40 yrs.
Assuming your salary is in the $72k range (also great for age 25), I would go with the 20% goal.
Using your best case ($7M in 40 yrs), if you add 3% per yr to your contribution (stay at 20% but get a 3% raise each yr) the $7M will actually be $9.7M. In case you want to retire earlier, it will be $3.5M in 30 yrs.
You are using post-59 1/2 accounts - ie, a posttax (roth) and a pretax (401k). It would be good to also have a taxable account for your pre-59 1/2 funds. It serves as a backup EF, an early retirement bridge fund, money for a small business, rental houses, etc.
IMO, don't be too conservative for the first 25 yrs, that is the time to build wealth aggressively. After that, you transition to wealth preservation. If you are very successful up to age 50, start transitioning to safety. If things didn't go well in that 25 yr period, stay aggressive for an extra decade.

[Firebird]

Mar 16, 2011 17:20:36 GMT -5 schildi said:

$80K annually will most likely not sound like much in 40 years. I think $16,500 is a good target to shoot for annually for a 401(k) if at all doable. Not sure about the percentage in your case.

Mar 16, 2011 17:15:14 GMT -5 Firebird said:

Since the first number stays the same with each percentage whether I increase my contributions or not, ...

I am not sure I understand ...

$16,500 is a whopping 24% of my current salary Adding the 7% from my Roth would put me at 33%. Perhaps a good number to aim for one day, but right now that would cut my short-term savings / debt payoff contributions by at least half. Not acceptable to me at the moment. Maybe next year.

And I agree that $80k wouldn't be worth much in 2050(ish), especially since that's only $4k-$12k more than I earn today. So hopefully my investments do better than 6%.

Sorry, I should have been clearer. I meant that 6% translates into 2 million something whether I contribute 17% or 20%, 8% translates into 3 million something whether I contribute 17% or 20%, and so forth.

[Firebird]

Phil, good. I was hoping you'd weigh in (not to discount the contributions of everyone else, which are also much appreciated )

Assuming your salary is in the $72k range (also great for age 25), I would go with the 20% goal.

Sort of. It depends on whether you count bonuses. I'm at $68.5k now (up from $65k) and I received a $7.5k bonus this year which bumped up my gross to $72k.

Using your best case ($7M in 40 yrs), if you add 3% per yr to your contribution (stay at 20% but get a 3% raise each yr) the $7M will actually be $9.7M. In case you want to retire earlier, it will be $3.5M in 30 yrs.

Ooh, good point. That's a very convincing number, actually.

You are using post-59 1/2 accounts - ie, a posttax (roth) and a pretax (401k). It would be good to also have a taxable account for your pre-59 1/2 funds. It serves as a backup EF, an early retirement bridge fund, money for a small business, rental houses, etc.

Sorry to be so dense (this is usually where you start losing me but what are some good taxable accounts? Do I just buy into different funds at investment companies? How can I learn more about which ones are good?

I *would* like to do this very soon, because DBF and I want to start saving for a house in the near future and I don't want to put it in a plain old ING since it's likely we won't need the money for at least five years and I'd like to get as much growth out of it as possible.

IMO, don't be too conservative for the first 25 yrs, that is the time to build wealth aggressively. After that, you transition to wealth preservation. If you are very successful up to age 50, start transitioning to safety. If things didn't go well in that 25 yr period, stay aggressive for an extra decade.

To clarify, I didn't mean conservative with investments, I meant conservative with my savings percentages - i.e., it would be better to save/invest 30% now and have to dial it back to 25% when I have kids than only save/invest 25% now in the hopes that "maybe later" I could save/invest more.

It is nice to know that I've already got $1m saved if I keep on track, though ;D

[Firebird]

Mar 16, 2011 17:27:34 GMT -5 Gardening Grandma said:

My EF is about $5,000. I plan to get it to $10,000 before diving into other financial goals, namely debt repayment. At my current savings rate, I should be at $10,000 by July.

Since you asked for opinions, here's mine.
17% saving for retirement at the age of 25 is freakin awesome!
With an EF at $5000, I'd focus on debt repayment (esp if the interest rates are high) as my next goal rather than increasing either the EF or retirement contributions.
Do you mind posting the debt with the interest? That might change my mind.

Thank you as well - it's nice to get encouragement

I have two debts - my car and my student loan. I owe approximately $15,000 on my student loan (which is at 6.8% interest) and approximately $8,000 on my car loan (which is at 0% interest).

Obviously my priority is the student loan. "Snowballing" my debts would be ridiculous in this particular situation.

I would feel better with $10k before attacking the student loan, but I'm curious as to whether that interest rate justifies attacking it now in your eyes.

[phil5185]

I have two debts - my car and my student loan. I owe approximately $15,000 on my student loan (which is at 6.8% interest) and approximately $8,000 on my car loan (which is at 0% interest).

The car loan is an obvious keeper, keep it full term. The 6.8% is high but I would probably pay the 6.8% and retain the use of the $15,000.
Example - if you borrow $25k at 6.8% for 20 yrs it will cost $46,000. The borrowed $25k, invested at 11%/yr for 20 yrs equals $202,000 (worth paying the $21k in interest?).
The point - don't let small debt prepayment derail a $9M plan. Stated differently - don't prepay loans simply because they exist (or because dave ramsey says you must), make sure the math supports it.

but what are some good taxable accounts? Do I just buy into different funds at investment companies?

Historically, a plain old broad market index has consistory beat the managed mutual funds. And that makes sense - the SP500 index grows at 10% to 12%/yr and that is the 500 companies that fund managers select from. So they must consistently get a 14% to 15% return for the 10% to 12% population to pay their 2% costs and net 10% to 12% to the client. You can use a SP500 Index Fund at Vanguard or Fidelity. Or use a Target2055 Fund, it is balanced (and automatically rebalanced) for a 2055 retiree.

[SVT]

Firebird,

You're doing pretty good so far, especially on the income side of things. As for the taxable account, open one wherever you have your Roth IRA. Remember a taxable account, or a brokerage account, is just a type of account like a Roth IRA which can be opened at any investment firm and can be invested in all sorts of different things. I assume you have the Roth IRA at Vanguard or Fidelity?

If you wanted to be a little more aggressive, you could forget increasing your "EF" to $10k. Leave it at $5k and use the Roth contributions as possible EF money. Also consider you have some discretionary income, it seems, that are currently going towards savings. If an emergency came up, you simply use the extra income towards that emergency. It's a slightly more aggressive approach but can help you build wealth faster.

[Firebird]

Example - if you borrow $25k at 6.8% for 20 yrs it will cost $46,000. The borrowed $25k, invested at 11%/yr for 20 yrs equals $202,000 (worth paying the $21k in interest?).

Yeah but on the other hand, I can easily pay off the $15k in less than a year. Prepaying this loan will delay my wealth building only nine months. I can't argue with your big-picture conclusions, but I don't just don't know if I have the fortitude to pay $21,000 for the privilege of keeping a piddling little $15k loan when it could just be out of my life in only nine months.

I would also like us to have as few monthly obligations as possible - in my experience, that helps motivate me to throw much more money at saving/investing than I otherwise would. I am very, very careful to keep my monthly commitments well under 50% of my take-home salary for exactly this reason.

So in the long term, I'd like DBF and I to be debt free simply so that we can put that extra $200, $300, $500 into a respectably large investment amount on a monthly basis. I know that doesn't make the most sense mathematically, but I think it is the best way for us (knowing our personalities).

You can use a SP500 Index Fund at Vanguard or Fidelity. Or use a Target2055 Fund, it is balanced (and automatically rebalanced) for a 2055 retiree.

Okay, that makes a lot of sense. Thank you Is it okay to keep all my investments at the same company, or do I need to use more than one? My ROTH is with Vanguard and I really like them. I would prefer to have all my investment funds in one place for easier tracking, but if I need to utilize more than one I will.

[Firebird]

As for the taxable account, open one wherever you have your Roth IRA. Remember a taxable account, or a brokerage account, is just a type of account like a Roth IRA which can be opened at any investment firm and can be invested in all sorts of different things. I assume you have the Roth IRA at Vanguard or Fidelity?

Ah. This will teach me to respond to different posts separately. You just answered my last question to Phil. Yes, my ROTH is at Vanguard. Thank you both for answering my question clearly. I've long been fuzzy about where to go after I had a ROTH, a 401k, and an ING Orange EF.

If you wanted to be a little more aggressive, you could forget increasing your "EF" to $10k. Leave it at $5k and use the Roth contributions as possible EF money. Also consider you have some discretionary income, it seems, that are currently going towards savings. If an emergency came up, you simply use the extra income towards that emergency. It's a slightly more aggressive approach but can help you build wealth faster.

I mix and match your suggested approach, actually. I can't bring myself to consider the ROTH a "backup EF" even though I know I can take money out of it without penalty, but I *do* consider my $1,600/month short-term savings contribution as a temporary EF. If my car broke down, for example, I'd just stop my auto-contribution and use the cash rather than transferring the money out of the account.

And that does cover most emergencies. The EF is basically there in case I find myself suddenly unemployed. Since that's the eventuality I have in mind, I would prefer it be large enough to sustain me for a lot longer than I think it would actually take me to find a new job.

Plus, we're getting a cat soon ;D So I have to think of potential kitty emergencies as well.

Incidentally, this is why I contribute to my ROTH in lump sums instead of $416/month like almost everyone else. If I transfer $5,000 every April 19th like clockwork, I don't have to worry about it anymore. I don't have to be tempted to hold back my contribution on a month when things are tight. But that's just my weird quirk - I like to tackle one financial goal at a time.

[SVT]

Keep everything at the same company.

[Gardening Grandma]

Firebird
Thanks for the additional info
Here's my .02 re the debts
The car loan (at 0%). If the 0% is for the full life of the loan, then I'm with Phil - don't prepay it.
The student loan isn't horiffic (15K) but at over 6%, yes, I'd definitely make paying it off a priority. Sure, you can hope for that 10 to 12% return, or you can get a guaranteed return of 6+% by paying it off asap.
I'm assuming that your retirement funds are aggresively invested. That would make sense for your age. So, I'd go for the sure thing - the guaranteed return you'd get by paying off the SL before increasing the EF. (Now, I'm assuming that your job is pretty secure. If not, then maybe the EF does need to be beefed up)

[Firebird]

I'm assuming that your retirement funds are aggresively invested. That would make sense for your age. So, I'd go for the sure thing - the guaranteed return you'd get by paying off the SL before increasing the EF. (Now, I'm assuming that your job is pretty secure. If not, then maybe the EF does need to be beefed up)

I think we are pretty much perfectly in sync with this one. Since I can pay it off in 9 months with no hardship, I'm pretty sure that's what I'm going to do (after the EF is beefed up - like I said, that should be in July if all goes well).

My job is very secure *tap wood* Let's hope it stays that way. But I'm conservative at heart. There are times when I can override that and times when I can't. It is inconvenient to live without a fully funded EF. Interferes with my beauty sleep.

[cronewitch]

I like the idea of paying off the student loans sooner than later. For one thing you are saving for a home with someone you aren't married to. If you pay down your debt before saving for a house it will give him more time to save his half and more time to see if the relationship is going to last. Investing in a home with someone you aren't married to is always a major danger there isn't a standard contract for the partnership so having to work out all the details yourself will take a lot of time and talking.

[Deleted]

I'm also with the "pay it off" crowd. (Sorry Phil!). I think we're in for a bumpy ride these next several months. 6% isn't too bad but I don't think equities in general are going to do well given all the uncertainty with Japan and the Middle East and its relationship with oil. If oil remains high it will slow our US recovery even more. So go with the guaranteed pay off.

Personally I think I would go with the debt payoff before the EF beef up because you have the Roth for any serious emergency. But if you're not comfortable with that then split the baby and pay off 1/2 the debt while contributing 1/2 to savings.

I don't remember what your living situation is but one of the best pieces of financial advice I got from my MIL was to live on one salary and bank the other. Now might be a really good time to move towards a similar plan.

[skubikky]

"My instinct, FWIW, is to shovel as much into savings right now as I can, before I start with the money-sucking life things such as having children"

Are you married? I'm sorry if I missed that.


"I don't remember what your living situation is but one of the best pieces of financial advice I got from my MIL was to live on one salary and bank the other."

We were able to do this and it has had a great impact on the accumulation of wealth.

[whoisjohngalt]

Didn't read your OP, just your title. There are much smarter "finance" people on here who would be able to answer your question, but I just wanted to say one thing - for a 25 yr old you sound so balanced, intelligent, rational, reasonable and seem to have such a clear idea of who you are and what you want, that no matter what your "numbers" are right now, I am 100% sure you will be more than fine, financially and otherwise.

Lena

Wow,that was one long sentence....

[Wisconsin Beth]

I want to say thank you for this thread. It sort of spelled out a lot of the stuff for me. So karma to Firebird for starting it.

[Deleted]

Karma Firebird and you are my SHEro

I agree with your plan and say follow the live on one income advice.

My wife and I are cutting back as much as we can now so we can be in that position in 4-5 years.

[Firebird]

I like the idea of paying off the student loans sooner than later. For one thing you are saving for a home with someone you aren't married to. If you pay down your debt before saving for a house it will give him more time to save his half and more time to see if the relationship is going to last. Investing in a home with someone you aren't married to is always a major danger there isn't a standard contract for the partnership so having to work out all the details yourself will take a lot of time and talking.

Oh dear God yes. It's not gonna happen. No way am I buying anything permanent with DBF until/unless we get married (well, I mentioned that we're getting a cat so I suppose that counts - but that one was super difficult for me! ;D).

Anyway, yes, I think it's prudent to use this time while we're still unmarried to get our respective financial houses in as much order as possible so that when the time comes, we will (hopefully) be mutually debt free and on our way to saving a good chunk of money for our house. I'm really pushing DBF to start buckling down on debt repayment / savings as well. I'd like us both to be in good shape, not just me.

I don't remember what your living situation is but one of the best pieces of financial advice I got from my MIL was to live on one salary and bank the other. Now might be a really good time to move towards a similar plan.

I live with DBF and on paper, we're there. His salary is lower than mine at present, and it's just about enough to cover all of our expenses (joint and separate). That's one reason I'm itching to combine our income statements and balance sheets, so that we can start looking at it that way (something else I'm not comfortable doing outside of marriage, which is why I'm focusing on my own finances for the time being).

But anyway, when/if we get married it should be quite a simple matter to streamline things so that the lower salary is paying the bills and the higher one is meeting financial goals.

"My instinct, FWIW, is to shovel as much into savings right now as I can, before I start with the money-sucking life things such as having children"

Are you married? I'm sorry if I missed that.

Nope, living in sin. I actually meant before we start to go down that road of money-sucking things like children ;D

Didn't read your OP, just your title. There are much smarter "finance" people on here who would be able to answer your question, but I just wanted to say one thing - for a 25 yr old you sound so balanced, intelligent, rational, reasonable and seem to have such a clear idea of who you are and what you want, that no matter what your "numbers" are right now, I am 100% sure you will be more than fine, financially and otherwise.

Aww, thank you Lena! It helps that I've been on the YM boards since I was 21 or so I wouldn't be where I am without the good souls here.

I want to say thank you for this thread. It sort of spelled out a lot of the stuff for me. So karma to Firebird for starting it.

You guys are starting to make me blush Thanks for the karma!

Karma Firebird and you are my SHEro

Cawiau, that means a lot coming from you! Like I said, we definitely plan to live on one income once we're married. It would be doable today, I'm just not comfortable coming finances until we're legal. Personal quirk.