Retirement litmus test

[willuc8]

Well, I do count my 3% match as part of my 15%

[LivingAlmostLarge]

Retirement is still such an unknown because I wonder how many retirees currently are covered by their employed provided health insurance plan in retirement? This supplement takes care of a lot of retirement medical costs not covered by medicare. I will guess that a lot of people retired currently have paid for homes. Will this next retiring generation be the same? Will they have paid off their homes or used it as an ATM? Depending on the situation it makes retirement daunting to still have a mortgage.

Perhaps people are expected to need 85% because they still have excessive bills. They had kids later in life so they are helping their kids with college later or helping them period! I don't know that so many people in retirement are going to be able to afford to live on say 50% or less of their income in reality.

[stoney508]

That is what is concerning me the most because I need to rely on only what I save between now and then. I am 26 so I have time on my side but I don't expect there to be a pension waiting for me as well as not relying on Social Security because I can't rely on that as well as Medicare so I have to worry about my Retirement savings as well as save enough up for insurance costs well into my retirement. I am only using the company match as part of my 15% until I have a sound footing on my expenses and budget or until I get a substantial pay raise.

[jIM_Ohio]

That is not correct. The employer match doesn't count when we say you should be saving 15%. We mean you should be saving 15% of your gross income out of your own money - not counting any match. If you earn 100K, you should be saving 15K before any match.

Why is that? Why doesn't the match count? As far as I'm concerned, it is about living well below your means. If you count the 6% match, then you are living on 91% of your income. If you dont' count the match and save 15%, you are living on 85% of income. Being able to live on a lower percentage of your income forces you to keep your expenses lower. In turn, that reduces the amount you need to save for retirement.

I was going to post something similar, but DS already said it. Personal savings rate controls spending, which is a huge issue with retirement planning.

To elaborate, let's say you and I each earn 100K.

I save 15% of my income and get no match.
You save 0% but your very generous employer puts 15% in for you.
So each of us has 15K/year going into our retirement accounts.
In 30 years, with identical investments, we will each have about $2.3 million.

Now comes the difference - retirement income.

I have spent my life living on 85% of my income or 85K.
You have spent your life living on 100% of your income or 100K.

If we each draw 4% from our accounts, that will give us $92,000/year of income.
That's great for me since I'm used to living on $85,000. I get a raise in retirement. Sweet.
You, however, get an 8% pay cut since you are used to living on $100,000.

Except there are no FICA taxes to be paid, so the person who was living on 100k minus 7.65k is now living on $350 less per year.

I do understand your point, though. It is certainly something one must take into account when crunching their own numbers.

Both people would be in same tax situation in DS' example, so FICA would still be a wash to both people.

[stoney508]

I get what DS has said about how the saving does not add up and I will say that I am currently living on about 5-15% of my income (living at home) my expenses will change in the next 6 months when I move out. My expenses will change every time my income changes as well as SL paid off I have my contribution going up 1% each year until 15% so with a pay increase part of that money is increasing my contribution so by the time im 30 ill be contributing 10% or so if I do not change it by then to 15% as well as increase my ROTH which probably will be the first to increase to the 5,500.

[Snave]

25 times your income is insane. That is over 3 million just for my income. I think you have to take into consideration how much less expensive retirement living is. No college expenses, work expenses, other child related expenses like day care and clothing. I just worry about health insurance. I save as much as I can and hope its enough. I'm 39 years old now and have $290 k in my 401. I'm not even close to that 3 mil mark. Sigh

Reggie, do you have $290 or $290K? The reason I ask is you are well on your way to have over 3 million if it is 290K. Get a retirement calculator and plug your numbers. You made a comment that 25X your income is around 3 million. That means you make around 120K. Let's say you are putting away 15K a year into retirement and already have 290K and earn 8% then I get you ending with over 3.3 million. If it is $290, then we need to rethink things.

Plug your numbers in here. http://money.msn.com/retirement/reti...alculator.aspx

[stoney508]

Now I was woundering is that supposed to be 25 times your gross or net pay? because even though I may make 47,000 this year but taking home between 30k and 32k.

[kork13]

Now I was woundering is that supposed to be 25 times your gross or net pay? because even though I may make 47,000 this year but taking home between 30k and 32k.

Realistically, you should aim for 25x expenses, not income. What you earn each year doesn't necessarily relate to how much you are going to need in retirement. For example, two people could both make $100k/year pre-retirement, but in retirement one might only need $50k/yr, while the other might need $90k/yr. It's a matter of how much money you're going to SPEND.

[stoney508]

I understand the expenses but thats the thing at the age of 26 I have no idea what my expenses are going to be like when I retire im looking for a general rule of thumb because I have 30-40 years to go before I will realistically know what im looking at. I plan to have a house paid for but wont know property taxes or what my insurance will be like (car/home/life if i need it)as well has healthcare until im closer to that age which I would find out well before I retire. I know rule of thumb does not take into account individuals needs but it is a good starting point to strive for.

I would much rather have 25x my income rather than 25x expenses because I do not know how long ill live or what my situation will be like then I will have to actually see what that pans out for in say another 26 years or so.

[disneysteve]

I understand the expenses but thats the thing at the age of 26 I have no idea what my expenses are going to be like when I retire

True. So for now, you're focus should be saving at least 15% of your gross income, not counting any company match, and letting it grow. As you get older and closer to retirement, the crystal ball gets less fuzzy and you can start to make realistic predictions of your expenses and start fine-tuning your plan. Within 10 years of retirement, you will probably be able to make pretty broad assumptions. Within 5 years, more detailed projections.

[stoney508]

True. So for now, you're focus should be saving at least 15% of your gross income, not counting any company match, and letting it grow. As you get older and closer to retirement, the crystal ball gets less fuzzy and you can start to make realistic predictions of your expenses and start fine-tuning your plan. Within 10 years of retirement, you will probably be able to make pretty broad assumptions. Within 5 years, more detailed projections.

I will be doing the 15% counting my company match until my loans are under control and I have a better view of what my budget will be at the end of this year with moving out of the parents house and in with my fiance. I can then figure out my budget save for my EF as well as wedding (cheap as possible) and hopefully increase my income in which at that point increase my contributions. As of right now im doing what I can.

[disneysteve]

I will be doing the 15% counting my company match until my loans are under control and I have a better view of what my budget will be at the end of this year with moving out of the parents house and in with my fiance. I can then figure out my budget save for my EF as well as wedding (cheap as possible) and hopefully increase my income in which at that point increase my contributions. As of right now im doing what I can.

That sounds like a good solid plan.

15% is the goal. Very few people are able to achieve it from day one. I've posted before that when my wife and I got married, we were saving 6% of take home. Little by little, we increased it as we were able. Then we switched to % of gross - first 10%, then 11, then 12. Eventually we reached our current level which is saving 23% of gross (not all for retirement) and most years, the actual number ends up being higher than that, more in the 25-26% range.

[stoney508]

I already have my % going up 1% every year until 15% through work and I have paid nearly half of my debt off in just over a year from 40k to somewhere around 25k right now. It is tough making 30-35k a year take home and paying nearly 20k to debt. But when I look at how im living now I will almost certainly be able to get that % up higher. I know my income will get higher its just a waiting game as well as hard work. Currently im putting in 50+ hours in a week 6 days a week and work 2nd shift so not much personal life. And that wont change all that much once me and the fiance will move in together because we have to be frugal to save for the wedding then its tackleing both our debts from there on while hunting for better/new jobs. Its a tough road.

[jIM_Ohio]

I understand the expenses but thats the thing at the age of 26 I have no idea what my expenses are going to be like when I retire im looking for a general rule of thumb because I have 30-40 years to go before I will realistically know what im looking at. I plan to have a house paid for but wont know property taxes or what my insurance will be like (car/home/life if i need it)as well has healthcare until im closer to that age which I would find out well before I retire. I know rule of thumb does not take into account individuals needs but it is a good starting point to strive for.

I would much rather have 25x my income rather than 25x expenses because I do not know how long ill live or what my situation will be like then I will have to actually see what that pans out for in say another 26 years or so.

Planning is not a one time thing, it is an ongoing process...

Financial planning has 4 categories- Accumulation, Distribution, protection and legacy.

If you plan your distribution before you accumulate the assets, you will miss some efficiency.
At same point, if you plan your accumulation and ignore how it will be distributed, you might get taxed too much or miss a different opportunity.
The protection you need when you accumulate is different than the protection you need when you distribute. If you want to protect a legacy, you need to plan that when young because the insurance at older ages may be impossible or expensive.

So focus on planning to accumulate while educating yourself on protection, distribution and legacy. As you learn and accumulate more, you may choose to shift.

For example if you plan to distribute before age 55, it is likely you need 1 accumulation strategy which bridges 401/Roth and taxable accounts.
If you know retirement is age 59.5 or greater, the accumulation in taxable accounts is less important.
If you will retire between 55-59.5, then you need to work on details to know which end of the tipping point you will likely end up in.

And also remember this quote about retirement planning

Measure it with a micrometer
mark it with a wide paint brush
and cut it with a long handled axe.

[LivingAlmostLarge]

Jim that's a great quote. I think that a lot of people in this recession were also forced into early retirement. At least that's what I've found from people not working. They were "laid off" and unable to find work paying as much or even in the same field. Those older than 50 consider themselves "retired". Those under 50 are just cobbling together a lot of people jobs, freelance, contracting, etc.

It's a weird economy and situation I think a lot of people find themselves in.