Are you on track for retirement? MONEY Article

[disneysteve]

The August issue of MONEY has an article with a few charts and guides to figuring out if you are on track with your retirement savings. It has already been discussed a bit in the blogs (Ima Saver's at least) but I thought it would be an interesting topic for wider discussion.

There is one chart to calculate how much you need to save each year to replace 80% of pre-retirement income. It is broken down by age and salary and has a factor to adjust for how much you've already saved.

Another chart gives the average retirement savings people have, also broken down by age and salary.

Personally, I find that I'm on track or ahead by both measures, which didn't surprise me really. The average savings chart is kind of difficult, though, because of the wide age ranges. For example, I fall into the "35 to 44" range. I'll be 43 next month. But I can tell you that I've got significantly more saved today than I did when I was 35, nearly 8 years ago, so I think that skews the averages to the low side. The next range is 45 to 54 and I'm actually ahead of that average too, so I figure that's pretty good.

What did everyone else think?

[Ima saver]

Well, with disneysteve's help, I figured out that we have enough saved according to the chart. However, I still don't think it is enough. I did not count in the value of my house even tho is it paid for.
I agree with Steve, my savings have really gone up a lot this past 10 years.

[RetireEarly]

Well from that article I am way ahead of where I need to be (not that I will cut back on saving or anything). Thankfully my Dad taught us about finances at a very young age. So now I am 25 with 32k in a 401(k), 13k in a Roth IRA, and the only debt I have I could just about afford to pay off if I wanted to but at 0% interest, why should I? I have the money for it invested and calculate that I should give me ~3k after taxes extra by the time it's paid off... Also I currently contribute 15% to my 401(k) and have a balanced budget, even including my monthly debt payments. I'm slowly converting the invested money for my debt into Roth IRA investments since it doesn't look like I'll need it to pay off the debt. Not going out and throwing away money on brand new luxury cars, etc. like all my friends did after graduating college is paying off for me when I have this much savings and they're still living paycheck to paycheck...

[moneybags]

I love retirement calculations. Do I have to buy the magazine to see the calculators or are they online somewhere? Is it worth buying? Thanks.

[Ima saver]

Well, I love Money magazine. I have subscribed to it for about 20 years; that is how I learned how to invest at first.

[RetireEarly]

Moneybags, click Do It Now: Get on track for retirement| Money Magazine to view the articles and associated calculators.

[marmatt]

I'm 41 & DH is 43. Combined, our retirement savings are slightly above the average noted in the article measuring ourselves against the "upper-middle" group.

I was actually relieved when I saw the article, it made me see at least we're on the right track. I've been focusing so much on debt reduction, that I've been feeling like a moron compared to all of you who've done so well with managing your money.

It does show that as we move toward paying off all debt (except the mortgage), we may be able to move ahead of the "average" within the next 3 years or so.

[Diolla]

This is one place where it is hard for me to calculate. I have a pension that, according to my last statement, if I didn't put any more into it would currently pay about 70% of my current income. Since I plan to stay in my current job, barring anything unexpected, and the pension is a state pension, not a private one, this amount is pretty set.

Most of my expenses are fixed and I currently live on about 60% of my income. Once DS moves out many of my expenses will go down. I save about 11% of my income now but except for my pension I was really late getting started. We don't have a 401(k) match so I have been trying to fund my Roth fully and then putting what little is left in our 457 plan.

I figure most of my retirement will be my pension with the other savings as extra to pay for increased medical costs and inflation. But because the pension is not based on contributions it is real hard to use the retirement calculators.

[aurielle]

Originally Posted by Diolla

But because the pension is not based on contributions it is real hard to use the retirement calculators.

That's my problem too.

[disneysteve]

I don't have a pension, but Social Security is basically a similar system. It isn't based on contributions and pays a fixed benefit. When I do my retirement planning, I don't include SS benefits. I strive to save enough to live on my savings alone and figure anything I get from SS will be a bonus. You could do the same with your pension. Of course, if it will truly pay you 70% of income (much more than what SS pays), you don't need to save nearly enough, but you can't be 100% sure that the pension won't change between now and retirement, even though it is a government plan, not a private one.

[Scanner]

I struggle with this too because as a couple, I think we are wayyyyy above average on our home equity, around 65% and home ownership doesn't seem to be calculated into these equations.

I mean, I think it's very possible a couple has $200,000 in their 401(k) but only 20% equity in their $500,000 home with 25 years left.

(also my wife's pension and my business, which is hard to assess a $$$ worth)

[disneysteve]

Originally Posted by Scanner

home ownership doesn't seem to be calculated into these equations

I'm not sure home ownership should be counted. If you have to sell your house or borrow against it's value to survive in retirement, I'd say that's an indication that you didn't save enough while you were working.

Certainly, some people plan to downsize when they retire for a variety of reasons, not just financial. As I've reported, my mom sold her house and moved to a senior apartment complex last year. That did improve her finances, but that wasn't the reason for the move. She could have afforded to remain in the house if there weren't other reasons to get out.

I think in the coming years we are going to see more and more people selling homes and downsizing or taking reverse mortgages because they have no other choice.

[jIM_Ohio]

I don't see the calculator online, unless it's the one on the front of the web site which asks for age, current salary and amount saved.

I have my own check points based on rule of 72 and doubling.

expenses=take home pay/.04= goal ($1.5 M me)

1.5/ 2= .75 M 1 double
.75 M/2= 375k 2 doubles
375k/2 = 187.5k 3 doubles
187.5k/2= 93.750k 4 doubles

I am between 3 and 4 doubles right now. Need more than 3 and less than 4.

I need to double my current investment 4 times. 9% return=8 years. 4 (4 doubles) *8=32 years. 3 (3 doubles) *8=24 ... very possible I could retire in 24 years or keep contributing and retire younger.

[Scanner]

If you have to sell your house or borrow against it's value to survive in retirement, I'd say that's an indication that you didn't save enough while you were working.

Either that. . .or you plan "to take it with you" as they say.

I just say that's a huge chunk of a person's net worth to take off the table.

[lgslgs]

Originally Posted by Scanner

Either that. . .or you plan "to take it with you" as they say.

I just say that's a huge chunk of a person's net worth to take off the table.

I think it is wise for many (and perhaps most) folks to take that chunk of net worth off the table. If they are doing retirement calculations and adding in their home equity - and banking on it getting them through the long term - they need to be very clear on when they plan to sell, the costs of their next living situation, the expenses of selling a home (real estate agent commission, upgrades to make it show well, cost of packing and moving, etc.), and they need a backup plan in case they can't sell and access the equity in their desired time frame.

We're retired and we don't add home equity, home business income, or future social security into our planning. We don't plan on selling, and the other two income streams are things that we consider bonuses - nice if we get money there, but we aren't risking our futures by counting on them to be there when we need them. My personal view is to calculate 75% of your cash and investment holdings and view that number as your "secure nest egg". That covers you for most market shifts.

In my experience, if you need to sell a house quickly you see a lot of your gains vanish quite quickly. A lot of things that were current best technology when you bought your house might be money pits when you want to sell. You better hope that your wiring, carpeting, windows, roof, heating and cooling systems and septic system (if you have one) meet the requirements of inspectors and buyers when you go to sell. If you think your are going to finance your stay at the old folks home with your house you need to figure in those costs - and taxes on the sale as well. A lot of folks who are house rich and investment/savings poor are going to be in for a very rude surprise.

Lynda

[Scanner]

Lynda,

It's my opinion (and I dont want to repeat the whole subject) that as home prices appreciate in the long term and a person theorectically starts in the world with

$0

and by the time they get to retirement has:

$500,000 home

+

Whatever

that's it unfair and perhaps naive to not calculate that into the big picture.

Now, I am not saying everybody has to reverse mortgage their way to surviving in retirement but let's face it - only 2% at best are going to have 3.5 million liquid dollars into retirement, whether it's for good reasons (economic recession, a disability) or bad reasons (poor retirement).

I think the US gov't understands this and this is why home ownership is considered a form of "social insurance" among policy planners.

I'd personally rather not calculate SSI into the equation vs. ignoring the home we own.

It also doesn't calculate into the fact that some people here at this forum (not me, beleive it or not) advance-pay their mortgages to live a debt-free lifestyle. Sure that's a conservative way to invest but it's valid.

It may appear to the pundits that these people are not accrueing a heck of lot of retirement money when in fact, IMO, they are.

That's all I mean.

[Scanner]

BTW,

Another reason I don't like it, is, I as an investor choose to view bond ownership = debt repayment.

That is, when doing my asset allocation, I'd always rather just pay down some debt, with a guaranteed 6-10% return rather than buy bonds vis-a-vis a mutual fund. I just sent another $500 last month towards my business loan.

I could have "invested it" but I chose to do this and make a 10% return on my line of credit.

[disneysteve]

Originally Posted by Scanner

It also doesn't calculate into the fact that some people here at this forum (not me, beleive it or not) advance-pay their mortgages to live a debt-free lifestyle. Sure that's a conservative way to invest but it's valid.

It may appear to the pundits that these people are not accrueing a heck of lot of retirement money when in fact, IMO, they are.

Interesting point. You're right that those folks are "investing" by prepaying their mortgage. Many of us feel that isn't the best place to invest because most have relatively low mortgage rates, but it is investing all the same.

The problem is, what do these people plan to do for money when they retire. You can't just withdraw $500 or $1,000 from your family room every time you have a bill to pay.

Originally Posted by Scanner

I'd always rather just pay down some debt, with a guaranteed 6-10% return rather than buy bonds

I think it depends on the return. If you are saving 6-10% interest, that probably makes sense. In my case, after the tax deduction, my mortgage is costing me 4.4%. I don't think prepaying a 4.4% loan is the best use for my money right now. However, I also have a home equity loan that has a higher rate and I am prepaying that one.

[RetireEarly]

I was always under the impression that most retirement calcs assumed your house was paid off... Personally, I would only count the house as an addt'l expense if it wasn't paid off at retirement...

[Scanner]

DisneySteve,

Yeah, the home thing is an interesting issue.

I read a commentary today that said there are only two ways your home is valuable to you:

1. Completely leveraged (and hopefully building equity in the market cause gee, I'd hate to consider the opposite)

2. Or completely paid off

All the in-between stuff is a poor use of money. It did make me think twice about our 65% equity.

( I have prepaid my business LOC's and my student loans)

I don't know if I agree with it but I thought the author did have a valid point. I guess he'd rather see you borrow 80% against your home, invest it in the market long term and then pay it all off at once, rather than inching your way down.