Should I ratchet up my retirement contributions?

[PauletteGoddard]

My hubby and I didn't earnestly start saving for retirement until our late 20s. We started investing at 10%, sometimes 15% until the baby came, when we both cut our contributions to 10% to allow for dependent care spending account benefits, and now full-time daycare is a past concern so our disposable income has increased a little.

I have read that one should start retirement savings at a 10% minimum in one's 20s, and move up to 20% or greater when one reaches 40. We're both at the point of turning 40. I'm putting aside 16% (I get a nominal employer match) and fully contributing to my Roth IRA annually. My spouse's contributions might be at 10% I think -- started with a new employer a few months ago. I'm asking him to do 12-15% this year.

Is the "save 20% or greater" guideline mostly for 40-year-olds who are just now starting to save for retirement? Should we be able to get by with 1%-per-year increase of retirement contributions?

[sweeps]

If you started saving in your 20s and you've been saving 10-15% since then, then you're way ahead of the average person.

Would your lifestyle be dramatically affected by saving 20% instead of 15%? If not, then I would say go for it. My hunch is that you're probably fine either way -- but run the numbers on a retirement calculator to get a swag.

[jIM_Ohio]

at what age do you plan to retire?
how much is in the accounts now?
what is the asset allocation of the account (% stocks-%bonds)

if you have 100k in the accounts, and you are in your 30's, 10% is fine if the allocation is aggressive (at least 80% equities). If your expected return is less, or the timeframe (age) is higher, then the 10% should be higher.

I think the 20% guideline is for people which want to retire early or are behind.

[disneysteve]

The 20% is for folks just starting, not those who have been saving 10-15% for 15 years. That said, certainly more is better if you can swing it.

I suggest increasing your contributions by 1% every quarter or every 6 months until you feel it isn't leaving you enough to live comfortably and then back off slightly. When we first started saving in 1992, we put away 6% of my take-home. Then 8%. Then 10%. Then 10% of gross. Continued to gradually increase and now invest 18% of my gross. I couldn't have started there, though. It never would have worked.

Also, look at your combined houselhold income and figure the percentage from there. If you and your spouse earn considerably different incomes, you may not both need to be putting away the same percentage to have the overall percentage be where you want it to be. (Does that make sense?)

[PauletteGoddard]

jIM_Ohio asked:

at what age do you plan to retire?

This was 67 originally. It might be earlier if an irreversible condition I have becomes a disability that puts me out of work.

how much is in the accounts now?

$206,332. This last quarter hasn't been kind.

what is the asset allocation of the accounts (% stocks-%bonds)

72% equities/28% bonds

[jIM_Ohio]

jIM_Ohio asked:
This was 67 originally. It might be earlier if an irreversible condition I have becomes a disability that puts me out of work.
$206,332. This last quarter hasn't been kind.
72% equities/28% bonds

Throwing some numbers out there...

72-28 allocation **should ** generate an 8% return each year on average.

using rule of 72, an 8% return doubles principal every 9 years.

206k current age
412k current age+9 (income=16,480)
824k current age+18 (income=32,960)
1648k current age+27 (income=65,920)
3296k current age+36 (income=131,840)

If age 67 is the goal, and you are 31 now, at age 67, I would be confident you could withdraw 131k per year in retirement without adding another penny for next 36 years.

If age 67 is the goal, and you are 39 now, at age 67, I would be confident you could withdraw 65k per year in retirement without adding another penny. Additional deposits would increase the withdraw amount, or lower the age, maybe both, depending on the 8% return.

Other comments- T Rowe Price suggests 100% equities if money is not needed within 15 years. This was in an investor magazine they sent out over holidays. If you take on more risk, it's possible you reach the milestones above in 34 years (instead of 36) for example. Maybe even 30 years or 25 years.

[TBH]

If you have a medical condition that may shorten your working life, I'd say you should try to save some outside your retirement accounts in case you need to retire before you can get penalty-free withdraws from your 401k. Maybe you should save that additional 4% bringing you up to 20%, but put it in a taxable brokerage account.

Just a thought.

Also, do you have disability insurance? I don't, and I'm wishing I did because now I've got a recent medical diagnosis that will make it hard to get coverage. I'm 31. Shoulda bought coverage in my 20s. Oh well.

Also, we don't know what your income is, but it looks like you're doing very well.

[LivingAlmostLarge]

Actually even if you retire before 59.5 you can withdraw from retirement accounts using the equal distribution law. So that's not necessarily a concern to save outside of retirement accounts.

How much do you have and what do you think you'll need?

[humandraydel]

Actually even if you retire before 59.5 you can withdraw from retirement accounts using the equal distribution law. So that's not necessarily a concern to save outside of retirement accounts.

True, but having some tax efficient investments in a taxable account can be a good thing. If used properly it can reduce your tax liability in retirement.

[LivingAlmostLarge]

Um, not really. Roth IRA contributions are tax free so they beat anything else.