How to get enough for Retirement?

[BMEPhDinCO]

I don't have a lot of understanding of how investments really work, so bare with me here...

My DH and I have about $33,500 in investment accounts (about 50% of that is in a Roth, another 30% in Wells Fargo non-retirement investments, and the last bit 20% or so is in a rolled over 401k to IRA) - we are in our late 20s and I would like to retire around 68-70.

Now my question is - right now earnings are ALL over the place, since the markets go up and down so much, how do I estimate the value for retirement calculators? Should I say an average of 8% return? More? Less? My Roth is in a 2050 fund, my DH's is in a similar target account - the others are similar risk, just not target accounts. But returns have been between negative values and up to 29%+ over the last year or so - do they stabilize or are they always so volatile?

And if I can assume around 8-10% safe return over the 40 years, and inflation is around 4% - that estimates that I'd need around $2 million in today's dollars for bringing in around $100k a year for retirement - the "Safe return" on the money we have now, plus what we can put in is around 1/10 of that!

How do people save enough for retirement without super risky investments?? I can't count on SS or a pension so we have to fund it all ourselves....Do you put in more as income rises? Right now we are grad students and will be for a few more years, but then would we need to put in like 50% of net income later to try and get near the $2 million?

How are people investing now that are younger to save for 40 year in the future?

Thanks!

[KTP]

Well, it is pretty simple really.

Assume you can live off what you do now in retirement. Sure, you may have more medical bills (although probably not at 68 since there will still be some form of medicare) but you will have fewer expenses like car, work commute, etc. Balance it out with increased vacations and I think you can assume you need 100% of what you currently bring home, after savings.

So if you make 100K after taxes, but contribute 20% of that to savings, then you really are living on 80K. But whatever...you said 100K, so go with that.

Assume a real return of 3%. That means each year the amount you put away for 40 years has 1.03^40 = a gain of 3.26 real dollars over the 40 year period. This means you need to be putting away 100K/3.26 = $30,675 each year such that you can have a comfy, pretty much guaranteed retirement. If you can live off 50K a year instead, you only need to put away about $16,000, which is slightly less than the amount of a single year's 401K contribution. Pretty easy.

edit: I was assuming a 40 year retirement, and there would probably be money leftover since at the start of age 68 you would still have excess money compounding for the 40 retirement years.

[i_am_the_slime]

I don't have a lot of understanding of how investments really work, so bare with me here...

My DH and I have about $33,500 in investment accounts (about 50% of that is in a Roth, another 30% in Wells Fargo non-retirement investments, and the last bit 20% or so is in a rolled over 401k to IRA) - we are in our late 20s and I would like to retire around 68-70.

Now my question is - right now earnings are ALL over the place, since the markets go up and down so much, how do I estimate the value for retirement calculators? Should I say an average of 8% return? More? Less? My Roth is in a 2050 fund, my DH's is in a similar target account - the others are similar risk, just not target accounts. But returns have been between negative values and up to 29%+ over the last year or so - do they stabilize or are they always so volatile?

And if I can assume around 8-10% safe return over the 40 years, and inflation is around 4% - that estimates that I'd need around $2 million in today's dollars for bringing in around $100k a year for retirement - the "Safe return" on the money we have now, plus what we can put in is around 1/10 of that!

How do people save enough for retirement without super risky investments?? I can't count on SS or a pension so we have to fund it all ourselves....Do you put in more as income rises? Right now we are grad students and will be for a few more years, but then would we need to put in like 50% of net income later to try and get near the $2 million?

How are people investing now that are younger to save for 40 year in the future?

Thanks!

Starting with $33,500 now, if you earn 6% (after inflation) for 40 years, you will need to contribute $14,000 per year in order to accumulate $2.5 million (the standard assumption is that you need 25 times your annual income).

[disneysteve]

how do I estimate the value for retirement calculators? Should I say an average of 8% return? More? Less?

There is no "right" answer to this question. Personally, I usually run the numbers using 7% and then again using 6%. Over time, I hope to do better than that but I'd rather overshoot the target than come up short. On the other hand, Dave Ramsey does his examples using 12%. i think that gives people an extremely twisted sense of how they're doing because the vast majority of people will not achieve 12% returns. Stick with 6-7% and you should be good.

returns have been between negative values and up to 29%+ over the last year or so - do they stabilize or are they always so volatile

?
That partly depends on what happens in the world and partly depends on the specific investments. Some are much more volatile than others.

And if I can assume around 8-10% safe return over the 40 years, and inflation is around 4% - that estimates that I'd need around $2 million in today's dollars for bringing in around $100k a year for retirement

How do people save enough for retirement without super risky investments??
Right now we are grad students and will be for a few more years, but then would we need to put in like 50% of net income later to try and get near the $2 million?[/QUOTE]
Don't forget about the most powerful force on earth - compound interest.

Just look at what you already have: $33,500. If you are 27 (I think you said that elsewhere), just leave that money to grow for 41 years until age 68. With a 7% average annual return, it will be worth $643,258.68. That's if you don't add another penny to those accounts.

Of course, you will continue to add to your investments. The point is that you actually have nearly 1/3 of what you will need for retirement already saved. When you look at it that way, accumulating $2 million isn't nearly such an overwhelming prospect.

[kork13]

Should I say an average of 8% return?

For the purposes of estimation, I use 3% inflation and 4-5% average gains over the long term. Anything between 7-10% is generally considered "reasonable."

How do people save enough for retirement without super risky investments?? I can't count on SS or a pension so we have to fund it all ourselves....Do you put in more as income rises? Right now we are grad students and will be for a few more years, but then would we need to put in like 50% of net income later to try and get near the $2 million? How are people investing now that are younger to save for 40 year in the future?

It's really quite easy, because you're starting young. Use a basic mix of stocks and bonds in a few simple index mutual funds and you'll generally do well enough to be fine for retirement. Save a healthy amount in your retirement and other accounts (20%-25% of income is a good goal). Once you're set in place with that, it's just a matter of time, as DS already mentioned. Just save consistently, and compounding will be your friend.

As your income rises, it's definitely a good idea to increase your savings at the same time. My personal philosophy is that 50% of any raise goes to savings, 50% goes to lifestyle/spending.

As for what others are doing.... I'm about 25 y/o myself, and I'm doing just what I said above. I have a 2050 Target-date fund in my Roth IRA, and use a variety of stock and bond index mutual funds (large-cap, small-cap, int'l, bonds, and treasuries) in both my TSP (401k) and taxable investment accounts. I'm currently saving 15% of my gross income specifically toward retirement, and another 20% in non-retirement savings/investment accounts (but that's abnormal for most people--I'm saving pretty aggressively right now). If you can do 15% to retirement and 5%-10% in non-retirement accounts, you're probably doing just fine.