having trouble making a plan

[crabbypatty]

For me, I need small goals and big ones to stay on track. As it is, I feel like I have no goals except "not be destitute in retirement" LOL

I hear about "save 10% of gross" but I'm not willing to make that a goal unless I know why 10%. It seems like too round of a number.

I've also seen places where people say you need x amount of your current income in retirement. But how do you arrive at that figure. Right now our home is our largest expense. In retirement our home will be paid off and we'll downsize, pocketing a nice bit of money.

I just don't know how to factor in all of these things and it's getting in the way of me creating S.M.A.R.T retirement goals.

[sweeps]

I hear about "save 10% of gross" but I'm not willing to make that a goal unless I know why 10%. It seems like too round of a number.

How about 9.68%?

Seriously, if you want a better guesstimate of what you should be saving for retirement, try one of the free calculators out there. CNN Money's calculator, for example.

[crabbypatty]

We're actually not that far off, probably at about 8% right now. And we're temporarily in a one income situation. I'm guessing for about 5 more years. So I'm feeling pretty good about that 8%.

[disneysteve]

10% is based on starting in your 20s and ending up with a large enough nest egg to replace 80% of your preretirement income. If you start later, you need to save more than 10%. If you think you can live on less than 80%, you could conceivably save less (though I wouldn't recommend it).

As for how much you'll need in retirement, obviously nobody knows for sure. The general target is 80% of preretirement income. Some will be fine with 70%. Others will need 90% or more. It depends on many factors and how you plan to spend your later years. The huge unknown for all of us is the future cost of healthcare.

The other factor is the rate at which you withdraw your money in retirement. The general rule there is that you should spend no more than 4% of your portfolio in year one of retirement. Then that 4% figure gets adjusted annually based on inflation. That maximizes your chances of not outliving your money. So your nest egg needs to be 25 times your desired annual income to be able to draw down at 4%/year.

To give an example with real numbers, let's say you earn 100K when you retire. You want an annual income in retirement of 80K (80% of preretirement). You need a nest egg of $2 million to generate that income.

Be careful about your assumption of downsizing and taking a big profit. Many people think that and when the day comes, they decide they don't really want to move and leave their home. Or the smaller homes have appreciated too and the price gap isn't as large as they anticipated.

[Scanner]

Depends on what kind of retirement you want.

DisneySteve wants to cruise the world a few times per year - he's going to need to save more.

I don't have the travelbug in me as much and really plan to work part-time until they put me out to pasture.

Round numbers have a psychological benefit to it - I have a goal of a million dollars in liquid assets + home paid off by age 60.

Many calculators will tell me that's not enough but I have a different idea of retirement than most people. Considering I have an extensive healthcare background, I see lecturing and possibly volunteer work (something like Doctor's Without Borders or other stuff) being in my cards.

I think 8% is pretty darn good - I was going to suggest 1% to start with, 'cause it sounded like you hadn't started but 8% is much better than that.

[disneysteve]

We're actually not that far off, probably at about 8% right now. And we're temporarily in a one income situation. I'm guessing for about 5 more years. So I'm feeling pretty good about that 8%.

When we first got married, we saved 6%. Gradually over the years, we increased that. We are now at 17%. For the past 2 years, DW was working full time and we were banking almost her entire salary which brought our total savings to 26%, but she's back to SAHM status so we're back down to 17%.

[disneysteve]

DisneySteve wants to cruise the world a few times per year - he's going to need to save more.

Don't exaggerate. I only want to cruise the world once. I'm planning to take Holland America's 114-day Grand Voyage circumnavigation cruise.

[Ima saver]

I have always tried to save 10%, however I do save 100% of any windfall or extra money that might come our way. (Can you say, $20 challenge!)

[jIM_Ohio]

For me, I need small goals and big ones to stay on track. As it is, I feel like I have no goals except "not be destitute in retirement" LOL

I hear about "save 10% of gross" but I'm not willing to make that a goal unless I know why 10%. It seems like too round of a number.

I've also seen places where people say you need x amount of your current income in retirement. But how do you arrive at that figure. Right now our home is our largest expense. In retirement our home will be paid off and we'll downsize, pocketing a nice bit of money.

I just don't know how to factor in all of these things and it's getting in the way of me creating S.M.A.R.T retirement goals.

See my blog for some of this. Here goes the readers digest (abridged) version.

If someone has savings $S for retirement and a style of living $L which they need to live on, retirement is a function of $S supplying $L. This would be your "rate of return".

Studies have been done, and it is advised that a person use no more than 4% of $S(avings) to generate $L(iving) the first year of retirement. The logic to this is 4% (as a starting point) allows for $S(avings) to last 30+ years. The biggest risk in retirement is you lose your ability to earn more money, so if you "outlive" your assets, you only have Social Security to live on. 3% would be more conservative, 5% is quite aggressive.

The 4% is the initial "withdraw rate". If you divide $L by 4% (L/.04) you come out with 25*L... meaning you need 25x what you spend each year in $S(avings). $L(iving) is what you make each year while working. You need 25x L to retire with same lifestyle you have now.

L is a variable. You can shrink it to "80%" as mentioned by other posters. You don't need to pay SS, you don't need to save for retirement, you won't have a mortgage. The 80% is conservative... if you live frugally, you could probably cut this down to 40%.

The 4% increases each year in retirement (because of inflation). And because the overall $S(avings) is being reduced by 4% each year, this 4% "withdraw rate" steadily increases to around 8% by the time you have been retired for 30 years.

Deep breath. Closing this post.

[jIM_Ohio]

The 10% number (savings rate) comes from same place 80% of living expenses comes from. The number is arbitrary. I want to travel and retire, so it's possible my cost of living in retirement is more than I make now.

The 10% is a round number and a starting point. If someone is young (in their teens or early 20's, 5% might work. If someone is late to the game (30's or 40's) 10% is way too little.

For planning, the suggestion I make (and use for myself) is

current income/4%

This comes out to what I need to save.
I then have checkpoints along the way.

I can assume 9%, 10% rates of return to see how likely I can replace my current income. The good news is I have replaced all my current income in my 401k alone., bnased on my checkpoints and what I have saved so far.

The bad news is this does not account for raises, my wife's income, and other variables. (we save the equivalent of half my wife's salary each year, around 16% of overall gross). This also does not account for a paid off mortgage, not needing to save 16%, and other expenses which will come and go between now and retirement.

I can list checkpoints as needed... some of this was explained in really early entries on my blog.

10% is a guideline, but the issue is really chicken and egg.

You don't know how much you need, until you know how much you spend the final year of your "working" life. By the time you hit that final year of your working life, it is too late to save anything.

So you need to make "best guesses", SWAGs, estimates and assumptions to plan for a number you cannot even be sure the stock market will cooperate with.

In most posts I'll list calculations and some of the assumptions/risks involved. I am sure others could poke holes about assumptions not listed. Since the first time I posted, I edit posts a few times to add in assumptions I forgot to mention.

And I still have other assumptions/risks not listed.

This is why "yearly" checkups help. it allows you to add more assumptions or risks and develop a comprhensive plan. IMO it is IMPOSSIBLE to implement a comprehensive plan with one step (like save 10%). This does not account for debt, for example, or age, as another example.

[sweeps]

See my blog for some of this. Here goes the readers digest (abridged) version...

Or... you can use an online calculator.

[jIM_Ohio]

I have yet to see any online calculator which fully accounts for everything and can "report" the important sub steps.

For example The Vanguard and T Rowe Calculators tell me different things with same info. Vanguard said "on track" and T Rowe said I was "save more".

My analysis said I need to save more for about 1-2 more years, then I am "on track". I believe me more than them (nothing personal).

[anonymous_saver]

Like everyone said, it's different based on each person. I'm 24 and save 25% of my income (plus I have a pension building), and I make $35,000 a year. I plan on retiring when I am 50-55 years old though, so that is why I am being pretty agressive in my savings.

Personally though, 10% sounds like a pretty small amount to me though, unless you are 18-20 years old.

What are you thinking that you could raise your percentage to? Do you contribute to a match in a 401(k), do you contribute to a Roth IRA, a pension, etc?

[sweeps]

I have yet to see any online calculator which fully accounts for everything and can "report" the important sub steps.

You can never account for everything. And by attempting to include everything including the kitchen sink, it just overly complicates matters. It's like trying to measure the distance from L.A. to New York with a yardstick.

[disneysteve]

You don't know how much you need, until you know how much you spend the final year of your "working" life.

Actually, you don't know how much you need until after your first year in retirement. And even then, most calculators assume a steady spending rate throughout retirement. In reality, most of us will spend more during our early years in retirement (like when I'm on that world cruise) and less as we age and become less mobile. Of course, that's where healthcare costs could increase to make up the difference.