So, how much are you trying to save for retirement?

[Caoineag]

I want a min of $1mill but am hoping for more. Basically, will be maxing out tax advantages accounts and then start on taxable accounts. However, as I am fairly young, a lot can change between now and then...

[brig2221]

You are forgetting a couple of important details.

1. INFLATION and TAXES: Sure, your savings can earn 5% each year but if inflation is 4%, that's a net gain of only 1%. If that 5% is also taxed at a 20% rate, there goes the other 1%, so you've now had a net gain of zero.

DisneySteve,

I always look for your comments on any threads that I read because I very much respect your thoughts and passion for most of these personal finance related posts.

That said, if I see someone throw around those inflation and tax percentages like you did above, it will be too soon.

I would agree with you that inflation is definitely a concern for retirement, as well as any and all tax implications. That said, I don't believe it is that black and white, or easy to sum up. I would think you would agree that inflation does not affect all of us in the same way. If you own your home, your car, and don't drive all over gods green earth, you probably aren't going to feel the effects of inflation as much as everyone else. So I don't think it's realistic to just take 3% off the top of any interest earnings on principle.

I don't know, but it just bothers me that everyone thinks that is the absolute truth. It's like my cash savings that I have outside of my 401k retirement investments. I have people actually telling me that I am losing money in money market accounts and CD's? OK, so are you telling me it would be better that I just spend the money and not save it, as I am just losing it anyway to inflation? The whole concept throws me for a loop sometime.

[PrincessPerky]

$1,000,000 will generate an annual income in retirement of $40,000. If that's all you need to live, then a million is plenty. Personally, I wouldn't want to live on 40K.

neither would I but I have been living on less for most of my life..so I guess living on it in retirement wont kill me......


I have to agree with brig2221 in that I do respect your posts..but sometimes I wonder if you realize how little many of us make in a year....

[disneysteve]

I would agree with you that inflation is definitely a concern for retirement, as well as any and all tax implications. That said, I don't believe it is that black and white, or easy to sum up. I would think you would agree that inflation does not affect all of us in the same way. If you own your home, your car, and don't drive all over gods green earth, you probably aren't going to feel the effects of inflation as much as everyone else.

I have people actually telling me that I am losing money in money market accounts and CD's? OK, so are you telling me it would be better that I just spend the money and not save it, as I am just losing it anyway to inflation? The whole concept throws me for a loop sometime.

Nothing in finance is black and white. I'd certainly agree with that.

As for inflation, you are correct that it doesn't affect everyone equally, but it is impossible to predict that. I referred to how inflation might affect your investments, but what ultimately matters is how inflation affects your purchasing power. If you currently earn 50K, for example and 10 years from now you are still earning 50K, you'd be in a lot of trouble as your money wouldn't go nearly as far no matter whether you own your home and car or not. Utilities will go up. Groceries will go up. Medical costs will go up. Gas will go up. The cost of pretty much everything increases over time.

Regarding your CDs and money market accounts, you aren't losing money, of course, but you may not be making much either. The numbers I used earlier are true. If your money market now pays 4% and inflation is 3%, your net gain is only 1% as far as increased purchasing power is concerned. Your balance will increase by 4% but those dollars will have lost some of their purchasing power so they aren't actually worth 4% more.

[disneysteve]

neither would I but I have been living on less for most of my life..so I guess living on it in retirement wont kill me......

I have to agree with brig2221 in that I do respect your posts..but sometimes I wonder if you realize how little many of us make in a year....

My apologies if that comment about living on 40K inadvertently offended anyone. Certainly not my intent. I wrote that specifically in response to Scanner saying he was hoping to save $1 million. I know he is a chiropractor and I'm assuming (always dangerous, I know) that he earns a fair amount more than that. If that is true, I'm not sure that 40K would be a comfortable retirement income for him, just as it wouldn't be for my me and my wife.

I do realize that I'm very fortunate to earn what I earn and I'm well aware of the fact that many people earn less than me. Median household income in the US was about 48K in 2006, so fully half of all US households earn less than that. A retirement income of 40K would be fantastic for a great many people. But if you currently earn 100K or 150K or more, 40K just wouldn't cut it. Heck, here in NJ, property taxes alone would eat up nearly 1/4 of that or more.

Again, sorry if I sounded insensitive to those who earn less than me. Please feel free to point that out to me if I do it again in the future.

[brig2221]

Disneysteve,

I would like to get your thoughts about the market as it pertains to retirement and retirement income.

Ok, so if someone parks a large chunk of money for retirement, say 2 million dollars, and they put it in very low risk investments netting 5% returns on average, you are saying that the $100K earned without even touching the principle isn't going to work long term.

What if that same person has 50-60% in the stock market for presumably higher returns, enough to fight off inflation, and the market hits the skids for 2-3 years, and this person loses 20-30% of their retirement nest egg? I ask this because I have about 10 examples of this happening to fairly well off retired people within the last 10 years. I still know people that are only just new recouping what they lost in the tech bubble nearly 7 years ago!

I like Dave Ramsey and all, but he makes it sound all so easy, just pick a growth stock mutual fund, one with a good 10 or 20 year track record, and you will be earning 12%. What hogwash in my book. I would love to find someone who typically averages double digit returns every year, and again, even if they do, will most likely lose a very large chunk at some point in time when the market corrects itself.

I guess what I am saying is, which is more preferrable, getting good sleep at night knowing you will be earning an honest 5% return every year, but may be losing out to inflation, or, you are exposed to the markets, have good years taming inflation, but then also risk losing a quarter or a third of your investment portfolio to a bad year or two?

At 32 years of age, I don't worry about that large drop so much because I know I will be in the market for a long time. But what about those retirees who may not have 5 years just to recoup market losses?

Just curious of your thoughts on this.

[flatrock]

Saving goal

Trying to amass $600K min and a paid off mortgage on my primary residence in 10 years at which time I will be 55. Secondary residence is paid off already. Dont want to retire then but I could if I had to with that minimum balance. I will get a nice 40K pension at 60 & then SS. No matter what I can leave at 60 with 5 more years of penison credits & more cash. Right now struggling with the entire stock market scenario. I think Im starting to realize that I am becoming more risk averse . Worry about stuff like a Japan style decade of stagflation. What would this do to my 401K in the next 10 years? 10 years ago wouldnt have thought twice about it. As I get older I dont like to lose what I have accumulated.

[disneysteve]

Ok, so if someone parks a large chunk of money for retirement, say 2 million dollars, and they put it in very low risk investments netting 5% returns on average, you are saying that the $100K earned without even touching the principle isn't going to work long term.

Whether or not that 100K will work long term depends on a few factors like how much income you need in retirement, what inflation does, etc. It might be plenty, but it might not.

What if that same person has 50-60% in the stock market for presumably higher returns, enough to fight off inflation, and the market hits the skids for 2-3 years, and this person loses 20-30% of their retirement nest egg?

Great question, and a very realistic one, too, as you've seen. I don't think a retiree, or someone close to retiring, should have 50-60% of his money in the market. Retirees need to maintain some exposure to stocks to achieve growth and combat inflation, but 50 or 60% at age 60 or 65 is probably too much for just the reason you pointed out. At that age, there simply isn't time to recover from a market downturn.

I like Dave Ramsey and all, but he makes it sound all so easy, just pick a growth stock mutual fund, one with a good 10 or 20 year track record, and you will be earning 12%. What hogwash in my book.

Absolutely hogwash. I agree 100%. I'm not a big Dave Ramsey fan. This is just one reason why.

I guess what I am saying is, which is more preferrable, getting good sleep at night knowing you will be earning an honest 5% return every year, but may be losing out to inflation, or, you are exposed to the markets, have good years taming inflation, but then also risk losing a quarter or a third of your investment portfolio to a bad year or two?

At 32 years of age, I don't worry about that large drop so much because I know I will be in the market for a long time. But what about those retirees who may not have 5 years just to recoup market losses?

A very good question. Ultimately, we all need to invest in a manner that allows us to sleep at night, while balancing that with our financial needs.

[Snave]

To throw a wrench into the equation, a lot of people that are years away from retirement (about 30 for me) have to remember that the 25 x salary rule works on your last years income. If I was to plug that number in now and multiply by 25, then I would be significantly low-balling myself because it would not take in to account the inflation over the next 30 years. This gets mathematical, so if you hate numers, just skip to the next post. None of this takes into account a pension, living on less, or social security (which in 30 years I'm not holding my breathe for anyway) In this example, if I plugged 50K as a salary in and multiplied by 25, it would look like I would need $1,250,000. I would actually need to calculate what 50K would be at the rate of inflation for the next 30 years (and hope my salary stays the rate) and then multiply that by 25. In this case, my salary in 30 years would need to be about $120K to be equivalent to the buying power of $50K today. That means I would need to have saved $120K x 25 = $3,000,000. If I only saved 1.25 million, then what I thought my 50K a year retirement buys me is about 20K in purchasing power.

[disneysteve]

Ok, so if someone parks a large chunk of money for retirement, say 2 million dollars, and they put it in very low risk investments netting 5% returns on average, you are saying that the $100K earned without even touching the principle isn't going to work long term.

I know I just answered this, but I wanted to expand on my answer.

Let's say you determine you need an income of $100,000 from your investments in year 1 of retirement. You've got that $2 million earning 5%. So you figure you are all set. Just pull out the $100,000 income that money generates and you are good to go. Great.

But what happens in year 2? Inflation that first year was 4%, so for year 2, you need to draw $104,000 from your account, meaning your principal gets reduced by $4,000. So the next year, you earn 5% on $1,996,000. Year 3, you need to draw $108,160, reducing your principal another few thousand dollars. Each year, due to inflation, you need to pull out more money than the previous year to maintain the same purchasing power. If your account keeps earning the same 5%, you will be steadily losing ground and spending down your principal. That also means that each year, your nest egg will generate less income because the principal will be smaller, so your spending will reduce the principal even faster.

Now this still might be just fine and dandy because you may not outlive the principal. I just ran these numbers through a couple of retirement spending calculators and with a 4% inflation rate, you could spend $100,000/year for approximately 22 years before running out of money. If you retire at 65, that gets you to 87. That may or may not be long enough. Who knows? And if you retire before 65, your chances of outliving your money increase.

Does that all make sense? I realize it is oversimplified because inflation won't be exactly the same every year and your needs will change from year to year, but this is the basis for the recommendations we always hear.

[Snave]

With the mathematical equation out of the way on my last post, that leaves me with trying to figure out how much I will need in about 2038 when I am looking to retire! Currently we save about 28-29% of our income in retirement (401K, Roth's, etc...) and also some of that 28-29% is in taxable accounts once we hit limits. We also put about 3% in our son's 529. If I want to try to have 100% without ss, or my pension, then my number runs in to the $9,000,000 range based on inflation. Gulp - anyone want to help fund my retirement after you fund yours! The goal would be to hit that, but obviously we could live on a significantly less percentage as seen by our savings habits. Plus, the house would be paid for and currently I have a pension (still holding my breathe on social security).

[Snave]

Disney Steve, it makes complete sense. That's why I put my post about the 25 X salary for those that are younger.

[PrincessPerky]

DS No big..not mad. Actually I laughed when I read it .

[Like2Plan]

To throw a wrench into the equation, a lot of people that are years away from retirement (about 30 for me) have to remember that the 25 x salary rule works on your last years income. If I was to plug that number in now and multiply by 25, then I would be significantly low-balling myself because it would not take in to account the inflation over the next 30 years.

Snave,
This is a significant obstacle to determining how much you need to save. The problem is compounded if you receive significant salary increases towards the tail end of your career. I would be willing to wager that most folks would significantly underestimate what their income is going to be 30 years from now.

[safari]

Snave,
This is a significant obstacle to determining how much you need to save. The problem is compounded if you receive significant salary increases towards the tail end of your career. I would be willing to wager that most folks would significantly underestimate what their income is going to be 30 years from now.

This is a good point. Someone making $50K today will have a salary of over $121K in 30 years if that person gets a 3% raise every year. If the annual raise is 4%, the salary is going to be over $162K in 30 years. A person making $100K today will be making $324K in 30 years with a 4% raise.