How much in retirement savings?

[pao2310]

My husband is 30 and I am 26, how do I know how much we should have ALREADY saved in our 401ks and IRAs in order to be on track?

Currenty we only have access to IRAs not 401ks, Is the rule 10% of our salaries go to retirement, is that before or after taxes?

We are planning on retiring at 60.

Thanks!

[LivingAlmostLarge]

As much as you could have saved. That's a rhetorical question, the more important question is what do you need to save? Not what should you have saved.

[pao2310]

I want to make sure we are on the right track.

[jIM_Ohio]

My husband is 30 and I am 26, how do I know how much we should have ALREADY saved in our 401ks and IRAs in order to be on track?

Currenty we only have access to IRAs not 401ks, Is the rule 10% of our salaries go to retirement, is that before or after taxes?

We are planning on retiring at 60.

Thanks!

The 10% guideline is based on gross pay. If you cannot afford this, work on a plan to start at something less, and increase by 1 or 2% every 6 to 12 months.

How much to save? I would suggest know your annual expenses (like 40k) then multiply that number by 25. 25X expenses is a 4% withdraw rate. A 4% withdraw rate would allow retirement to last between 40 and 60 years.

How much now? I use this checkpoint. If you are reasonable at math, it should be easy (or at least not difficult).

1) Know your annual expenses. This is amount you spend each year on taxes, shelter, food, utilities and other expenses (like travel, cars, fuel and many unrelated, but common expenses). 40k is a number I see used often for examples, but make sure your number is applicable to your situation.

In this example I will use 40k.

2) multiply the number in 1) by 25 (to assume a 4% withdraw rate).

In this example that number becomes $1 Million

3) pick an age to retire. I suggest using 68. Keeps the end result with less sticker shock.

In this example I will use 68.

4) list the amount in 3) and 2) side by side

age 68 $1 million

5) subtract 8 from the age and divide amount by half.

age 60 $500,000

repeat until you hit current age

age 52 $250,000
age 44 $125,000
age 36 $62,500
age 28 $31,250
age 20 $15,675

6) conclude based on chart. If you had $15,675 in retirement accounts at age 20, then I assume you are close to having $31,250 now. More than likely this is not true (who sets aside that much when they are teenager?).

Your are likely close to the age 28 mark now (being 26). The question is could you set aside 15k each of next two years to reach the chart milestone?

If not, then look at age 36 milestone ($62,500) and realize that is setting aside only 6k each of next 10 years.

So the goal is to set as much aside as early as possible to get ahead of the curve.

This table used the rule of 72. The 8 years comes from 72/9. Take the percentage return (9%) and divide into 72. That is number of years (8) it will take to double money (8 years in this case). If you got a 12% return, money would double every 6, if you got a 2% return, money would double every 36 years.

A 9% return requires some risk (I would term risk profile as moderately aggressive)- probably 80% stocks and 20% bonds or 100% stocks.

The assumption is made also that you need 40k of todays dollars. In 20-40 years when you retire, the need is much higher. But this lets you know if current savings can replace current income in some date in the future.

[pao2310]

Jim - Thank you so much! I love this! Thanks! We are not on target but not as far behind as I feared!
Now I have a better idea how to prioritize between retirement savings, emergency fund and credit card debt whenever we get a bonus/tax return.

Thanks!

[LivingAlmostLarge]

It is not really right to think about savings in terms of what you have. 3years ago we had $2k in retirement. Now we have over $80k I think, so where you are and where you are going is completely different.

Just because you have nothing, but planned on saving and do it then great. I would have seen the 28 year old number 3 years ago and scoffed. Especially knowing our plans to save quickly.

But we had what? $2k? So it doesn't make sense to try to figure out what you need to have at 28. What you need to do is figure out where you are going and how to get there.

[Seeker]

Jim - Thank you so much! I love this! Thanks! We are not on target but not as far behind as I feared!
Now I have a better idea how to prioritize between retirement savings, emergency fund and credit card debt whenever we get a bonus/tax return.

Thanks!

Actually, while what you need for retirement depends on expenses, 30 years from now is a long time away. Expenses don't rise at a consistent rate, nor should your savings stay at one rate.

If you use Jim's numbers, you will have to adjust them constantly. Otherwise, you will find yourself short of funds at some point.

There are things not really built into the numbers either. If in retirement you plan to travel some or move from the current place of residence... etc. the current $'s spent will not help you in saving for other potentials.

If your CC debt has a higher interest rate than your savings are earning, it may be more cost efficient to pay off your debts first.

[pao2310]

Of course its important to know where you are going but its silly to keep moving forward without looking at the odometer to see how much you have traveled already.

It is important for me to know where I stand today because we are expecting our first son next month and I am worried I wont be able to catch up on my retirment savings once I get the extra expenses of raising a child like daycare, formula and diapers.

[Seeker]

Of course its important to know where you are going but its silly to keep moving forward without looking at the odometer to see how much you have traveled already.

It is important for me to know where I stand today because we are expecting our first son next month and I am worried I wont be able to catch up on my retirment savings once I get the extra expenses of raising a child like daycare, formula and diapers.

Well, it sounds as if you are going to have more expenses than you've been used to before.

Of course its important to know where you are going but its silly to keep moving forward without looking at the odometer to see how much you have traveled already.

To borrow your analogy, you can continue to travel forward and put on the miles on the odometer if you blindly miss a turn as well.... you still won't get where your going if you only look where you're at.

Jim's numbers are a starting point and not stationary. I agree with LivingAlmostLarge here... what's your target? It's not what you have now. Even your target numbers will change as your environment changes.

[pao2310]

Seeker - I agree with you regarding paying high interest credit cards first.

My plan for 2008 is that in addition to our monthly automatic debits, we put all bonuses/extra money we get into our emergency fund until we have 3 months of paychecks saved minimum, then payoff our credit card (5% APR) and once that is done concentrate on retirement.

As far as retirement, we dont have access to 401ks at the moment so we are just saving enough each month to meet the annual limit.

Hopefully after the summer my husband will be able to start contributing to his company's 401k and my plan is for him to save the max the company will match. Because of the baby coming up I dont know yet if we would be able to mantain saving the max in his IRA.

[jIM_Ohio]

The chart presented is dynamic, and step 1 was to identify current expenses.

This is for 2-3 reasons

1) current expenses will change. One year roof will need to be replaced, another year is a trip to Europe, another year is heart surgery. At age 26, these expenses are not in the budget, so not accounted for. But over time a person will know "there average yearly expenses" and that is number most retirement board suggest using. People do need to buy a new car in retirement... so that cost needs to be accounted for in spending.

2) If the amount saved is equal to 25X current expenses past the age of 50, a person can retire with a high degree of confidence (assuming the expense numbers are accurate).

3) Knowing the value of current contributions is an important aspect of retirement planning. The chart did not say $1 M is the goal, it used $1 M as the amount needed to cover todays expenses.

My list of assumptions also commented on inflation (not accounted for), and many many other things. The OP asked for a check point, and I gave the one I used with the assumptions therein.

I agree with LAL. Early on that chart means little (when you are at zero assets saved). I am 11 years into saving, and am barely short of my 9% milestone to retire at 60. A person with a higher savings rate at a young age will turn that chart into a history lesson, but I also think many of the conservative types on this board may end up oversaving, or take on less risk than 9% returns as well.

**edit**
the other huge fourth assumption is the age. As a subsequent poster pointed out, time is the biggest factor in compounding. In my example to OP I use age 68. In my spreadhsheets for me, I use age 60 and would like to use age 52, but not there yet. I am just short of age 60 milstone for 9% returns (and have the milestone if returns are 12%). Meaning the reason I save is to retire earlier than 60 and/or account for inflation, but my current savings will easily replace current expenses based on this calculation.

[maat55]

I'd use a savings calculator and enter what you have and a number you can put in monthly and an estimated rate of return. Keep adjusting the numbers to fit you. Also the number of years you have to save.

[scfr]

pao2310 - Here is a really quick & easy way to get started:

Click on this link:
Fidelity Investments

and then click on MyPlan Snapshot and answer the questions when prompted.

As others have explained, "quick & easy" certainly won't tell you the whole story, but you need to start somewhere. Once you have a rough idea of where you are, then you can begin factoring in all of the variables and tweaking.

[An amusing aside about the Fidelity MyPlan Snapshot: After I plugged in my numbers, both the "best case" and "worst case" scenarios showed that I would exceed my goal handily. But the narrator's voice said "Ooh - It's short. How fun." Are they referring to the fact that I'm currently short even tho I'm on-track, since I have around 20 years to go until retirement? Or did Fidelity assume everyone would be short and play the words "Ooh - it's short" for everyone? Would they tell Warren Buffet "Ooh - it's short?" I think so. Just for fun, I plugged in some fake numbers ... 65 years old, making 40K, have 3mil saved already. Sure enough, it told me I was short! LOL So, my suggestion is to look at the NUMBERS and ignore the one-response voice.]