Are we doing ok?

[wal23]

I am 38, my wife is 34. Combined we have about $290,000 saved in 401k's and IRA's and we are invested in 90% stocks, 10% bonds. We also have about $60,000 in home equity. We have no debt except for our mortgage and we save about $35,000 of our $140,000 gross income per year for retirement right now. How are we doing in relation to others our age? I am worried we won't have enough to live a comfortable retirement. I want to retire at 55-60 if possible. We have one two year old child and plan for one more so we have to factor in college as well. Right now we save about $150 per month in a 529 plan for our two year old. Any advice or opinions?

[kork13]

Just from a quick look at the numbers, you seem to be doing just fine. My only "critique" might be that you're a bit aggressive (heavy in stocks), but if you're comfortable with your current allocation, I won't knock it. From my quick figures and based on your current savings rate, your retirement accounts will have a total of ~$2.2M in 20 years. That amount will be sufficient for you to withdraw up to ~$100k/year, and have the money last for approximately 30-35 years. I say you're on track, and if you have extra money at the end of each month, the 529 or your mortgage would both be good candidates for it.

[LMA]

You are saving more than 20% of your income which is awesome. As long as you are maxing out your Roth and the matching part of your 401k first then contributing to college plans then you are rocking.

90% in stocks is heavy in stocks even for young people like you. I would have a hard time relying so heavily in stocks but that is an investment choice. As long as you are aware of your risk then it's your choice.

Considering your retirement goals, have you considered investing in real estate?

[swanson719]

I honestly don't think you're investing enough to retire without taking a fairly substantial hit to your standard of living. Let's figure you'll live on 75% of you're pay when you retire. At age 55, you'll be making $230,000, so in retirement, you'd live on $178,000. Adjust that upwards 3% each year to keep up with inflation in order to maintain your standard of living. At you're current rate of investment, your retirement money runs out at age 82. Try FOXBusiness.com - Are My Current Retirement Savings Sufficient? to play around with some numbers on this. I always assume social security won't be there and that you'll live to age 90 at a minimum. If you don't, the kids have a decent inheritance.

You also might want to look into a Coverdell Education Savings Account (ESA). It works the same as a Roth, but it's for your kids college. You can contribute up to $2,000 a year from the time they are born. Would probably be a good idea.

[maat55]

Do you have an sufficient emergency fund?

Do you save and pay cash for consumption items(cars, tv's etc.)?

Your situation is great, but be sure to prepare for future large purchases other than by borrowing.

[jIM_Ohio]

I am 38, my wife is 34. Combined we have about $290,000 saved in 401k's and IRA's and we are invested in 90% stocks, 10% bonds. We also have about $60,000 in home equity. We have no debt except for our mortgage and we save about $35,000 of our $140,000 gross income per year for retirement right now. How are we doing in relation to others our age? I am worried we won't have enough to live a comfortable retirement. I want to retire at 55-60 if possible. We have one two year old child and plan for one more so we have to factor in college as well. Right now we save about $150 per month in a 529 plan for our two year old. Any advice or opinions?

I honestly don't think you're investing enough to retire without taking a fairly substantial hit to your standard of living. Let's figure you'll live on 75% of you're pay when you retire. At age 55, you'll be making $230,000, so in retirement, you'd live on $178,000. Adjust that upwards 3% each year to keep up with inflation in order to maintain your standard of living. At you're current rate of investment, your retirement money runs out at age 82. Try FOXBusiness.com - Are My Current Retirement Savings Sufficient? to play around with some numbers on this. I always assume social security won't be there and that you'll live to age 90 at a minimum. If you don't, the kids have a decent inheritance.

You also might want to look into a Coverdell Education Savings Account (ESA). It works the same as a Roth, but it's for your kids college. You can contribute up to $2,000 a year from the time they are born. Would probably be a good idea.

I think you are doing well. Here is my math:


You earn 140k per year
You save 35k per year

I conclude you spend 105k per year. Is this accurate?

105k of spending means you want about $2,625,000 to retire on.

If you retire at age 68, that means the following would be good benchmarks for savings based on 90-10 allocation giving you 9% returns before inflation.

Age 68 $2,625K
Age 60 $1,313K
Age 52 $657k
Age 44 $329k
Age 36 $165k

You have 290k and are age 38, so within next 6 years you will add 6*25=210k to that and have about 500k at age 44, well ahead of the graph.

There are some assumptions built into this:
1) Inflation is not known
2) You spend less than you earn, so inflating wages (like post I quoted above) is mis guided. Inflation will happen, but the focus should be on the changing of expenses, not the rise in income.
3) As you add more money to your savings, you will see 2 factors helping you
a) the amount you have already saved will grow over next 30+ years to be enough to retire on
b) the amount you add to existing savings now will be what helps you either retire earlier and or beat inflation

If you ever decrease spending (like pay off the mortgage), then change the chart above. If you ever take less risk, change the chart. What I did was this:

Age I subtracted 8 because a 9% return will double every 8 years. Its the rule of 72. divide the interest rate by 72 and the result is the number of years for investment to double.

72/9%=8 years

I took your expenses and multiplied by 25 to create a target retirement amount. This is based on 4% rule (withdraw 4% of assets per year and adjust that for inflation each year... inflation is built into 4%).

So 25*105k=$2.625 M
If your spending drops when the mortgage is paid off, lower the 105k to your annual expenses. If your mortgage is $2000/mo, that means expenses drop by 24k and the new math is this

25*(105-24)=25*(81) $2,025,000

then rebuild the chart

Age 68 $2,025,000
Age 60 $1,013,000
Age 52 $507k
Age 44 $254K
Age 36 $127k

You can see you are almost a full age bracket ahead of the chart if mortgage is paid off.

[wal23]

We do have an emergency fund which totals $31,000 in a money market fund. I drive a company vehicle which is fully funded (insurance, maintenance etc.) by the company I work for. My wife drives a car that has 87,000 miles on it so we are hoping to get another 5 years out of it before buying something else. We will probably have to finance any new car in the future. We have a 30 year mortgage at 4.6% that we are making extra payments on to cut the term down to 18 years (approx. an extra $395 per month) which would put me in a fully paid off home by age 56. That's the plan anyway until we decide we want a different home I am also eligible for my company pension at age 55. My company contributes 6% of my pay annually to this pension fund at no cost to me. I anticipate that will be worth between $1,500-$2,000 a month. I am assuming social security won't be there for me. If it is I will treat it as a bonus. These are details I left out and which may make my situation appear a little better?

[ktmarvels]

My wife drives a car that has 87,000 miles on it so we are hoping to get another 5 years out of it before buying something else. We will probably have to finance any new car in the future.

Why would you need to finance a new car in the future? First, I would recommend purchasing a quality used car rather than a new one. New cars depreciate the minute they are driven off the lot.

Second, why don't you start saving for that car now? When we paid off our cars, we kept the car payment. Each month money was sent to a car fund that can be used for car repairs/maintenance, but the main goal is for us to pay cash next time we need to purchase a car. Even if you put away $200 a month (a lower end car payment) for 5 years is $12,000 not including any interest you would earn. If it turns out that you don't have the full 5 years, then at least you'd have some money earmarked as a down payment for the new car.

[jpg7n16]

I conclude you spend 105k per year. Is this accurate?

105k of spending means you want about $2,625,000 to retire on.

...if retiring today.

There are some assumptions built into this:
1) Inflation is not known
2) You spend less than you earn, so inflating wages (like post I quoted above) is mis guided. Inflation will happen, but the focus should be on the changing of expenses, not the rise in income.

True, but it can be and should be estimated. A normal estimate is between 2-4%, so 3 is commonly used. I don't know about inflating the income, but you absolutely need to inflate the expenses. Although yes, you are currently spending 105k/year.... using the same rule of 72 - the expenses will double in the next 24 years. That would require expenses at retirement of $210k in order to maintain current standard of living.

The 25x guideline is based on final expenses at retirement. Which is pretty intuitive because if you retire with 25x current 2010 expenses, and expenses in 2040 are 210k, you cannot satisfy living expenses on a 4% withdrawal rate. (210k/2625k = 8% just to maintain current lifestyle expenses)

Now after retirement begins, the 4% withdrawal rate accounts for inflation during retirement. But you can't say "if in 30 years, I have 25x today's expenses, I have enough for expenses 30 years from now." That just won't work.

So shoot for 25 * (expenses 30 years from now) = 25 * 210k = $5,250,000

then rebuild the chart

Age 68 $5,250,000
Age 60 $2,625,000
Age 52 $1,312,500
Age 44 $656K
Age 36 $328k

But keep in mind that this chart is for a lump sum growing at 9%. It does not account for new money. You could say that this chart shows how much you need to have before you can theoretically stop contributing (which you shouldn't do).

In order to have the 5,250,000 (if growth is exactly 9%) - OP would need to contribute $10,288 each year to reach the goal. Since current contributions are at $35k, they are on a very good pace to have more than enough to meet the above scenario.

At 7% growth, the required addition is 32.2k/year. (which is being met, and would be even easier if wages rise)
At 11% growth, they don't even need to contribute any more at all, and would end up with $6.64M.

[swanson719]

I inflate the income because most jobs, especially $100K+ jobs, have some level of parity of raises with inflation, if not greater. If wages today were the same they were 25 years ago, and costs had doubled due to inflation, then the standard of living would have to be cut in half, regardless of a shift in expenses. This is why I continue to raise the amount to live on even through retirement in order to maintain parity for standard of living 30 to 50 years out.

Given the extra 6% your company invests for you, that your house will be paid off, and that you have a good EF aside from everything, I'm more concerned about your kids college than I am your retirement. Unless you plan on them joining the military or going to community college, you need to start saving for that. Not to mention helping pay for a wedding at some point in time.

[JDS]

I am 38, my wife is 34. Combined we have about $290,000 saved in 401k's and IRA's and we are invested in 90% stocks, 10% bonds. We also have about $60,000 in home equity. We have no debt except for our mortgage and we save about $35,000 of our $140,000 gross income per year for retirement right now. How are we doing in relation to others our age? I am worried we won't have enough to live a comfortable retirement. I want to retire at 55-60 if possible. We have one two year old child and plan for one more so we have to factor in college as well. Right now we save about $150 per month in a 529 plan for our two year old. Any advice or opinions?

You are doing very well indeed. The median household income in the U.S. is approximately $48,000 per year, so you are far above the vast number of Americans. I don't know the statistics, but most people are woefully unprepared for retirement and are counting on Social Security to make ends meet. You have close to $300,000 saved for retirement with plenty of time ahead to save.

I think an early retirement is very possible, depending on what life style you wish to maintain.

Count your blessings and realize that most people in this country are in far worse shape.

[jIM_Ohio]

True, but it can be and should be estimated. A normal estimate is between 2-4%, so 3 is commonly used. I don't know about inflating the income, but you absolutely need to inflate the expenses. Although yes, you are currently spending 105k/year.... using the same rule of 72 - the expenses will double in the next 24 years. That would require expenses at retirement of $210k in order to maintain current standard of living.

If my expenses for one item go up 5% in one year, I do not increase expenses by 5%, I usually cut 2-6 other placed of budget by .5-50%. Gas prices double, I stop eating out, so one expense had inflation, another expense gets removed. Just because CPI goes up 2.4% on average does not mean expenses went up 2.4%. This is because I cannot increase my income instantaneously when inflation occurs. If I am lucky I get raises once per year, so at the time of the raise I can do one of two things
a) pay off cc debt which I gathered because inflation made expenses more than I earned
b) incorporate it into my normal 20-80 breakdown (savings-spending) because when one cost went up, I dropped another expense.

The 25x guideline is based on final expenses at retirement. Which is pretty intuitive because if you retire with 25x current 2010 expenses, and expenses in 2040 are 210k, you cannot satisfy living expenses on a 4% withdrawal rate. (210k/2625k = 8% just to maintain current lifestyle expenses)

Now after retirement begins, the 4% withdrawal rate accounts for inflation during retirement. But you can't say "if in 30 years, I have 25x today's expenses, I have enough for expenses 30 years from now." That just won't work.

So shoot for 25 * (expenses 30 years from now) = 25 * 210k = $5,250,000

I can control expenses more than I can control inflation, and projecting inflation is tough to do- if CPI went up 2.4% but much of that were things I do not use or do not buy, then 2.4% is meaningless.

I tend to find my budget has negative inflation 1 of every 3 years- meaning 1/3 of the time my expenses one year are LESS than they were the previous year.

The 4% withdraw accounts for inflation from moment withdraws start... if at any time in life you have savings equal to 25X of current expenses, you can retire with a known amount of confidence.

Should be noted if you can get withdraw rate down to 3.3% it has been shown in one study that the money will last "forever" with very little risk of running out of money.

[jpg7n16]

If my expenses go up 5% in one year, I do not increase expenses by 5%, I usually cut 2-6 other placed of budget by .5-50%. Gas prices double, I stop eating out, so one expense had inflation, another expense gets removed. Just because CPI goes up 2.4% on average does not mean expenses went up 2.4%

That would require expenses at retirement of $210k in order to maintain current standard of living.

Like the last line from my post you quoted - I said if they want to maintain current lifestyle, they need to plan for increases in cost.

Your solution to the increasing expenses is to cut lifestyle back... which is by definition not maintaining lifestyle.

[jIM_Ohio]

Like the last line from my post you quoted - I said if they want to maintain current lifestyle, they need to plan for increases in cost.

Your solution to the increasing expenses is to cut lifestyle back... which is by definition not maintaining lifestyle.

LOL its a basic of retirement planning and spending. The third choice in your equation is to reduce saving.

Cost of gas goes up

either
a) go into debt to cover new costs
b) dip into savings
c) lower another bill

I do not consider lowering a bill to be reducing my lifestyle in many cases. If I eat out 1X per week instead of 3, that is making ends meet, not lowering my lifestyle. If I drive on vacation instead of flying (another way to deal with higher fuel costs) that is not lowering my lifestyle to me.

I am sure in an economic textbook that is lowering of lifestyle.

However most people cannot just see a cost go up and pay it- because if they do this they go into debt. Dipping into savings defeats the purpose of having savings most of the time (if costs go up 2% and you always use savings to cover those costs, eventually you run out of savings).

Even you and I and Donald Trump cannot see costs go up and "just pay them". To some degree or another when one cost goes up, another must go down somewhere else on list of expenses. Income is fixed for everyone between one raise and the next raise (money cannot easily be created in between raises to handle higher costs).

[jpg7n16]

Standard of living: A term describing the amount of goods and services that an average family or individual views as necessary.
(Standard of living | Define Standard of living at Dictionary.com)

Lifestyle: the habits, attitudes, tastes, moral standards, economic level, etc., that together constitute the mode of living of an individual or group.
(Lifestyle | Define Lifestyle at Dictionary.com)

But maybe that's just how they define it in the dictionary...

I think this pretty much sums it up:

If I eat out 1X per week instead of 3, that is making ends meet, not lowering my lifestyle.

How that reads: If I change my spending habit from 3x to 1x, that is not changing my spending habit.

I think you're missing that these costs will be in 30 years. Your options of a, b, or c - only consider how I will pay for them today. But you don't have them today... they are 30 years away.

The question is: "how much do I need to maintain the same spending habits in 30 years?" not "how can I afford higher costs today?"

If a family wants to maintain a lifestyle of eating out at a nice restaurant twice a week, flying across country on vacation once a year, driving the car to and from work instead of taking the train, and living in an upscale neighborhood, then you need to evaluate the costs of maintaining those same habits (see definition above) in 30 years.

In general, a basket of identical goods will go up in cost by 2-4%/year on average. And therefore, you should expect the costs to maintain the same habits to roughly double in 30ish years.


But if you want to boycott the gas stations when you retire, that's your choice. "Well 30 years ago, I only had to pay $2 a gallon! I'm not buying more than $25 of gas this week!"

Can you imagine trying to live in today's economy with a "Leave it to Beaver" budget? "Here's $5 for groceries honey, that should last us a while" - well that's what your method will force you to do in retirement. Live on a budget that was suitable for the economy 30 years ago.