How much money should we save? (1 Viewer)

[Ryan Tsang]

First of all, I realize that this is a very open-ended and loaded question, but I'm gonna ask anyway. When to retire, and what type of lifestyle that people want in retirement is probably the biggest factor.
Is there a rule of thumb that apply to the average working class, Bose-buying Joe regarding savings as a percentage of his net income? (assuming he retires at 60, lives to 85, and maintains the same standard of living)

I've heard it should be at least 10%

I look around and see kids with cell phones, new grads with shiny cars, 40K SUVs everywhere, and housing prices going through the roof. Are we spending more than we make? Is this wealth a reality or an illusion?

 

[Scott L]

Great question. The idea of spending a huge chunk of my paycheck towards a monthly payment over several years for a car I couldn't have afforded otherwise scares me. This is why used cars have always appealed to me.

About saving though, my uncle's motto seems to be why save when you can invest? He's very good at it though and has made a very nice living for himself with his know-how.

 

[Mike Voigt]

Great point. I think it is an illusion; I cannot for the life of me figure out how a recent grad from college - or maybe one or two years down - can afford a $250K house, a $50K SUV, 3 other cars including a $50K luxury sedan, and so on. The payments on these must be massive - what, somewhere around 3.5K a month? Basic salary to cover that should be around 130K... minimum; figure 30% taxes, etc., then 45% of what is left over. That's a pretty serious amount of money to make! Doesn't exactly grow from trees...

 

[Garrett Lundy]

Luckily the men in my family tend to be short-lived. Sadly modern medicine will probably eliminate the conditions that lead to my timely demise so I'll have to start saving soon (My fathers generation is the first to live to 60).

Of course how-much I'll need depends on how much a house costs in 40+ years. But I only need to save enough to cover from 'Retirement - Dementia'. Seeing as how Alzheimers and other diseases tend to be the #1 reason otherwise healthy elderly persons get placed into full-time care homes, which at $6000+/month(!) tend to make people very poor very fast, and then it falls onto the government to worry about me during the period of 'Dementia - Death' as being broke will get me onto Medicare/Medicaid.

So I figure if I retire at 65, and debilitating disease or disorder finacially cripples me by 75, I only need enough savings to last 10 years. Thats one new car and a single-wide in Florida. Except global warming may make Maine the new Florida for retireing Gen Y'ers.

 

[BrianB]

Quite simply, they don't.

 

[Evan S]

This is the key factor...how long you expect to live and at what age you want to retire.

Rule of thumb is that you need 80% of your retirement year salary level to maintain your standard of living in retirement. The longer you expect to live, the more money you need to have prior to retirement for obvious reasons. So, say you retire at age 65 and expect to live to age 85. Assume you make 100K a year at retirement. You will then need 80,000 a year in retirement to maintain your standard of living. (mortgage is usually paid off and other expenses fall, but you may do more traveling in retirement so that takes money).

20 years of retirement and 80K per year means you have to have about $1,050,000 at retirement saved, given historical inflation rates of 3.5% annually and a growth rate of your money of approximately 8%

Personally, I think anyone can live within their means and save 10% of their salary into their 401(K). You'd be surprised how easy it is if you start low (say 4%) and increase your percentage by 1-2% every time you get a raise. I've done that throughout the years and currently I'm saving 15% of my salary and trying to prepay my mortgage somewhat. Of course there are sacrifices to be made. I drive a 9 year old car with 121K miles on it and my house is a modest 162K, 1400 sq. ft. ranch.

Saving takes discipline and a lot depends on your personality. A lot of people live for the here and now and don't WANT to save.

 

[Ryan Tsang]

Garrett: I can't tell if you're kidding or not. You're relying on the gov't to take care of you?

 

[Ryan Tsang]

Evan: You're a Whalers fan?!?? I can't believe I'm not the only one! Of course, now it's Carolina.

 

[PhillJones]

Well, you can always shoot yourself once you turn 60. Then you don't have to worry about retirement.

Seriously though, it's brutal that we think of longevity as a bad thing in this country. I guess it's because you're pretty much on your own financial wise.

Here's my doom-mongering prediction of the future.

The cost of healthcare is only going to go up. We're already prescibing people things like Lipitor for high cholesterol, as a preventative measure. The number of these types of preventative drugs is only going to invcrease over time as we identify all these statistical risk factors for things like Alzheimers and develop drugs to slow down the progress of the disease or reduce the risk.

By the time todays 20 or 30 year olds are 60, they'll be on something to ward off heart disease, something for AD, another thing for arthritis, something else cancer of something or other. Who's going to pay for all of these medicines? They'll all be proprietory, and driven by market forces so will cost a fortune.

The rise of the 'middle class poor' is already starting, poeple who were middle class but exhaust all their savings on nursing homes and end up dieing when they run out of money, thier insuranbce company gives up or medicare cuts them off.

The long term care/medical industry is going to hit a wall in the next couple of decades. We'll either have to have a medic underclass or some kind of redistribution of wealth to look after the elderly in society.

 

[Drew Bethel]

Forget about retiring at 60 0r 65 unless you're a maniac investing a lot of your income, living on little to nothing, and socking away 15% or more of your income in a 401k. And by doing this your life sucks in the present for an uncertain length of life in the future.

Most people will need some kind of supplemental income when they retire - maybe a part time job. Pensions are on the way out...just ask United workers.

 

[John Alvarez]

Drew,
I guess I'm in a diffrent boat than the norm. I'm 43 and have been with the same company for 23 years. I have a great retirement and 401k built. I have a house paid for in Miami waiting for me to retire plus the house I built 2 years ago that has gone up 100k already. By the time I retire I should have quite a bit of equity in it.

 

[Joe Szott]

Ryan-

Good thing you are thinking about this now, instead of when you are 50 and looking at an empty savings account. Rule of thumb would be 10%, if possible sock away as much as you can as early as possible.

If you live with your folks, or have cheap rent and make good money on the job, 20-25% for a few years can shore up a ROTH IRA or 401k plan very well. Remember that in these tax defferred (or exempt) savings plans, you have two things to invest: money and TIME. A little more money given a lot more time can in the end give a much greater return than a lot of money given a short time. The moral: invest as early as you can in retirment and you will have less and less to worry about as it approaches.

When I started work in a career job (~23), I jacked my 401k contributions to 15%, even though I was dirt poor and had to pass on new cars, bigger apartment, whatever to do it. Now I'm 32 and have lowered my 401k to 7% and dump some extra in a Roth IRA. Both of those accounts together are close to $70k and I'm still 30+ years from retirment.

It's easy, just commit to saving early and get used to not having that money to spend. Good luck man.

 

[Brian Perry]

I saw a scary stat the other day in the WSJ -- over half of the people at 60 years old (i.e., nearing retirement age) have less than $10,000 in savings for retirement. In other words, basically nothing. They obviously will be living off Social Security/Medicare and working until they drop dead.

The future isn't pretty...the frustrating thing is that the people who do plan and save will probably be penalized in the future, because as the programs come under strain the only way to keep them afloat will be to do means testing.

 

[Philip Hamm]

I think the government sponsors this website http://www.choosetosave.com/ . It may have some answers. Asking a qualified Financial Advisor is what I would recommend.

 

[JonZ]

"I cannot for the life of me figure out how a recent grad from college - or maybe one or two years down - can afford a $250K house, a $50K SUV, 3 other cars including a $50K luxury sedan, and so on."


People dont seem to mind being in debt. I cant stand it.
I was out of debt for 3 years and loved it.
Now owe 7k for left on my my car and 119k for my house, but
I just make it every month right now.I have a simplistic look at life and have no interest in "stuff". HT is my one indulgence. Between the House and bills it leaves me very little for DVDs, and basically I really dont save. I need to make more $

I dont plan on being around after 70 so hopefully saving for retirement wont be a issue

 

[Mort Corey]

Of that, I have no doubt. Someone with cash in the mattress will be means tested differently than one with banking or stock products. Both will be ripped by inflationary factors that exceed government CPI figures by large margins (they lie). The rules regarding tax shelters such as 401k's, IRA, etc can be changed by a whim of Congress (they lie too).

Mort

 

[Leila Dougan]

I don't have any words of wisdom since I'm trying to figure this all out. So far the only real answer I've gotten to the "how much to save" question is "as much as you can". Well. . .I hope that is enough for me. I come from a family of longevity - My grandparents are well into their 90s yet still live alone, go out shopping, travel on vacation, etc. Of course they have family nearby for occasional help, but for the most part they are all very independent. Heck, one grandmother didn't retire until she was 70, not because she needed the money, but because she enjoyed working. After retiring she continued to volunteer there for the next 10 years!

Anyway, I'm 25 now and only have a 401(k). It's alright, but I'd like to open an IRA for additional savings since I'm already contributing the max to the 401(k). I'm unsure, exactly, how to go about this. Do I get a financial planner first? Or what? I have a pretty good idea of what I need to do but putting my plan into action is where I'm having difficulty.

I find it very difficult to maintain a modest lifestyle when everywhere I look, my peers are spending extraordinary amounts of money on material posessions. I'm not materialistic so I can manage, but considering I'm a member of HTF, I do like new shiny electronic gadgets. I try to keep my spending under control and don't get caught up into consumer debt, but it takes thick skin to deflect the comments about why I'm driving my 8 year old Cavalier when I could afford something nicer. Afford, sure, if I didn't contribute to my 401(k) just like they don't. Delayed gratification just doesn't seem to be a strong component of my generation.

 

[AjayM]

You're joking right?

$1k of an initial deposit and $2k per year at 10% (2% lower than the average of the stock market over the long haul) will give you around $1.1M by the time you're 60 if you start at the age of 20. That's assuming you never add more than $2k/yr to the mix (you most likely would increase that yearly contribution as your salary/career grows). At that point you should be able to live off the interest without much of an issue.

$2k is hardly giving up everything in your life. It hurts just a little bit in the beginning, after that it's clear sailing.

 

[GordonL]

Not really necessary to get a financial planner unless you don't want to do any research yourself. If you're not adverse to risk, I would suggest you open an IRA account at one of the major brokerage firms like Schwab or Fidelity. You can have a Traditional IRA or a Roth IRA or both (depending on your needs and tax situation). Once you have your accounts set up, you can buy most any mutual fund with your IRA contribution. Both have pretty good mutual funds researching tools so you can pick and choose according to your own tolerance for risk.

Or, if you're adverse to risk, consider buying IRA CD's at your bank. The rate of return won't be as nice as with mutual funds but it is secure. At your age though, you should go the mutual funds route. Historically, the rate of return for stocks is a bit higher and stocks are for people who have long time horizons such as yourself.

Everything you need to know about IRAs

 

[Leila Dougan]

Thanks for the advise, GordonL! I definitely don't mind doing my own research, especially since it'll save me some money from having to pay someone to do it for me. I'm not too adverse to risk and I know that it's the long-term trends that are most important. I've got the time so I can weather short-term fluctuations if it's likely it'll go up in the long-term.