I just turned 40, and as now, really have no retirement savings. Working full-time until the day I die at age 98 is not a realistic option, so I am seeking y’alls advice on where to start…. all of my direct ancestors have lived into late 80’s or 90’s, several over 95. so I’m looking at 20-30 years of retirement.
Say if I want to retire at 65, how much should I be targeting to save over the next 25 years….I average about 45k per year now.
Is there a general rule of thumb, i.e. some percentage of salary that should be put away for retirement — also thinking of catching up on the last 22 years of work where I have not paid into a plan.
Replies
That fact you arre starting to think about this now puts yopu a few years ahead of two thirds of the population. Congrats!
There are a number of financial management sites with software to help you answer this Q.
Google for: (+ retirement)
Kiplingers
Money Magazine
Charles Schwabb
Some of the Mutual fund families too
Excellence is its own reward!
The simplest approach I've seen is as follows:
I think the general estimate is that most people can comfortably live on about 50 - 60% of their working income, after retirement (some much less). The trick is to figure out what you're paying for now that you won't be then, then calculate how much you need and how long you have to accumulate it. Warning: very rough math here!
Of course, this doesn't take into account interest on investments or anything like that, just the bare-bones numbers.
Hope this helps!
Inflation is lower now than it was 20 or 25 years ago, but it doesn't show any sign of going away. Assuming you're talking about investing your retirement money and not just stashing it in a mattress, :) you need to think in terms of rate of return after inflation.
Good subject for a thread. I don't think you're too late either. Our generation is generally responsible for its own retirement - few of us outside of state/city/fed employees will have pensions. Look at the steel workers.
>Add an estimated amount for health-care (e.g. private insurance).
I would love elaborations on this. It worries me. I don't expect to be eligible for medicaid until age 70, and likely will be ineffective in work force after age 60. So what in the world do you do for 10 years with no health insurance? Lose said retirement savings? I can't go to work for myself now because of this issue.
>Of course, this doesn't take into account interest on investments or anything like that,
I guy I unfortunately partnered with years ago had a big thing with looking at it as doubling-periods. He was a lot older than I. Savings you have typically double in a period of 5-7 years, but you can calculate out how long it takes based on different returns, etc. So you can do an excel spreadsheet showing what you plan to put in each of those next 25 years, and what effect a given doubling rate will have (7 to be safe) and figure out your retirement savings. I'm sure someone more sophisticated would have software to do that.
Anyway I would put 10% a year into retirement savings and make whatever sacrifices it takes to do that. It's a start and probably what an average person can afford. Fully fund your Roth IRA. We do each year $2,000/partner. Investigate tax-deferred retirement savings options available to you. Best of luck.
remodeler
If you want to get a rough idea of how long it takes money to double, just use the "Rule of 72". Take the interest rate you expect to receive and divide it into 72. The answer is approximately how long it will take your money to double. For example, if you think you can invest at 10%, your money will double in a little over 7 years.
Of course this is of limited use when calculating retirement savings because it assumes you put a lump of money away all at once. If you are familiar with Excel, I can walk you through the functions you need to use to look at any number of possibilities in terms of rates of return, years of investing, years of withdrawals, etc. In fact, if there is enough interest maybe I can make up a blank template and post it somewhere people can get to it.
I think the biggest mistake people make is overestimating the return they will get on their savings. Part of the is because they ignore inflation (which was already pointed out), and part is because most individual-investor experience with the market has been tainted by the big runup in the 90's.
I did a google search on"retirement calculator" and here are a couple that seems pretty good just rushing through them.
http://www.asec.org/ballpark/ Good one!
http://www.usnews.com/usnews/nycu/money/moretcal.htm kind of complicated.
just heard something interresting on the financial part of our local news yesterday....
finance guy said if U have a kid just old enough to work....age 14....that U can usually open a roth ira in their name.
If the kid puts away about $2K each year.....and say by the time he's 20 he has $10K in there....at a low-ball rate of return....and with out investing any more after that...and leaving it all untouched....
They'd have well over $200K by the time they turn 60 yrs old.
Not bad....I'm seeing a way to pay my kid part time when he's old enough!
JeffBuck Construction Pittsburgh,PA
Fine Carpentery.....While U Waite
Jeff,
You're forgetting to account for inflation. If you have already, disregard the following points.
Using the calculator at http://eh.net/hmit/compare/, I find that $10k back in 1963 is comparable to $57,800 in today's terms. If your son worked from age 14 to age 20, he would (assuming that inflation rate is fairly constant), that would be a contribution of about $8300 per year.
I know that the inflation rate for the next 40 years might not match that of the past 40 years, but it seems to me that many people fail to discount that huge effect that past inflation has had. You often hear stories of how someone bought a plot of land for $3000 in '58, then sold it for a huge sum last year. I think many do not regard the effects of inflation, and some are probably paying for that mistake out of their own pockets.
Jon Blakemore
just saw the quick blurb at the end of the news.....but I'm pretty sure the tv finance guy said someting about that being adjusted for inflation.
he also made the point twice about that projection being based on a fairly conservative interrest rate.
I had the same thought though.....in 50-60 yrs...what's +$200K gonna be worth.....then thought...worth more than not having the +$200K sitting around somewhere!
JeffBuck Construction Pittsburgh,PA
Fine Carpentery.....While U Waite
Jeff, Another example of the power of compounding that I read is that if I had started investing when I was only 20YO with only $30/mo (cost of a daily cup'o'java) and continued it 'trill I retired, I would be a millionaire..
Excellence is its own reward!
Glad ta hear you're thinking about it. I didn't start until I was 36, and wish I had started sooner.
The only rule of thumb I know is that you can't save too much. We had a friend who is an investment guy figure out about what we needed to save per year for retirement. We managed to do that for 4 years, but then hit some rough times. We haven't been able to save that much for a couple of years, and it doesn't look good for the near future. (Unless the spec house sells)
Talking to an investment guy like we did might be a good move.
Best of luck.
If you can remain calm, you just don't have all the facts.
Around 10% off the top b-4 taxes seems to be a good figure. A little less or a little more will work. Like the others say...... You are ahead of the usual bunch if you start NOW.. I am 63 and have enough to live on now and it makes me feel real good. If your kids are out and on their own that helps a bunch also. Also sit down with your wife and map out what your expections (realistic) are. Then go for it! You won't be sorry.
This really doesn't have to do with retirement savings, per se, but everybody here in Breaktime knows how to build/fix up houses and that can count for a lot.
If you can save up some money and buy a property that needs rehabbing, and you can do the work yourself, and you live in the house for two years, you can sell it and the capital gain (250K for an individual, 500K for a married couple) is tax free. Doing that now can get a very large amount of money set aside for retirement that will be worth a lot more later on even with conservative growth rates.
In fact, someone who is talented can probably make more, per year, doing something like this than working a real job ... the only kicker is that you have to have the funds to live on in the meantime.
John
Yeah, I agree with johnhardy. It's important to not only plan for retirement, but to consider where you can get the best return on your investment dollar. The stock market is one way, there are others.
You might find "Nothing Down for the 90's" by John Allen interesting reading.
You also might try looking into FHA 203k rehab loans. You can borrow 80% of 110% of the expected value of a building to buy it and rehab it - basically pay yourself to do the rehab work if you want to, then rent the building out to pay the motgage and provide the interest on the money you originally invested. The returns on your investment can be impressive.
Of course, borrowed money is not taxable. So say you accumulate a certain amount of real estate through these rehab loans over your working life. When you get ready to retire you go to the bank, borrow every penny you can against the equity, and give the properties to your kids. They get the property with no down payment and you get all the accumulated equity as a cash lump, tax free.
This is just a simple plan, but it could work. I hope.
Jim...
you trying something along those lines?
How's it working so far.....any major hick ups in the road.
In that senerio......who covers the new equite loan?
The kids...or did we already make enough to pay it off cash somehow?
That last part threw me.......it's late.....and I'm slow enough during the day!
We're meeting my wifes financial planner boss on Fri....going to go over our retirement plan....get some basics set...and that's one of the goals I'm going to set.....
a fair amount of rentals and/or rehabs in the next ..say...10 to 15 yrs. Gotta see if we can set up some sorta account that we add to with an eye for the long future...but one we might be able to borrow against...or dip into....in the near...10-15 yrs..future...to start building the empire.
JeffBuck Construction Pittsburgh,PA
Fine Carpentery.....While U Waite
Yeah, that's part of our retirement plan. Seems like it will work out fine, but we'll see.
The kids will assume the debt. The rental property we own now is already returning about 12%/year cash on our initial investment, plus pay the TIPI (taxes, insurance, principle, interest). As rents rise with inflation that will only increase through time. Even though the properties will be heavilly mortgaged when the kids get them, a similar rent/TIPI relationship ratio should exist, which means not only will the properties pay for themselves, they should provide at least a little income per month. If it turns out not to be worth it to manage the properties, the kids will be free to sell them.
We invest other ways too. The thing we are doing with the best potential is the build, move into for 2 years, sell and realize the taxfree capital gains. We're not looking forward to all that moving, but that seems like another good opportunity that fits our situation.
Trying to focus on enjoying today, the journey, while still keeping an eye on the future. I am a VERY lucky man.
Hey Everyone:
I think all here have good ideas, but I'd like to stress one point that has worked well for me, and that is to get control of what you spend today. This can be done fairly easily using something like Quickbooks or Quicken or whatever, but can also be done with a sheet of paper and pencil. I'm younger than a lot of you, but I have learned that this is invaluable in my situation...
When you find out what your NECESSARY expenses are (this does NOT include the new Harley that you want to buy), figure out a budget. In your budget, first take out the expenses for the things that you MUST have (mortgage, utilities, etc), and then take out some amount that you want to "put back" each month. This step requires that you kinda know what you want to have in the end - use one of the financial calculators on the web...
Then, you can take what is left over for the nice things in life that you WANT, not need. Take a hard look at these expenses, because they are the ones that you can control.
I haven't looked at these calculators too much, but this looks like an interesting site for financial calculators (there are a bunch of them):
http://www.financenter.com/consumer/#budget
Take Care,
jamie
To build on the budgeting approach, something I've found very helpful is to have all my bill payments (rent, loan, phone, etc.) and my savings contributions (RSP and Mutual Fund) come out of my account automatically on payday - whatever's left is my "living on" money until next pay. It keeps things consistent and it's easier to control expenses, not to mention being able to see "down the road" where my finances will be at the end of the month, three months, etc.
Something to consider, too, is having a "fun fund" - I've set up a mutual fund that gets $25/paycheque, and that's set aside for vacations and bigger-ticket items. It's a small sacrifice on payday, but can add up to something really worthwhile and/or memorable over a few months. It's also a great way to avoid going into credit-card debt for the "luxuries".
Probozo,
Congrats on recognizing a problem. Yes, you're late, but you can make up.
We CFP's use a rule of thumb in our guestimates of 70%. This means you will most likely need 70% of your current income after you retire. Since you're doing 45K now, this means figure on about 31,500.
To avoid confusion about inflation factors (not ignoring them), let's talk in terms of today's dollars only. And let's understand EXACTLY what your retirement age will be. Since you just turned 40, according to Social Security, your normal retirement age will be a few months short of 67. They changed that a few years back.
Where's this 31,500 gonna come from? Social Security can provide a good amount of that. Refer to your most recent statement that you should have received (and convert that number to an annual amount). Use that number and subtract it from the 31,500. The remaining (probably around 15 to 20,000) is what you'll have to provide with the savings from here until they pack you up. Not paying into Social Security? Get over that issue real fast. All of you playing that game. It's dangerous.
Now you have about 27 years to create a pool of assets to generate that amount. That pool of assets should be figured upon to generate 6% in income. If the economy continues to stink, that number should go lower. Don't EVER use a higher number. Even if you are able to generate a higher income from the pool, the excess over 6% must be reinvested to provide an inflation factor.
6% of 333,333 is 20,000. So your targeted asset pool (in today's dollars, not inflation adjusted) is that 333,333.
Not to sound condescending to some of the other posters and their interpretations of the calculations, but this is not an easy Excel spreadsheet calculation (it can be done, but I doubt if anyone on this board knows how - I won't even attempt it in Excel and I can manuever those spreadsheets quite easily). Time Value of Money calculations require a special programed calculator AND training in understanding what's being calculated and how. The easiest way of doing them is with the HP 12C business calculator.
But the most important factor in determining your answer is: What is the most accurate rate of return on this investment pool over that 27 years and beyond? This is where the blue smoke and mirrors come into play. No one knows what that rate of return will be. What has become expected over the last 10 to 15 years will NOT occur over the next 10 to 15. Expect something lower. Especially since this number also has to make up for dumb investments (we've all made them) where you lose.
My take? To be on the safe side, I would offer you an educated guess of 5%. And this is based more on an equity portfolio that fixed income.
And the inflation adjustment factor being skirted? Add another 2.5% So your pool of assets will have to generate at least 7.5% on average from now til forever. For those that are saying, "that's a joke, I can do better than that," be my guest. This is where people get in trouble. Trying to compete with professionals. (In any business.)
Anyway, $319.10 per month for the rest of your working life (using the above assumptions) will generate that pool of cash. That's $3829.30 per year, or 8.5% of your current income.
My common rule of thumb is to save 10% of your income. The other 1.5% needs to go into another pool for goals sooner than retirement.
Someone said that it is impossible to save too much in your retirement plan. That's not true. It is possible. Too much in one's plan can trigger a number of other consequences. The most significant problem with saving too much is that it starves something else in your current life. The wife doesn't get her share, the dog doesn't get decent food, you can't afford new tools or trucks. Just this past week, I had to get a young couple to pull back on how much they were stuffing into their plans. Between their 401's and Roths, they were putting away 24% of their income at age 27. They were making good money ($115,000 per year), but they had other goals of children, bigger house, etc. Such large amounts being saved in inaccessable locations inhibits their other plans.
Someone else mentioned real estate rehabs. This sounds like a good idea for someone like you. You will have far more control on what happens that way - and no one else to blame if it doesn't work.
Best wishes.
Guys
I got 5 years and a wake up then Im done. Ill go do sumthing else but Im done with my present career...
Darkworks: We fight for Peace