I'm curious how people have set their retirement savings goals. To-date I've saved up to the threshold pre-tax, and whatever I can beyond that. But I've never crunched the numbers. DH and I have been talking lately about what having another kid - or taking a more interesting but potentially lower paid job - would do to our long-range financial goals. I know that the general recommendation is to save 10-15% of your pre-tax income, starting in your 20s, with the idea that this will allow you to maintain around 85% of your monthly income given the typical retirement age and typical lifespan. Obviously this is a lot to save, especially when there's also daycare, mortgage, etc, but at the same time the maintaining 85% of income doesn't account as far as I can tell for things like high medical expenses or long term care, which could eat savings quickly and go way beyond the part of our income that goes to things like daycare, which obviously won't exist in retirement. With the state of our government it is hard to know what (if anything) medicare will look like in 30 years, and so many people end up in very low quality nursing homes or burdening their families. Not sure how well long-term care insurance can insure against this...Are you planning to save an additional amount for this, and how much? Anyways, just interested in how people have thought through long-range savings goals...
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I would recommend meeting with a Certified Financial Planner. This is entirely dependent on your individual goals and situation. I would not just aimlessly save as you have no idea if you are saving too much or too little. You also have to factor in other goals (education, etc) and play that balancing act. A good planner should be able to help you prioritize and make a plan. You can create an ongoing relationship or just find a planner who will do a one-off plan for you - often planners offer this service complimentary with the understanding that you may eventually become a client.
Your statement regarding what you contribute didn't make sense to me. For clarity's sake, the maximum you can contribute to a 401(k) is $18,500 annually. I've noticed a lot of times people saying they are "maxing out," but mean they are just taking advantage of the employer's match (usually between 3%-6% of their income). There is a huge difference.
ETA: Whoops, didn't answer your actual question in relation to my specific situation. We met with a wonderful CFP and have very specific marching orders regarding saving for retirement and education. We save exactly what she told us in our accounts and the excess goes in an account (that doesn't have restrictions) towards future unknowns.
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We have thought about retirement a LOT and trying to actively plan for it.
Rather than just using a percentage of our income savings target, and general numbers like saving x% *should* lead to y% of our current income.... we said ok, in retirement, we want to maintain our current lifestyle, so how much will it take to do that. We determine calculate our running monthly average spending (including mortgage - assuming that mortgage payment will probably turn into health insurance payment or something of the sort) to see how much of a "salary" we need to be able to deduct from our retirement savings. My husband is very much into investments and tracking, so he has a huge spreadsheet with all our investments and it's performance to date, and then there's a part of the sheet that shows projected performance based on past average, based on market average, and whatever else.... along with years and target withdrawal dates and what not to see at what age, based on what projection, we can start to withdraw what percent to maintain our lifestyle, while maintaining growth in the investments. Our long term goal is to have enough invested so that even with the withdrawals required to maintain our lifestyle, to still have the portfolio grow and not run out... and to be able to leave that to our kids. -
@LBee: Thanks! I'm sure seeing a planner is worthwhile, and we definitely will, but I'd also like to have a pretty good ballpark number from my own calculations. I don't entirely trust a planner - who knows if we've really found a good one - with such a big thing, and I've heard so many horror stories about them pushing investment and insurance products with high fees that they received commission for.
@PurplePumps: This is great, we need to make something like your spreadsheet... By saying you still want the portfolio to grow and not run out, do you mean that withdrawals will be less than the rate of return - i.e. so basically living off the interest - or just that you aim not to completely deplete it given conservative projections about life expectancy, etc.
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@periwinklebee: The withdrawals should be less than the rate of return. Or at least the average should be so that even in a down market, the portfolio should be able to recover and ideally, we'd never deplete it no matter how long we lived.
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@periwinklebee: CFPs are bound by a fiduciary standard so if that did occur they could be reported to the CFP board and lose their certification. Those stories usually have to do with people utilizing insurance salesman for a capacity that they are not trained to help. If you employ a fee-only planner they make no commissions so they are neutral to what type of investment recommendations, if any, they make. Becoming a CFP requires a great deal of training (over 3 years) and is no joke. The exam often has a less than 50% pass rate.
I would say that it's similar to this --- I'm sure you've heard of people getting horrible haircuts and could youtube to figure out how to do it on your own to avoid that possibility. But why would you? There are trained professionals who are certified to do it. And that's just your hair!
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@LBee: word. Find a fee only fiduciary. Totally different from “financial planners” who push investments and keep a portion
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@LBee: @gotkimchi: Thanks for the tip about the "fee only fiduciary" - very helpful. Do you know if they will give you whatever model they actually use to crank out the numbers - or if a standard version is available somewhere online - or do those tend to be proprietary? I see the haircut point, but at the same time I want to fully understand exactly where any number that is going to have a big effect on our lives comes from (what the formulas are), what assumptions underly it (there must be lots, as there are so many uncertainties in planning for the future), and whether there might be a reason for modifying those assumptions.
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@periwinklebee: Software is proprietary usually or bought by the firm (there are several popular ones). All plans are legally required by the SEC / FINRA to fully disclose all assumptions. Assumptions are also heavily discussed usually in meetings. A financial planning relationship with a CFP is not one sided - you are very involved in the process. It can take several meetings and you can be presented multiple scenarios in the end.
It sounds like you are skeptical and feel you can do it on your own. Good luck!
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@periwinklebee: ugh it’s posts like this that make me feel like not a real grown up !
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@periwinklebee: We met with a CFP once who crunched our numbers (current savings, future savings contributions, etc) and all we got was a report saying what our average would be, and then potential high and low based on those numbers projected out to like 80 or something. They definitely did not/could not or would not say how they came to those numbers other than "we use very sophisticated software tools and models". We are super type A control freaks, especially when it comes to something this important, so not seeing the work and steps to come to that did not give us a warm feeling. I know they are trained professionals and all, but we could not just go off of that and trust something it all. We like to see data, numbers, how the numbers move, etc. Since we do that on our own already though, meeting with the CFP did solidify the data we had and confirm what we were doing.
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@LBee: Even if I completely trust the number - and I'm all for hiring someone to go through everything as I know there's a lot involved - I just want to understand where it comes from (the formulas used to calculate it, which sounds like not surprisingly is hidden behind a software interface). This is all super helpful to know.
@mrsbubbletea: not a fan of adulting
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So I just speak to a financial planner through the company I use where my IRA and another portfolio is at. I have found that to be sufficient as they get on a call with me twice a year, get an update on my financial status, current situation, how all my investments are doing and whether we're "on track".
So they know that for the past 3 and the next 3 or more years, I have daycare costs and therefore not really putting much into these accounts (I still contribute the max to my current 401k). But we've established that I should be fine once I come out of the expensive daycare cost land, hopefully have at least 1 raise by then, and will go back to contributing.
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@PurplePumps: Thank you, I feel really similarly... I've been bad about long-range planning basically because I was saving what I could and there wasn't really an opportunity to make any life decisions to change things, but now I really want to get up to speed and need to understand what's going on given it could have a big impact on how we live our lives. I'm afraid of course of making a mistake so would like a second opinion, but "we use very sophisticated software tools and models" would not cut it.
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The best way to set your retirement savings goal is to first determine how much you think you'll need at retirement. What will your budget look like? Will you have income streams outside of your retirement savings? What will your expenses be? Do you hope to have enough money for extra traveling, to give to your grandkids, etc? From there you see what that amount would be, see what age you think you'll retire, and then you can calculate what amount you'll require at retirement age.
If you're willing to do the work, this is the best way to see what *you and your family* will need (and if it's attainable). Try not to listen to these "rule of thumb" statements you hear - "save 10%", "you'll need 70% of your pre-retirement income", etc.
I think a fee-based planner is a good idea as they actually help with budgeting and how much you'll need to save.
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We have a financial guy that we go to and we discuss our goals and where we are in reference to said goals. He does use a computer program to calculate futures, it's just a "what if" scenario and it uses the market past/present and predicted behavior to calculate. Of course there's always a chance that the calculations will be way off or never come to fruition bc obviously no one can really predict the future. It sounds like your DH has a sheet that already does that so I guess you're just asking others what we do? So to answer your question we have someone who does it for us and we talk to him and he shows us the "predictions"
As pp's stated we have calculated "expected expenses".. again taken with a grain of salt bc who truly knows what our expenses will really be?? and voila we can see if we are on the right path or if we have a deficit, overage or whatever.
We max out our 401k yearly, as another pp said we put in $18500 into DH's and mine and we also kick any extra we have to savings or we invest it... we randomly discuss and decide when we have the extra.
We don't have a number in mind or anything.
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@periwinklebee: from what I have read, the generally accepted rule of thumb is for a 30 year retirement (eg. age 65-95), you will need to have saved up 25x-30x yearly spending in retirement. So if you think you’ll spend $40k per year, then you would need at least $1M at age 65 to retire.
In order to get to $1M you would have to work backwards to get to a yearly savings goal that makes some assumptions on growth.
I like http://www.firecalc.com to model out different scenarios. It takes only 3 inputs: retirement savings, time horizon and yearly spending and it tests against historical market returns.
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People are really putting $37,000 a year into retirement savings? @mrsbubbletea: I am also feeling very non-adult after learning that.
A meeting with a financial planner is on our list of to-dos this year. We've looked at several online calculators, but the majority of them are hosted by companies trying to sell you services and I find them untrustworthy. We each put 10% of our salary into retirement accounts, and will increase that amount as daycare expenses drop-off, but need to do better in the long-term plan department.
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@kiddosc: @mrsbubbletea: Don't feel bad, I don't think it's about being adult-y so much as the fact that Hellobee is not all that representative of the general population when it comes to finances
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@snowjewelz: It's good to hear that they are helpful, I've wondered before if they'd be useful but never tried!
@sunny: Thank you for the calculator link!
@gestalt: @sunny: Thank you!
@kiddosc: @MrsSCB: I've been negligent about adulting, though I do try to save what I can, but want to get on top of it now, as we need to make some life decisions that will affect finances. I'm not concerned about how much people save, as it will be very person-specific and I know hb isn't representative, but just curious how people thought through it....
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@periwinklebee: I used to just talk to whoever but I found this lady I loved and I got her direct # and I always only speak to her and she has helped me a ton!
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I'm probably being pretty conservative (at least, I hope I am), so I took my monthly/yearly expenses and assumed it would stay roughly the same (mortgage and daycare costs will decrease, but healthcare costs and travel will increase). Then calculate what that expense will be when I retire, assuming 3% inflation increase. So if you're currently spending $40k a year and are planning to retire in 2050, that's $103k a year.
Enter that number into the calculator @sunny: linked and then put a number for the portfolio and see how it fairs. $1M at retirement only has a 0.9% chance of being enough money. $2M gives you a 70% chance of having enough money. $2.5M is a 93% chance of having enough. That seems like a good amount.
So you set your goal for $2.5M, with maybe the hopes of having more. Assume a rate of return on investments somewhere between 5 and 8%, you can figure out how much you need to save each year to get to $2.5M. If you have $0 in savings now, and start putting away $18500 a year, assuming a 6% rate of return would get you to $1.8M by 2050.
Based on our example, that won't be enough, but maybe you have money in savings already. It's also safe to assume the max you can put in your 401k will increase over time, as it has been. If your employer matches a percentage, maybe you don't even need to be maxing out your savings to get to your goal.
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Honestly, I think those calculators of how much you need in retirement are pretty useless.
#1: They are based a lot on your current lifestyle and I currently have young kids living with me...
#2: There's no guessing how government programs are going to be when you retire.
#3. Your cost of living may drastically change based on where you retire to.
#4. They are based on a projection of raises and inflation.
#5. It all depends on when you retire and when you start pulling money out.
So I'm aiming to save as aggressively as possible. I max out my HSA and contribute as much of my salary as possible within our budget. I used to do post-tax, but now that we're dual-income, I moved to pre-tax. About 80% of my raises get moved into retirement contributions so even though I save more, we're not really spending more. I've seen the graphs about the power of compound interest, so I started contributing as early as I could and I'm pretty happy with how my saving has gone so far.
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Here's an example of my retirement worksheet. It's got starting salary, assumed increase, 401k contribution, employer match, starting salary, and any additional savings, and then calculates what will be in my 401k each year, so I can see if I'm on target. I update it every year with my new salary and current account amounts so I can see if I'm still on track.
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@gestalt: that’s how I do it. I start with a sample budget as a senior. Then multiply how much I need monthly (minus the amount coming in) by estimated months I plan to live. Inflation is tricky so I just double almost everything.
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@codeitall: i agree that your lifestyle and expenses will be drastically different once you are not working and don't have dependents. I take all those projections with a big fat grain of salt
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@Adira: Thank you, this example is super helpful!
@codeitall: I agree, there's so much uncertainty.
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@Adira: the $40k/year example with $1M in savings was assuming today’s dollars. In 2050, if you require $103k/year after inflation then you’d need 25-30x that. However the $103k after 32 years is based on 3% inflation which I think is aggressive. I think historically we have been closer to 2% which makes the $40k turn into $75k/year.
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We each put in the federal Max ($18500). Our thought is that we can afford it now and it'll give us options down the road to save less.
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@sunny: I don't think it matters that the calculator uses today's dollars. I already took inflation into account for my expenses. Or are you saying the calculator doesn't take into account inflation when determining if your money will last 30 years?
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I have a general question for everyone - when people are calculating this it is for a family or 2 people right? So like my husband and I need 2.5mil combined correct?
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@Adira: can you send me your excel sheet?
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@Adira: I pointed it out because you were saying that $40k, after inflation would be $103k in expenses. But if you're still relying on $1M as a goal # then your change of failure is almost certain.
My point was, whatever dollar you use in the calculator as your yearly expenses, you'll also need to use the same dollar as your retirement goal #, which is why it is just easier to think in terms of a multiple of your expenditures.
So if you are thinking in today's dollars $40k then you'd need 25x $40x = $1M. If you're thinking in 2050 dollars $103k, then you'd need 25x $103k = $2.5M.
Personally, I find it easier to think in today's dollars rather than future dollars since I can easily imagine what a $X year lifestyle looks like.
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@gotkimchi: Right, if your yearly expenses for you and your SO when you retire will be about $40k in today's dollars, then together, you'd need around $2.5M, assuming you're retiring in ~30 years and living for another 30 years.
I'd be happy to email you my spreadsheet, though I won't be able to until around noon eastern tomorrow, so wall me your email address around then.
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@sunny: I mean... We got to the same numbers, just in a different way, right? I was using future dollars for my target amount so I could figure out if I'm going to reach it based on my current savings.
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@sunny: Maybe I wasn't clear about how I was using the calculator. I figured out my yearly expenses and then compensated for inflation. Then I entered in a random portfolio amount ($1M) into the calculator and checked the results. It wasn't going to be enough, so I tried $2M, which might be enough, but to be safe, I upped it to $2.5M. That's where I got my goal - just guessing and using the calculator with my assumed expenses.
Hope that cleared things up!
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@Adira: will do!
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