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Author: PaulEngr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 46842  
Subject: Re: Saving for house vs. reirement Date: 5/5/2005 8:15 PM
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It took my wife and I about 3 years to save for a house. Last I heard, the "average" is about 4-4.5 years so anything less than that is peanuts.

Although we aren't saving for a first home anymore, the same issue applies (saving for retirement vs. shorter term goals). The "retirement" goal is somewhat easier to quantify for us right now so I set retirement to a comfortable level and then max out the savings on everything else.

At the time, I did the retirement savings like this. I used one of those retirement calculators that figures out how much you need to save. I ignored the 401K match and social security (which is looking less and less likely by the year). At the time, it meant I'd need to save about 10% of my salary to achieve our expected lifestyle using all the assumptions. The retirement calculator was assuming an average savings rate of 8% annually which is easy to achieve (simple version: invest 100% in a stock index fund). So that's how much I saved for retirement. Everything else went towards a house. We still lived like college students (cheap!) in southern Georgia (cheap!) so we saved a lot in a very short period of time.

Since that time, I've downgraded the retirement savings rate gradually to 8%. The reason is because the 401K matches and the "8% assumed annual savings rate vs. reality" assumption keeps causing my retirement savings to be underestimated. So I can compensate over time by decreasing my savings needed to achieve retirement goals and/or loosen the goals (decrease the retirement age). We could keep the higher savings rate higher (that old time-value of money thing kicking in again) but we need to build money outside tax shelters which restrict the money to retirement. Like paying for our kids in their teenage years!

I think the same logic applies in your case. You've got this relatively well defined savings goal (retirement) that although it is way out in the future, you can put some real dollars and estimates to it. Then you've got this other definite but short term goal where you'd like to minimize the amount of time that you save for it. So if you start out by saying that you're going to save x% or $X per year towards the first goal (retirement) and put hard numbers to that, then it ceases to be a consideration.

Goal #2 is building up your emergency fund if you haven't already (actually, this is goal #1 but at your age, retirement is a small piece of the pie). This is easy. All available extra cash goes towards the emergency fund and everything else is on hold until that time.

Goal #3 is the house. Obviously you want to minimize the amount of time that you need to achieve that goal. So once #2 is taken care of and you took the money off the table for #1 (retirement), then again, all available extra cash goes towards #3 until you achieve your goal.
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