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luke5579, you asked:

<< Here is my financial plan, any advice would be great. I know very little about finance so all of this is just based on a hunch, probably not the best way :)

Me and my wife are both 24 years old, we have been married 3 years. My salary is 75,000 dollars per year. I clear about $4,400 per month(after 350 for health insurance) and I currently contribute nothing to 401K. My wife just graduated school and will start as an RN in 1 month. She will make 41,000 dollars per year. If I am doing my math right she will clear around $2,400 per month. She will receive a 1,000 dollar bonus every quarter for the first year as well.

Right now we are living on my income with about 500 dollars left over every month. This could be more if we really tried but we honestly dont, eat out alot, buy more things than we should, etc etc.

My problem is what will this plan give us in 10 years? 20 years? 30 years? If we wanted to retire in 20 years will this be a strong enough plan to make that happen? What about 30? Sure would be nice to retire in 20 years when our kids that we are going to have in 5 years will be starting High School.

The first thing you might do is go the library or a book store and get a good book on personal financial planning (e.g. Ernst & Young's Personal Financial Planning Guide; Ernst & Young's Retirement Planning Guide) and read though it a couple of times taking some notes. You'll find a great deal of good information and it'll help you in the kind of planning you're trying to do.

You'll find that there's an emphasis on first establishing an Emergency Fund equal to about 6 months living expenses. In your case, base on the numbers you've given, that amount would be around $23,000. This should be VERY high on your priority list. And always remember that an Emergency Fund is JUST for emergencies. It's not a spending fund. One should try to leave it alone and use it ONLY for emergency cash needs and when used, it should be replenished as soon as possible. Also note that the emergency funds should increase as your living expenses increase (there's typically an inflationary factor).

If you were to put $900 month away for an Emergency Fund it would take you about 2 years to accomplish this. However, I'm not suggesting that doing only this might be the best way. If you've got matching 401(k) program, it would be a good idea to put in only amounts that are matched and then the balance towards the Emergency Fund.

Yes, it would be nice to be able to retire in 20 years, but that's not really a very long time to be able to build up to a point where you can live off only your money – “critical mass” as some might call it. For example, if you take inflation into account (using something like 3% per year), in 20 years that $3,900 your now living off of ($4,400 after taxes - $500 after expenses) would be about $7,000. In other words, in 20 years you'd need $7,000 month for living expenses and that amount over the next 40 years will rise with inflation. So, just how much do you need to generate future income? That'll DEPEND on just what assumption YOU feel you are willing to make and remain somewhat conservative to be sure that you'll have a high probability of succeeding.

Putting away 10% of one's net income over 20 years will most likely not produce enough to reach “critical mass”. Putting $900 a month away and increase it with 3% inflation and using a constant rate of return of 8.5%, might achieve about $650,000 in 20 years. That's far from enough to produce $7,000 month retirement income at that time. Now if you put about 25% away, then it a much higher probability of happening. And for all practical purposes, 25% very likely could accomplish a 20 yr. to retirement plan (assuming you're starting from zero and have no other assets coming into the picture).

The two MAIN factors for accumulating a retirement fund is TIME (the longer the compounding time the better) and CONTRIBUTIONS (the more you can contribute the better. Note that early contributions have a much stronger effect on the results than rates of returns. Too often people focus too much rates of return and not enough on the contributions.

Well, perhaps you can see that when planning for retirement, you need to make some specific goals that you feel are attainable. Once you decide on what those numbers are, you can pretty much calculate how you can get there and what your probabilities are. A good personal financial planning book can be a lot of help to this end. . . . especially if you're not going to hire professional help.

BTW: The purchase of the house looks like a GOOD decision. The numbers look like you'll net about the same expense for housing as you're currently paying.

I hope you find this helpful. Good luck.
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