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Hi there. I am a young, single woman who is faced with some tough decisions about my own retirement planning. It's "open enrollment time" and I need to redirect my investments.

First off, I'd like to hear what percentage of your incomes you Fools save, and why.

I figure this will give me a place of reference from which to make an educated decision for myself. I've been saving 10% pre-tax, then an additional $2K post-tax in a Roth IRA, per year. This is a tidy sum for someone of my age and situation; however, it is tough for me to do both.

I need to face facts: retirement is a long way off and there are some more immediate concerns. I hate to do this, because I am in love with the power of compounding, but I think I will need to REDUCE my retirement savings... and instead build an emergency fund. As long as I still save SOME for retirement, I figure I should be OK.

Also, what is an average percent of income needed in retirement?

I've heard 50%, 60%, 70%. I know that amount will vary, but I want to hear first-hand accounts. Thanks!

I've got $1300/mo rent, student loans, and a (fairly modest) car loan, and it is hurting me. I wish I could give up the apartment and rent a room for half the price, but life would hardly be worth living if I had to monitor every stray hair I left on the floor, etc. I figure, if I am a working adult, having my own small apartment (1 bedroom) is not SO much of a luxury.

Any tips, advice, or other Foolishness is greatly appreciated!

--AliFool
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First off, I'd like to hear what percentage of your incomes you Fools save, and why.

I have 3 kids so I'm in a different place in life. Percentage-wise, I haven't toted it up. With the matching, 12% toward 401K (mostly Vanguard Index 500). It's been higher but never lower than the amount matched.

Also, what is an average percent of income needed in retirement?

For us, a percentage is not useful. Most of our current expenses involve our kids. I look at this with the question of how much do I want to live on in today's dollars. Then I work from there.

IMHO, you definitely need an emergency fund so I suggest taking the Roth money and putting it toward the emergency fund until you have a level of comfort both in terms of emergency and debt.

You sound like you have your head on straight and privacy is a big deal to me - so I wouldn't consider your apartment a luxury. You didn't mention credit card debt so you're way ahead. Have you consolidated/refinanced your student loans if you are eligible ? Also, have you figured tax savings if they are now deductible ? You may have more money than you know about.

Good luck
Jacki

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I ran some numbers. Compound interest is indeed wondrous, and I think you are doing fine.

For the sake of argument, let us say you are 25, making $40,000, and plan to retire at 65 which will be a bit early according to the current Social Security law. Suppose you never get a raise, and there is 0% inflation. If you can get 12% on your money (an optimistic assumption) then annual payments of $4000 will produce an account worth $3,068,365.68. Same calculation at 6% yields $619,047.86.

Here's a somewhat more realistic calculation. Suppose you want to have $40,000 a year at age 65. Figure $10,000 comes from Social Security (I am not a doom-and-gloom person on the topic of Social Security). So you need to amass a principal that will produce $30,000 a year in income. Suppose you can get Treasuries at 4%. Then you need $750,000 at age 65.

Historically from 1982-94, which is my benchmark, TIAA-CREF which is also my benchmark, returned 9.5%. So I ask the question, what sum needs to be deposited annually into an account for 10 years starting now, that gets 9.5%, and is then left alone for 30 years still getting 9.5%, so that in 40 years the account comes to $750,000? The answer is $3166.80, if I did the arithmetic correctly.

The previous paragraph effectively describes me, and is the reason I regard my active investments as play. As for what you'll in fact need in retirement, my retired friends (I work in a group where the average length of service is probably 37 years) say less than the financial advisors tell you. You don't buy your lunch, you need few new clothes, your car insurance drops because you don't drive very far, your mortgage is paid off, that sort of thing.

Anyhow, I think this calculation shows that the price of a nice leather sofa from Roche-Bobois is better put into the 401(k), and maybe the beanbags or the thing you bought at Goodwill are livable for another year.
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AliFool,

Saving "some" for your retirement sounds good, but it won't get you the money that you want or need.

Lets take this backwards.

In the past, the Wise said that you would need 70% of your pretax income after you retired since you would not have work-related expenses. This would include clothing, commuting, food, Social Security tax, etc. This figure did not apparently include retirement-related expenses such as Medicare and recreational expenses.

One of the biggest expenses that the Wise also assumed you would not have is housing. That is, you would own a home with no mortgage. This can eat up 25-30% pretax income.

If you intend on renting for the rest of your life, you will have to consider this as part of your expenses.

As to what is the proper percentage to save for retirement? 10% pre-tax has been used consistently, assuming that you would save for 30-40 years before retiring, and achieve an 8% return (I'm doing this from memory, so don't quote me).

Anyway, the correct way to determine what income you would need at retirement is:
1. Decide what pre-tax income you need now, and decide if your preferred lifestyle will support that. Make what ever adjustments you need.
2. Calculate its future value at retirement, assuming a 3-5% yearly inflation rate.
3. Multiply that future value by 15-20 to calculate what your future nest egg value should be so that you can withdraw 5-7%/year to live on, without drawing on the principal, while maintaining your standard-of-living.
4. Estimate what your long-term return rate will be. Remember that inflation will affect your nest egg, too. If you assume a 5% inflation rate and want to withdraw 5%/year to live on, then you will need at least a 10% yearly return. Notice that taxes are not included. You will probably need a return that is closer to 12 or 15%.
5. Using the nest egg value as your future value, and using the long-term return rate, calculate your present contribution, for the number of years until you want to retire. That should tell you how much you need to invest yearly, at the long-term return rate, for so many years, to accumulate your nest egg value.

This is the simple way to calculate it since it doesn't assume rising incomes and overstates the yearly contribution because of that.

Or, you can just continue as you have done, but cut back on the pretax amount, so that you can Foolishly maintain and invest your Roth IRA.

Zev
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zgriner wrote:
Or, you can just continue as you have done, but cut back on the pretax amount, so that you can Foolishly maintain and invest your Roth IRA.

but let me make sure you dont do this if it has anything to do with matching funds from your employer.
Yes if you are young the Roth is a no brainer (bet they eliminate it in the near future), but not sure its better than free money from your employer??

Those matching funds are what is generally (at least on the Fools board I think) called free money and in general you want to maximize that kind of money.

And you should know that I aint got much of a clue about any of this but have been retired for about a year and can tell you that even without a clue, compounding can work wonders over time, specially tax defered.

I do agree that the investment planning stuff and percentages (I have grown to hate pie charts) of whatever may be the wrong way to plan (at least with the software I tried and with the assumptions I used before trying to become Foolish, its like the questions they ask (expected returns on investemts) ought to be the answer you get, lol dont know if this make sense).

Well like they say that is my .02 worth

oldred22

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<<Here's a somewhat more realistic calculation. Suppose you want to have $40,000 a year at age 65.
Figure $10,000 comes from Social Security (I am not a doom-and-gloom person on the topic of
Social Security). So you need to amass a principal that will produce $30,000 a year in income.
Suppose you can get Treasuries at 4%. Then you need $750,000 at age 65.>>

Here is reality. If you need $30,000 per year today, you will need $144,031 per year in 40 years to maintain your life style. (Assuming inflation at 4% per year.) In addition, if you assume more than about 8% total return, you are being overly optimistic.

A good rule of thumb is that you need a lump sum that is 20 times your income needs to prevent loss of capital. That means you would need $2,880,620 when you retire at age 65.

Regards, Jim
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jvanscoy,

Of course inflation needs to be kept into account, it's just easier to do the calculations (and be brief in posting them) if you don't. One presumes that income and returns on investments like bonds will track inflation, so if you keep your savings at the appropriate fraction of your income, you're still OK.

Also, it is not necessarily true that expenses track inflation. What saved my bacon in the late 1970's was that while the CPI was rising at 11% and my salary was rising at 3%, my rent was only rising at 3% because of supply and demand.

It's easy to do a calculation and say the sky is falling. I can do calculations too, and I say it's not falling.
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Note that a Roth IRA is in effect emergency funds. You can remove the $2000 you put in (but not the earnings) at ANY time with NO penalty or taxes.

So put $2000 in a Roth IRA before you add money to any ordinary emergency fund.

A defect of a previous post is that it assumes 0% inflation and 12% returns. 12% returns have been happening because we have had 4% inflation or more and also a bull market. In the long run, stocks seem to make about 7% over inflation and bonds about 3% over inflation, so guess around a 5% return relative to inflation when making projections.

Or to be safer (allowing for the possibility of more bearish in the next few decades), figure a 4% return relative to inflation.

Bill
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First off, I'd like to hear what percentage of your incomes you Fools save, and why.

My wife and I max out our 401(k)'s and IRA's every year. Save an additional $1100/month for ourselves and $450/month for children's education.

We hope to have about 1/2 of the children's college expenses saved in their name by the time they go to college. The rest will come out of general funds. The general fund is also used to pay cash for cars, vacations and other major expenses. The rest is intended to cover early retirement (before funds can be withdrawn from 401(k) and IRA's.

Our plan is to retire in 12-16 years (at age 46-50). Sometime between when the youngest child enters and graduates from college.

We are both engineers, so saving this money is not a huge burden for us. We were Foolish early, we never got in trouble with credit cards and have paid cash for all our cars (except one).
--
Andy
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<Note that a Roth IRA is in effect emergency funds. You can remove the $2000 you put in (but not the earnings) at ANY time with NO penalty or taxes.

So put $2000 in a Roth IRA before you add money to any ordinary emergency fund.>

This is what I've pondered as my personal strategy, but I've seen things about needing to keep the personal contributions in for 5 years to avoid withdrawl penalties if under 59 1/2. What's the real story?
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First off, I'd like to hear what percentage of your incomes you Fools save, and why.

Currently I save 12% with an employer match of 1.5% on the first 4%. All of this is invested in an S&P500 index fund since it is the only fund in my 401K that is 100% in stocks. The other mutual funds in my plan have a mixture of stocks and bonds. However, I have a wife who works at home by raising our kids. I am not exactly in the same situation in which you find yourself.

Analyzing my current situation, what I should be doing is to

1) Put 4% in my 401K to get the employer match.
2) Invest $2000 in a Roth IRA.
3) Put the rest in my 401K.

However, I do not follow this approach. It is easier to invest in the 401K since it is taken out before I see the money. If I kept the money and invested $2000 in a Roth IRA, it would be tempting to take the money instead of saving it.

This will soon change as I am in the process of bumping up the 401K percentage to 15%. Even with this, I am still able to save for an emergency fund (just not as much as I would like).

Also, what is an average percent of income needed in retirement?

I have always disliked this because I have no idea what I will be earning when I retire. If I do not know how much I will make or need at retirement, how am I suppossed to know how much to save for? What I did to solve this problem was to assume that I get a raise every year until I reitre. In 30 years, if you get a raise every year of 3% (4%, 5%), then you can multuply your current salary by 2.43 (3.24, 4.32). For example a $30K salary in 30 years should be $73K assuming a 3% raise each year.

A back of the napkin approach shows that if one should multiply by your salary at retirement by 20 to see if you have enough on which to retire. That $73K means that you should have $73K times 20 = $1,430,000.

Will that money last? Taking out 5% (the inverse of the 20 multiple) the first year, then you could start off with $73K. If your money grows at 6% (8%, 10%) per year, each year you give yourself a 5% raise, then your money will last until age 86 (92, 112). Your salary at the time you ran out ofmoney would be $193K ($260K, $688K).

In short, the steps that I follow are:

1) Determine your salary at retirement (it is a guess, so remember this is a weak point).

2) Multiply by 20 to determine how much money you need.

3) Knowing how much you need to retire on, see if you are saving enough now with a reasonable rate of return. I use 10% since it is slightly less than that of the S&P500.

4) In retirement, start by taking out 5% the first year, then give yourself a raise of 5% per year. This will cover the rate of inflation that may occur during retirement.

Credit for this approach should go to TMFSheard.

However, retirement is only one part of the whole financial picture. I am plan to pay off the car loan early (and put it into savings) and to pay off the mortgage early (and put it into savings). Hopefully I will retire with no debts, plenty of money, and tons of time on my hands.

BTW: I plan to work the rest of my life, even in retirement. I just do not plan to be dependant on my employer. :-)

Lifeguard

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AliFool, you wrote:

<<Hi there. I am a young, single woman who is faced with some tough decisions about my own retirement planning. It's "open enrollment time" and I need to redirect my investments.

First off, I'd like to hear what percentage of your incomes you Fools save, and why.

I figure this will give me a place of reference from which to make an educated decision for myself. I've been saving 10% pre-tax, then an additional $2K post-tax in a Roth IRA, per year. This is a tidy sum for someone of my age and situation; however, it is tough for me to do both.

I need to face facts: retirement is a long way off and there are some more immediate concerns. I hate to do this, because I am in love with the power of compounding, but I think I will need to REDUCE my retirement savings... and instead build an emergency fund. As long as I still save SOME for retirement, I figure I should be OK.>>


You are correct. It's nice to save for retirement and you're doing a great job of it. But you do need to live today, too, and you do need an emergency fund. There is nothing "wrong" about cutting back some of your retirement savings until you have something like three to six months' of living expenses built up in an emergency stash.

<<Also, what is an average percent of income needed in retirement? >>

There are various rules of thumb. In general, anywhere from 60% to 85% of your gross income today is considered an appropriate target. As for me, I shoot for what I'm taking home after taxes and savings. After all, that's what I'm living on now and I certainly don't want my standard of living to drop in retirement.

Regards…..Pixy

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Eamays asks:

<Note that a Roth IRA is in effect emergency funds. You can remove the $2000 you put in (but not the earnings) at ANY time with NO penalty or taxes.

So put $2000 in a Roth IRA before you add money to any ordinary emergency fund.>

This is what I've pondered as my personal strategy, but I've seen things about needing to keep the personal contributions in for 5 years to avoid withdrawl penalties if under 59 1/2. What's the real story?


Contributions may be removed from a Roth IRA at any time free of taxes and free of penalty. The age 59 1/2 and five-year rules pertain to touching the earnings on the original contribution. Also, converted IRA money must stay in the account for five tax years before it can be taken free of tax and penalty.

Regards….Pixy

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<<First off, I'd like to hear what percentage of your incomes you Fools save, and why.>>

We save more than most. Married, 37 y/o, with four young children, we save the maximum allowed in my 403(b) plus the maximum in both Roth IRAs, plus my wife has a defined benefit plan, plus we're paying down our mortgage over 15 years to have it paid off three years before our oldest starts college, for a total savings rate including home equity of about 33% of our pre-tax income. Our lifetime financial plan is focused on gradually increasing our standard of living, which is already quite comfortable, so that we don't for example take a big financial hit when everyone goes to college. Stocks would probably be a better long-term investment, but the certainty of having that debt paid makes home equity a better choice for us. The remainder of our portfolio is 100% stocks.


<<Also, what is an average percent of income needed in retirement?>>

Financial planners talk in those terms, but I don't think that's quite the way to look at it. Rather, I expect most of our child-related expenses to be gone. Our mortgage will be gone. We'll need only one car instead of two. We'll probably travel more than we do now. It's best to simple compute your living costs in todays dollars. For us it works out to 40% of our current pretax income, simply because so little of our income is actually consumed now and in retirement we expect to consume all but enough to maintain the balance against inflation.

Advice for you: Use your best judgment. It's silly to live at a miserable level for 40 years so you can experience luxury when you're old. It's just as silly to live for the moment now and later have to comparison shop for the cheapest cat food for yourself when you're unable to work. Find a good compromise, but remember that things go wrong. Whatever you do, a little slack in your plan can make all the difference. In your position, I would get the maximum match for retirement funds and stretch a little to make that work with the budget. Beyond that point, it would depend on current desires for spending and for future security. You're on your own there, but good luck.

- Roger D.

Note: I agree on sharing an apartment. I've done it several times (slow learner) when I was young, and it was never worth the money.
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