Posted on 04/21/2010 7:19:36 AM PDT by Kaslin
Dear Carrie: How much should a dual income couple with no kids save for retirement outside of maxing out their 401(k)s? -- A Reader
Dear Reader: How much to save is on a lot of people's minds these days, especially as many folks have seen what they thought were adequate savings dwindle over the past couple of years.
So your question is a good one -- and essential. A specific answer, however, depends on more personal information than I have about you and your spouse. So, while I can't tell you exactly how much you should be saving, I can give you some help in determining that for yourself.
HOW MUCH ARE YOU CURRENTLY SAVING FOR RETIREMENT?
You say you're maxing out your 401(k)s. That's great. If you're getting a company match, that's even better. But "maxing out" adds up to different dollar amounts depending on your age and your employer's plan. The current maximum contribution allowed is $16,500 (plus a catch-up of $5,500 if you're 50 or older). Which means it's possible that you and your spouse together could save $33,000 a year in your 401(k)s, or up to $44,000 if you're both 50 and older. That's a pretty good sum -- but it may or may not be enough.
If you're able to save more, that's even better. Consider opening a Roth IRA. The current income limit for joint filers is $166,000 to make a full contribution. The benefit of a Roth if you qualify is that, while contributions are made with after-tax dollars, withdrawals are tax-free. And another great choice is to simply save more in a brokerage account. In this case, your contributions are not tax-deductible, but you will have the advantage of paying taxes at the reduced long-term capital gains rate when you sell investments you've held longer than one year.
HOW LONG HAVE YOU BEEN SAVING?
Your age and when you started saving are two other important factors. For those who start saving in their 20s, putting aside 10 percent to 15 percent of their yearly salary may well be sufficient -- provided they consistently save that same percentage every year. But someone who waits until their 30s to get started needs to up that percentage to between 15 percent and 25 percent. Put off starting to save until your 40s and you're looking at needing to save 25 percent to 35 percent a year. That can be quite a challenge!
HOW MUCH WILL YOU NEED?
How much to save really depends on when you plan to retire and how much you think you'll need for the retirement lifestyle you want. For planning purposes, it's wise to assume you'll need the same amount you're living on now. That's because, while certain costs such as mortgage payments and work-related expenses may go down, others such as travel, entertainment and health care may go up.
Here's a simple calculation to help you determine how large your retirement nest egg needs to be:
Your annual expenses minus income from Social Security, pensions or real estate equals how much additional income you need to generate from your portfolio. Multiply that amount by 25 for a rough estimate of the amount you'll need in your portfolio to have a high (roughly 90 percent) probability of making the money last for 30 years, adjusted for inflation.
Let's put in some numbers. Say you and your spouse want an annual income of $75,000, and your combined Social Security income is estimated to be $30,000. This means you'd have to generate another $45,000 to meet your expenses. Some industry experts suggest that you need a portfolio 25 times the amount of your first-year expenses to be reasonably confident that your money will last throughout your retirement. So in this case, you'd need $45,000 times 25 for a portfolio of $1,125,000.
Here's the other side of this calculation. You should withdraw no more than 4 percent of your portfolio your first year of retirement. Then you can increase that dollar amount each year for inflation. This will help make sure you don't run out of money prematurely.
This might seem overly strict, but the idea is to have as much confidence as possible that your money will last for 30 years. Of course, you might have a shorter retirement time horizon in mind or be willing to accept a lower probability of success; in either of those cases, you could consider withdrawing more.
NOW CRUNCH THE NUMBERS
These are all hypothetical examples, so I'd suggest you either consult with a financial adviser or use an online calculator to get some real numbers for yourself. The usual formula is to enter your retirement goal, the amount you currently have saved, the amount you intend to add each year, the estimated rate of return and the number of years until retirement. You'll then clearly see if you're on target or need to up your yearly savings.
Doing this can be eye-opening as well as empowering. With the figures in front of you, you can adjust your savings plan as needed -- or relax with the knowledge that you're in pretty good shape. Either way, now's the time to take stock -- and take action if needed. Good luck!
I’m looking a lot more at “nearer term” security than at long term security.
I don’t think “long term” is going to exist.
Not if the obamabots are getting ready to grab your 401K or IRA savings. And they are.
I’d be putting that money in beans and ammo. Something that you can use. There won’t be any such thing as a 401k in the future, especially when the feds steal it and use the money to buy crap banks. Cigarettes would be good for barter.
According to this, I’m forked.
Anything but cash at this point.
Cash will not have any value when hyperinflation hits.
>> I don’t think “long term” is going to exist.
No, but “eternal” is. I’m focused there. The rest is gravy.
Obama is Marxing out everything.
Anyone under 60 that is counting on Social Security is a fool.
Maxing is nice, but it’s not enough... here’s why. Aside from taxes on the monies when you begin withdrawal at 70-1/2 y.o., there is going to be a tidal wave of baby boomers beginning to retire at about the same time, which means all those securities will be on the market to sell at once... so their prices will begin to drop and will steadily decrease as more and more folks retire. So even if your 401K and IRAs are worth a cool million now, in 20 years they may be 1/3rd of that price.
I figure Mrs. Genoa and I are out of here sometime between now and 2017.
Mathew 25
13”Therefore keep watch, because you do not know the day or the hour.
Yes, and I know this isn’t a value I’m supposed to pursue,
but I seek to protect my family from unnecessary hardship
while we’re “keeping watch”.
But if there’s a seller there’s a buyer? These stocks will be owned by someone(s)/something(s) or bought back by the companies?
First thing to do is rid yourself of as much debt as you can, I’m in the process of doing that right now and I can tell you the feeling is good.
Most of the prediction tools assume you will need 80% of your present income for retirement. These predictions don’t take into account moving to cheaper places after retiring from jobs in higher expense places.
We took a big step in getting out of the market this year, and all we’ve got left is very conservative. Lost half last year, and I sincerely believe the current uptick is destined for a major correction or another collapse.
The lack of jobs is a ticking time bomb.
Thank God I have an Employee-Owned Stock Option Plan (ESOP) with my company in addition to a 401K. People here actually retire at 59 1/2. I just don’t see how you can do it with a 401K alone.
I'm saving, but with every dollar saved, I wonder what the future value of it will be, and if I wouldn't be better off using it to purchase items now.
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