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!
Get out of debt and pay off your house. You’ll be surprised how comfortably you can live on limited cash flow when you don’t have to make car, credit card, student loan, or mortgage payments.
After that — save 15 to 25% of your annual income. Invest. Diversify. You’ll be fine.
SnakeDoc
I’ve been thinking about investing in farmland...
I feel pretty fortunate to have worked for a company for the last 10 years which gives me 15% of my salary for a SEP-IRA. I started this in my mid 20’s. Combined with paying off debt, I think we and the Mrs. will be just fine.
We all know it will happen eventually. Let's say John and I start at the same company, on the same day, at the same wages. Every week, out of my check, I put $XX.XX in my 401k. John on the other hand decides to spend his whole check. 40 years down the road, we both retire, but John whines to the government that there is no way he can afford to live on Social Security alone, and it's not fair that I have millions socked away. The liberal dems agree with John, and poof, all of a sudden, I am too wealthy, and I don't need the extra income that Social Security will provide.
Isn’t the big 0 going to force those Tax Deferred funds to be converted into Gvm’t notes to keep their tax deferred status??
I would say, not any more, but when the whip comes down EVERYBODY is going to be smoking again. Ever wonder why the myth of those German prisoners so pathetically grateful for a cigarette came about? No smoking in the German army.
I’ve been saving up as well,
but half of what I was putting into cash
is now going into tangibles -
beans, bullets, bandaids, hard currency
these “experts” make me ill.........the median income in the US right now is 32,000.00 per year.......if you own your home and automobiles, this amount is more than enough to live very comfortably...if you are frugal, you can scrape by on 24k per year...just make sure you are debt free, and you will be surprised at how little you can live off of...
Well, if you can hang on to your cash savings when the HI comes, though the value of your holdings will be next to nil for a while, when it’s over won’t you be holding cash that’s worth far more than it was when you put it in? Isn’t it like those folks who bought houses before the last HI and were then able to sell them for a fortune 20 years later? I’m holding on and waiting and seeing. I cashed out some of my 401K when the market was in the 13s, and I’m glad I did, but getting bumped into a different tax bracket due to the income, and the 10% penalty bite got me in dutch with Uncle Revenue for a couple of years.
+1 Just met with a financial adviser last night and we both laughed when Social Security came up...
They’ll do a “currency reset”
where they force your “cash holdings” to be revalued in another currency. It may be called a “dollar”, maybe not. Could be an “Amero”. Either way, you won’t be able to hold onto your dollars until hyperinflation is over.
I understood the benefit of the 401K to be that you saved the money now while in a relatively high tax bracket, intending to take it out after retirement when your income is low, thus reducing the tax bite. I never really understood the Roth. Dave Ramsey likes it, I guess because once you pay the vig, the money is all yours. I’d say for certain types of ‘found’ money it could be good but it wouldn’t make sense for me to transfer from 401K to Roth while I’m working.
Now, if you’re not working, might be a perfect time.
I keep my eye open for property with a fresh water spring...it’ll be more valuable than oil and gold someday.
Here in my 50’s still contribute almost max to the 401-k.
I’ve stopped my IRA’s though and now keep greater cash options. If the hyperinflation kicks in and economic meltdown occurs too all of it will take a big hit anyway. For those of us who are responsible and saved/invested/incurred managable debt or none it’s going to be an injustice to suffer because of irresponsible, greedy, manipulative fools in both government, banking and the corporate world.
We’re in a real pickle. Either the economy keeps heating up and inflation picks up, which it has to do because of the multi-trillion dollar deficit spending, or it swoons again because employers are too wary of the snake to invest any more than they absolutely have to. I predict the former, at least at first. The sophomores who are handling the financials know how to heat an economy up, but they don’t know how to manage one. After the inflation, with unemployment still high, we’ll have stagflation.
With luck we’ll get a president in there willing to let us have the second recession, without bailouts. That’s really what Reagan did. He made us take the medicine and boy was he hated the first two years. But then everything went crazy. That won’t happen under a racial marxist.
The liberal government is looking at seizing the nation’s wealth in those 401k plans. They aren’t safe from grabbing hands of the Marxists. Certainly not 40 years safe.
Definitely a good investment.
Arable land, some food stores to get you by when the crops are lean, and some firearms to protect it all.
Not if the obamabots are getting ready to grab your 401K or IRA savings. And they are.”
ARgentina grabbed such pensions last year.
I am convinced that NObama is going to do the same thing. I don’t have a 401 K, and I have begged some people I know to get their money out of these accounts before it is all gone. They think I have gone around the bend.
Yeppers...the basic foundation of financial freedom!
I agree - a financial advisor (who I didn't end up using) recommended converting to a Roth. Their spiel always is that you know your tax rate now, but you don't know what it will be when you retire.
Sure, that's true, but I'm pretty sure I'm paying a higher rate now than when I will when I retire in 2036+. No, I don't know for sure, but if I'm paying a higher rate when living off retirement funds with a smaller house and no kids, then there's a lot more wrong going on...
So why would I pay that out now, while trying to raise 4 kids and save for college - doesn't make sense.
I also don't trust that Roth's will remain tax free by the time I would withdrawal - it's just too tempting of a pot of money for the government.
IMHO, the Roth IRA was a bit of budget trickery that contributed to the few year(s) where we had a budget surplus. The govenment got a lot of extra tax revenue from people converting to Roth's during that time window - it was a back door way for them to tap into retirement money and appear to balance the budget without any spending cuts. But it was practically a one-shot deal.
They need more money now and have opened up a window again for doing IRA/401K conversions, so they can tap some more IRA/401K money now rather than wait for it later.
Just another example of borrowing from future generations...
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