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!
The college student will graduate soon and will hopefully be employed soon, and the mortgage is down to about $30K. So we should be able to start saving much more aggressively in the next year or so. But I do worry/wonder about how inflation, taxes, etc., will throw up unforeseen challenges in getting through retirement. I always thought it would be a good idea to put a couple refrigerator boxes aside for a last resort abode....
They keep pushing us closer to an ‘Atlas Shrugged’ type scenario. If they try to seize our wealth and/or guns then CW2 is upon us.
Anytime that someone buys or sells stock, the stock is bought from or sold to a "market maker," whose job is to ensure liquidity in the market so that trades can always be facilitated. In selling, for instance, you'll sell to the market maker, who will hold the stock until someone wants to buy, then he'll sell it to the buyer.
1) Social Security payments will be effectively $0.00. The Ponzi Scheme will collapse.
2) 4% annual spend presumes stocks do well; make sure lots of your stocks are outside the U.S., at least until the 0bummer Communism is politically finished.
3) 4% presumes low rates of default on the bonds you hold. Avoid too many U.S. government (Fed / State / Local) bonds. They have so many unfunded liabilities (read: union retiree benefits) that many government bonds will default.
4) 4% presumes the U.S. dollar will not become worthless through a period of hyperinflation due to fiscal deficits and / or monetary expansion. Protect yourself with anti-dollar investments in foreign stocks and bonds (unhedged), gold, oil, TIPS (if they don’t default), etc.
Just a few thoughts.
one of my relatives is a dairy farmer...I was thinking of finding farmland near where he ultimately decides to set up shop and then rent it to him to pay the taxes until I’m ready to use it...
along those lines, fertilizer may also be a good investment if food is expected to be at a premium...
” 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.”
Excellent point. The 401 program is doomed. Not to mention, most people lost 1/3 or more of their holdings in the past 18 months and that isn’t going to cahnge anytime soon.
401(k)s are appropriate for financial instruments. The prudent investor will invest in other types of investments, and will steer those other dollars in that direction.
One fundamental message of the Book of Job — you can’t plan for everything. Sometimes you’ll get slammed for a reason beyond your control. I’m not the type to have cases of non-perishables and ammunition in storage for the apocalypse.
Do the best you can ... get out of debt, be liquid, well-invested, and well-prepared ... and let God handle the rest. If its your time to suffer, its your time to suffer. If its your time to go, its your time to go.
SnakeDoc
“I’ve been thinking about investing in farmland...”
Even better would be in ammunition.
Any posters know of outfits who stockpile purchased ammo like they do for gold?
Am thinking in years it will greatly appreciate and can be used as excellent barter.
It is! Other than a little debt on my credit card and an almost-paid-off Saturn, we are debt free.
The other thing I'd suggest - hide your money in a safe at home. Don't use the banks. Or if you use a bank put your cash in a safety deposit box. You want it some place you can get your hands on before the govt does.
Please explain
As serendippity would have it the average household income in the USofA is 44,000 and change.
Anybody see a problem here?
Should have said median dumdum.
Great post. Fidelity has a calculator in their retirement planning section that lets you play what ifs and plug in historical market performance numbers for the past thirty years or so to see how recessions affect retirement. That 4% withdrawal from savings each year appears to hold up very well.
This is just me, but the 401K is a government program and I just don’t trust it. Even if we were to stabilize and the Feds stopped their endless encroachment, I still think the hundreds of billions people socked away would be too tempting for future politicians. “It’s not fair that they were able to save” will be the cry of the day”. I stopped a long time ago. Demographics are not our friend.
see “ridesthemiles” post.
“............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...”
Agreed.
“If they try to seize our wealth and/or guns then CW2 is upon us.”
That’s a fact.
AMEN to that.
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