Financial saving for retirement

[sourlemon]

As the year is coming to an end, I'm start making plan for next year. One of the thing that I'm debating is how much should I save for retirement. I plan to retire in 35 years. My original plan is to save about 10K a year, but that only add up to 350K. It doesn't look enough. If I live for another 20 years, it would mean 17K+ a year. I don't know how much I can buy with 17K in a year in 35 years.

I also want to start saving for a house. But which one if more important? Retirement? House? How much should I save for both?

Why don't they teach us this in school?

Does anyone have any advice regarding this issue? How much should I aim to save for retirement?

 

[Astronuc]

As the year is coming to an end, I'm start making plan for next year. One of the thing that I'm debating is how much should I save for retirement. I plan to retire in 35 years. My original plan is to save about 10K a year, but that only add up to 350K. It doesn't look enough. If I live for another 20 years, it would mean 17K+ a year. I don't know how much I can buy with 17K in a year in 35 years.

I also want to start saving for a house. But which one if more important? Retirement? House? How much should I save for both?

For most folks, the house is the single biggest investment. Ideally it should appreciate in value, with inflation, or at least hold it's value. If one has a mortgage, it should be paid off by the time one retires. One can then live in the house, and only pay property taxes. Otherwise, one sells the house and finds less expensive dwellings.

Why don't they teach us this in school?

One should have learned from one's parents and grandparents.

Does anyone have any advice regarding this issue? How much should I aim to save for retirement?

Some folks live comfortably on very modest incomes when retired. It's probably desirable to have something like $500 K to $1 M when one retires. Having an income that exceeds expenses reduces the required sum when retired. Also, having it in various CDs that rollover on 6 mo or annual basis is a good idea.

The desired amount at retirement depends on how extravagant one wishes to live. If one wishes to travel overseas frequently, and stay in resorts or expensive hotels, then one will need a considerable sum at retirement. However, if one stays fairly local with little travel, one will not need as substantial a sum.

 

[jtbell]

I plan to retire in 35 years. My original plan is to save about 10K a year, but that only add up to 350K.

What are you planning to do, hide it under your mattress?

Over the long haul, investment gains will end up being the largest portion of your final sum. For a simplfied calculation, add 10K at the beginning of each year, then add 5% of the new total, and make it the beginning amount for the next year. After 35 years, you end up with nearly 900K. (It took me five minutes to figure this out on a spreadsheet.)

And after you retire and start taking money out, the money that's left will still be earning interest and/or dividends.

Of course, it's anybody's guess what long-term average investment yields will be like in the future, and inflation will reduce the purchasing power of the final amount. With a spreadsheet, you can play around with the annual contribution, investment yield and inflation rate to see the different results.

It's probably better to think of your annual contribution in terms of a percentage of your salary rather than an absolute amount. As your salary goes up, you'll be able to contribute more, both in absolute terms, and probably also in percentage terms. Over the past 25 years, I've increased my contributions to my retirement fund from about 7.5% to over 25% of my salary. The college where I work also matches contributions up to about 7.5%.

 

[Greg Bernhardt]

If I live for another 20 years, it would mean 17K+ a year. I don't know how much I can buy with 17K in a year in 35 years.

You'll make some money off the interest too! I try to put as much as I can away in my IRA for tax benefits. Retirement is hard for me to think about. I commend you for starting a plan. You are ahead of most people!

 

[AlephZero]

The main trick is actually to start saving, not just "thinking about it".

Certainly there are tax breaks for pension plans etc (which are country-dependent) but you need to make a decision on how "stable" you think those will be over a timescale of 35 years. In most countries, that means 6 or 7 changes or government and changes of policy, not to mention the other "stuff that happens" like wars, natural disasters, Lehman Bros failing, or whatever.

"Financial advisors" will give you the hard-sell on the advantages of long-term investment strategies, because they get lots of commision up front from selling the investment products. Just bear in mind that making a long term plan and then following it blindly is a very high risk strategy.

 

[xxChrisxx]

What are you planning to do, hide it under your mattress?

Over the long haul, investment gains will end up being the largest portion of your final sum. For a simplfied calculation, add 10K at the beginning of each year, then add 5% of the new total, and make it the beginning amount for the next year. After 35 years, you end up with nearly 900K. (It took me five minutes to figure this out on a spreadsheet.)

Optimistic growth figure in the current climate. Hiding it under the matress is probably a better bet. :tongue2:

Still, one could always wait till the Euro cracks and buy Greece... a few nice little retirement islands.

 

[jtbell]

Sure, over a five-year span, even probably a ten-year span, there's a significant risk of a big drop, or at least stagnation. But over 35 years...

To reduce the effects of a downturn in the stock market, don't put everything in the stock market. When I started to contribute to my tax-deferred retirement plan over 25 years ago, I designated half of my contributions for a stock mutual fund, and half for a variable annuity. Both are run by TIAA-CREF which has a large share of the market for retirement plans in academia in the USA. The annuity part has a relatively small but steady return, and is in fact guaranteed not to decrease in value. When the stock market tanked during 2008-09, the annuity kept chugging along, and the total value of my account dropped only about 25%. It's since recovered to a bit above its previous high, helped by the contributions that I've continued to make even during the downturn.

 

[MarcoD]

Put it in a house, it really is the safest you can do.

Still, one could always wait till the Euro cracks and buy Greece... a few nice little retirement islands.

To be honest, if I look at the overall picture, it's the Euro which has the short-term problem, but the dollar which has the long-term problem. I expect that if the Euro falls, the dollar will be next.

 

[turbo]

You'll make some money off the interest too! I try to put as much as I can away in my IRA for tax benefits. Retirement is hard for me to think about. I commend you for starting a plan. You are ahead of most people!

Not in today's financial market. The Fed is loaning banks money at almost 0%, so the banks don't have to pay you anything for your deposits. I thought I had things balanced out pretty well between savings, IRA, defined benefit pension, 401K... Then along came Greenspan and Bernanke, shoveling free money at Wall Street, and stuffing the money-market funds under the mattress started looking better and better (except for the possibility of a house-fire).

 

[excelsior]

I don't want to hi-jack, but how old were some of you when you really started putting back for retirement? I'm 29 and only have a meager amount in a retirement plan from my current job. I have a bit of credit card debt that I want to wipe out before I can really afford any sort of saving. I will be going back to school soon, so for the short term I might not be pulling in a large salary.

 

[russ_watters]

Optimistic growth figure in the current climate. Hiding it under the matress is probably a better bet. :tongue2:

Over the PAST 10 years, that's high, but that implies that the NEXT 10 years will be better. Either way, the lifetime average of the dow is more like 8%.

 

[char808]

I think if you have time to pay attention to what is going on in the stock market it can be a good place to invest some money. You really have to do your homework and pay attention to the fees you are paying to make it worthwhile.

You can open an Etrade (or similar) account and not put any money in it for 60 days and use their tools and research for free.

Diversification is the key. You don't want to be exposed to much.

With CD's and money market funds currently you are losing purchasing power due to the effects of inflation. Current CD rates are 1.5-7% (rough number) and money markets are even lower. Inflation was ~2.7% in 2009 and ~1.5% in 2010.

The FED is absolutely killing anyone who wants to save money and not invest it in the market.

I'd say that if you think you will be in the same place for awhile, buying real estate in a down market may be profitable. I don't currently own, but wish I did because I could take out a mortgage and pay less than I am paying in rent. Unfortunately for me, I need to be mobile for the next 3-5 years. At least you have a roof over your head.

 

[MrB8rPhysics]

I don't want to hi-jack, but how old were some of you when you really started putting back for retirement? I'm 29 and only have a meager amount in a retirement plan from my current job. I have a bit of credit card debt that I want to wipe out before I can really afford any sort of saving. I will be going back to school soon, so for the short term I might not be pulling in a large salary.

I was 20. Ten years later, and there isn't a lot put away in the pension fund just yet, but there's probably around another 35 years or so to go of saving... and although 17k P.A might not sound like much, but if there are no outgoings such as kids and mortgage, you will be fine. Heck, when I was 20 I got by on £18K including mortgage.

 

[turbo]

I don't want to hi-jack, but how old were some of you when you really started putting back for retirement? I'm 29 and only have a meager amount in a retirement plan from my current job. I have a bit of credit card debt that I want to wipe out before I can really afford any sort of saving. I will be going back to school soon, so for the short term I might not be pulling in a large salary.

My wife and I started out with a saving account (for rainy-day emergencies) while renting, then invested in nicer and nicer houses. The last one was paid off before I turned 40 and sold for ~2x the purchase price thanks to the housing bubble. I had to maintain that place for nearly a year after getting this place, but it was worth the trouble. Throw the mower in the pickup and drive down there to mow and mulch the leaves, load the snowblower and a shovel in the pickup to clear the driveway and clear the walk... It had to be done. You can't expect to get offers on a house that is not being maintained and can't easily be shown to its best effect.

You've got to be realistic with the real-estate agents, too. Think 7% commission is too high? Chisel them down to 6% or lower and see if your house even gets shown. There is a 3-way split (listing agency, listing agent, selling agent) so unless your property is in the high 6 figures, that 2% share to the listing/selling agents doesn't look like much of a payday.

Real estate has to rebound at some point, so if you have an opportunity to get into some property on the cheap, it might be a good time to invest. Disclaimer: I'm trying to stay quite liquid in case a large tract of timberland comes on the market and I need to move on it fast. That means sacrificing interest income because banks aren't paying squat these days. Calculated risk...

 

[char808]

Also, to have the same purchasing power of $17,000 today, you will need to have access to ~$47,800 in 35 years assuming 3% inflation.

http://www.calculatorweb.com/calculators/inflationcalc.shtml

 

[PAllen]

The main trick is actually to start saving, not just "thinking about it".

Certainly there are tax breaks for pension plans etc (which are country-dependent) but you need to make a decision on how "stable" you think those will be over a timescale of 35 years. In most countries, that means 6 or 7 changes or government and changes of policy, not to mention the other "stuff that happens" like wars, natural disasters, Lehman Bros failing, or whatever.

"Financial advisors" will give you the hard-sell on the advantages of long-term investment strategies, because they get lots of commision up front from selling the investment products. Just bear in mind that making a long term plan and then following it blindly is a very high risk strategy.

I agree with this, but would make the following ordering:

1) Worst: don't be blind, instead panic and follow the crowd: guaranteed result is lots of 'buy high, sell low'.

2) Ok, but not great: Pick a reasonable diversification, use index funds not commission based instruments. Diversification means not growth/value, large cap/small cap but stocks, bonds, commodities (readily investable at low cost via ETFs on e.g. E-trade), etc. - truly different asset classes. With dollar cost averaging, and re-balancing, and low transaction and ongoing costs, this is really not too bad.

3) Think about how allocation should change over time. Be the one to buy a low sector while the stragglers are still fleeing (unless you believe it has no real future chance at all). This doesn't take nearly as much time as individual stock picking, which is just not practical unless you make a real, time consuming hobby of it. For example, there are European index funds. Now is not the time to jump in. But if you are young, you should be watching to jump into such an index fund while it is still very low.

 

[MarcoD]

For example, there are European index funds. Now is not the time to jump in.

God, if I now understood the whole picture right, and I don't think I do, there's a horrible systemic crisis mostly not on government bonds but in the private financial sector between the US and Europe, between the UK and the Eurozone, and internally between the north and the south in the Eurozone. It looks like a complete mess to me.

Probably real estate, and then I mean like really owning the bricks, is your safest bet at the moment in the US. But I am clueless mostly, I'll admit that.

(To explain the above. I think it's just a very lousy idea to buy mortgages from countries which run trade deficits. It might be a good idea, since you'ld expect the trade balance to switch. But the economy is woman, it never abides the rules. If the trade balance doesn't switch, you end up with gaping holes in balance sheets at the creditor side because a country now has a double burden, so something needs to give, and people start defaulting on debt. It should be forbidden. And I guess this happened between the US and Europe, the UK and the Eurozone, and between northern and southern Eurozone states. We should return to financial markets which closely follow their own real economy, and start building factories where needed again.)

 

[Borg]

As the year is coming to an end, I'm start making plan for next year. One of the thing that I'm debating is how much should I save for retirement. I plan to retire in 35 years. My original plan is to save about 10K a year, but that only add up to 350K. It doesn't look enough. If I live for another 20 years, it would mean 17K+ a year. I don't know how much I can buy with 17K in a year in 35 years.

I also want to start saving for a house. But which one if more important? Retirement? House? How much should I save for both?

Why don't they teach us this in school?

Does anyone have any advice regarding this issue? How much should I aim to save for retirement?

Definitely put as much into retirement as you can while you are young. If you don't want to put a lot of work into it, you can invest in something like an S&P 500 index fund that will track the market. The long-term track record of the stock market averages around 8% per year but, that includes some periods like the 4th quarter of 2008 that was down nearly 30%.

Also, if you have any after-tax money that you want to invest, be sure to put it into a Roth IRA. You are limited to $5000 per year until age 50 but, the gains are not taxed when you withdraw (you do pay taxes on other IRA gains when you withdraw during retirement).

As far as the housing market is concerned, prices are quite low due to the 2008 housing bubble. There are a lot of deals out there if you do your homework. However, the first thing that you need to do is get prequalified to determine what your budget and down payment requirements will be. Those two will help determine how much house you can buy and how much you will be able to save for retirement.

One other piece of advice. Don't try to get the biggest house that the bank will let you have - they don't care how it will affect your retirement savings or standard of living. A big part of the housing bubble was due to people doing exactly that.

 

[turbo]

Borg's advice is good.

I'd like to add: don't get into the debt-trap when buying real-estate. Real-estate will rebound, and if you have sufficient savings to get into a property with little or no debt, this is a great time to buy (near the bottom). Remember, though, that interest on your loan will eat up much of the appreciation of the value of your property over the years, not to mention inflation. Buy something modest, with as much cash as possible (very little borrowed money), and when it appreciates, you can flip it and buy something else. The IRS allows you to deduct mortgage interest payments on your primary residence - but think how much nicer it would be to not have paid that interest in the first place, and only get to write off some of it.

My wife and I both worked, and we rented while I was chasing high-paying construction jobs, so that we could save money for our first house (it was an older house-trailer, but it was home). Got to live in a tiny 3rd-story walk-up for a few years? Do it. We were paying ourselves, not a bank.

 

[Borg]

The IRS allows you to deduct mortgage interest payments on your primary residence - but think how much nicer it would be to not have paid that interest in the first place...

I was always amazed at how many people told me that I would lose my mortgage deduction if I paid off my home. I would tell them that they were paying a dollar in interest and getting back 15 to 28 cents in tax savings but they usually couldn't understand it.

 

[turbo]

I was always amazed at how many people told me that I would lose my mortgage deduction if I paid off my home. I would tell them that they were paying a dollar in interest and getting back 15 to 28 cents in tax savings but they usually couldn't understand it.

That's typical idiocy on the part of people who are bad at math. I paid off my last mortgage (~20 years ago) as quickly as I could manage. My father did the very same over 40 years ago. He was a child of the Depression and couldn't stand owing any money to anybody. I learned that as a child. At some point, we might all have to consider taking on some debt, but that is not something to be taken lightly.

 

[Borg]

That's typical idiocy on the part of people who are bad at math. I paid off my last mortgage (~20 years ago) as quickly as I could manage. My father did the very same over 40 years ago. He was a child of the Depression and couldn't stand owing any money to anybody. I learned that as a child. At some point, we might all have to consider taking on some debt, but that is not something to be taken lightly.

I think the most common confusion when I talk to people is they just didn't think of it the right way. They know that they aren't subtracting the interest from their final tax bill but, because they deduct all of their interest (from their income), they see it as essentially getting all of the interest back. I usually don't bother to explain the other consideration that a person's deductions need to exceed the standard deduction before you even see any benefit.

BTW, paid mine in 2008 after only 8 years - making double payments puts a real dent in a 30 year mortgage. But, that's the advantage of not buying too much house. @sourlemon: I still put the max in my retirement during that time.

Disclaimer: My wife and I are DINKs. :tongue:

 

[turbo]

Disclaimer: My wife and I are DINKs. :tongue:

We are, too. We both came up through large families and neither wanted to have that burden or trouble. It's nice to have children around, and we both used to "adopt" nieces and nephews for weekend visits with videos, special food-treats, music, etc. The best part was that the kids had a great time, and we got to shuffle them back to their parents at the end of the weekend. If I see those nieces and nephews, they'll always say "remember that time..." and it is satisfying. Make some home-made pizza or chili, put on a video, play games, or put on music (always on, unless the TV was on) and those kids were so happy.

Back OT, it is a really good idea to be nice to yourself and pay yourself whenever possible. Got to live in a crappy rent? You're paying yourself instead of a bank. End up buying an old house-trailer for cash and living in that for a couple of years? You're paying yourself instead of a bank.

 

[Borg]

Back OT, it is a really good idea to be nice to yourself and pay yourself whenever possible. Got to live in a crappy rent? You're paying yourself instead of a bank. End up buying an old house-trailer for cash and living in that for a couple of years? You're paying yourself instead of a bank.

That reminds me. When I moved to the Wash. DC area, I purchased a mobile home and lived in that while I saved up. I did that strictly for the reason that I didn't want to get over my head on a mortgage that I could barely afford. This alls goes back to the OP: There are lots of options for saving and buying a home. Like anything else - research, research, research...

 

[char808]

If you run the math on 100k loan at 3.875% invested in a home and compare it to the purchasing power of the same amount of money in 30 years at 4% inflation you will notice that the two numbers are very close to one another.

Probably one of the few times where you can get a home mortgage that essentially just has you paying the average US inflation rate. And you get a house out of it.

 

[sourlemon]

One should have learned from one's parents and grandparents.

Lolz, I guess first generation immigrant like me are doomed then. But really, why don't they talk about this stuffs? I think it should be a requirement in college, just as foreign language is a requirement.

Thank you everyone for the replies.

jtbell, I was thinking in worst case scenario. But in this market, that may not be the worst case scenario. I may be thinking too much, but what if the company that I put my money goes bankrupt, does that means all my money is gone too? I can't help but feel I should hold a few thousands back "under the mattress" to be safe. But thank you for the calculation. I feel better knowing that's a good amount to contribute for me. I do plan to make a trip once a year to random places when I retire, but I mainly plan to live in a non-US country. Has anyone know someone who've done that? Is that troublesome?

So when you retire, the amount that you withdraw from your 401K/IRA is considered income? And that's how they calculate the tax?

I've looked over the 401K and IRA, but can't seem to wrap my brain around it yet. 401K seem like retirement plans that employer often helps contribute. The max limit is 16K. For someone like me who only plan to contribute 10K a year, having a 401K is good enough right? Should I consider getting an IRA? What's the difference between the two?

 

[sourlemon]

One other piece of advice. Don't try to get the biggest house that the bank will let you have - they don't care how it will affect your retirement savings or standard of living. A big part of the housing bubble was due to people doing exactly that.

Thank you for the advice Borg. I'm researching on where to put my $$ to save for a home. Recommendation?

Haha, I'm too lazy to buy a big house. Too much cleaning. My ideal home would be like an apartment, everything within 5 steps :)

 

[PAllen]

Thank you for the advice Borg. I'm researching on where to put my $$ to save for a home. Recommendation?

Haha, I'm too lazy to buy a big house. Too much cleaning. My ideal home would be like an apartment, everything within 5 steps :)

How long will you be saving? Time horizon is the single biggest determinant of what are reasonable investment options.

 

[sourlemon]

Thank you for reminding me of that. My current goal is 5 years. But I'm going to continue to look for a house where I am now, just in case I can find something good.

Is 20% for down payment low?

 

[PAllen]

Thank you for reminding me of that. My current goal is 5 years. But I'm going to continue to look for a house where I am now, just in case I can find something good.

Is 20% for down payment low?

You might as well go with a short term bond fund, with no-load.

20% is the minimum you should shoot for. If you can do 25% or 30%, much better. I second all the advice to have the leeway to pay off quicker. My approach was to get a 30 yr. mortgage, but then compute how much to pay to finish it by some chosen much shorter time frame (10 - 15 years). That way, if you have temporary setback, you can fall back to the minimum payment.

 

[russ_watters]

One should have learned from one's parents and grandparents..

One other piece of advice. Don't try to get the biggest house that the bank will let you have - they don't care how it will affect your retirement savings or standard of living.

My mother told me it is ok to stretch to buy a house because inflation and normal pay raises will enable you to grow into the payments. Damn her.

 

[turbo]

My mother told me it is ok to stretch to buy a house because inflation and normal pay raises will enable you to grow into the payments. Damn her.

20 years ago, that general advice might have been useful. If you followed that model in the past 8-10 years, you are screwed, especially if you took out a mortgage on that property that you were "sure" was going to appreciate faster than your interest rate and inflation could erode your investment.