| Thursday, September 13, 2007 |
| Do you have two times your income saved in your retirement plan? |
This Wall Street Journal article: Making Sense of Retirement Plans included a reference to another article which I found interesting: A $1 Million Retirement Fund: How to Get There From Here.
In the second article it is suggested that instead of focusing on your ultimate retirement number, which can be daunting (mine is that great big scary number: $3,376,500.00) focus instead on accumulating two times your salary in your retirement plan. Mr. Farrell figures the breakthrough occurs at around two times income. Let's say your salary has hit that $80,000, you have amassed $160,000 in savings, you are socking away 12% of your pretax income each month and your investments earn 6% a year.
Over the next 12 months, your $160,000 portfolio would balloon to $179,518, or $19,518 more. Your monthly savings would account for $9,600 of that growth. But the other $9,918 would come from investment gains. In other words, you've got to the crossover point, where the biggest driver of your portfolio's growth is now investment earnings, not the actual dollars you're socking away.
You should, however, keep salting away money. That sacrifice will be handsomely rewarded, as things really start to snowball. Using the assumptions above, your portfolio would soar from $160,000 to more than $418,000 a decade later. True, part of this gain would be lost to inflation. But inflation should also drive up your salary, allowing you to squirrel away more money.
Getting started. That still leaves the initial task of accumulating two times income.
"It can take people 12 to 15 years," Mr. Farrell says. "The earlier you can start, the better. But if you're close to two times pay by your early 40s, you're probably in pretty good shape." I think I should be able to accumulate two times pay in my retirement account by the time I reach my early 40's. I wish I could say I was already there - but I have lagged socking money away into those accounts. I am making up for it now, but still, it would be nice if I could go back and visit my twenty-something self and have a little heart-to-heart financial chat...Labels: Calculation |
| posted by Boston Gal @ 10:45 AM *
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| 18 Comments: |
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I think I'd have to slap my 20-something self. Especially when she cashed out her first retirement plan.
What bothers me is that even if I had 2X my income in my retirement plan, it wouldn't feel like much. My husband makes over twice what I do, so technically I've gotten used to a higher standard of living than would be possible on my salary alone. Therefore, to be on the safe side, I feel like I need to save as much for retirement as will allow me to continue my current standard of living.
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2x your salary doesn't seem like a lot to have saved particularly if you're in you're early 40s. That's halfway to retirement for most people.
Thankfully, I'll hit 2x by the time I'm 33/34 but then again, I plan to retire at or before 50.
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I'm eligible to contribute to a 401K plan for the first time ever next month. I just got the packet today and I'm so excited!
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I wish I started saving earlier as well. At age 18 I was still too busy enjoying myself. Well, better late than never!
-Raymond
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I read that article too, and I found the idea really encouraging. Once you hit a plateau, your funds really do grow at a much faster rate than you can save--which is all the more motivating.
I currently have 41% of my income in retirement accounts. My projections show that I should have 200% of my income in retirement by the time I'm 30--and I'm assuming my income will be 50% higher by then, too.
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I know. We are playing catch up in my husband's TSP as well. I think parent's influence has a great effect on that. His parents are not savers so he hasn't learned to be one either until after our marriage and I took over the finance. But of course, years have lost.
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I'd never heard of the 2x income idea. Since I'm in my mid-twenties, it doesn't seem like an unachievable goal at all. Fifteen years is a long time to squirrel away money. ;)
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Wow, I think this is the first time you cited an article I've already read. Usually I hear about newspaper articles first from you, because you keep in better touch with the mainstream media than I do.
Anyway, my answer is no, I do not have 2 times my salary in my retirement accounts. I have about 1.25 times my salary. But I think I'm on track to have 2 times my salary by my late thirties. I'm 30 now.
But that's just my personal income and my personal retirement accounts. If I look at household income and both of our retirement accounts, we're not doing as well. We're in okay, but not fabulous shape. We have about 1.33 times our household income socked away in our retirement accounts, and my spouse is fast leaving his early forties behind. Right now I'm looking forward to him getting to the point where he has ONE year's salary in his retirement accounts. I think that will take us another two years.
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That is a great way to look at it! The inflection point really is awesome to watch unfold before your eyes.
The coolest thing is that you don't really know the exact date that you reach it - it moves around daily!
Keep saving!
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Good luck to you in achieving this, BG. And I like the idea of having a smaller more manageable goal to strive for as a way to get folks to create a plan and start savings.
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I am playing catch-up in a serious way, and without a 401K. I'll get there, but I serously doubt I'll have 2x my salary by my early 40s. I'm still trying for 1x and I'm 36, egads. I do like the mathematical gift of compounding, though.
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Well...by the end of 2007, I plan to have $2,000 in my account. Since I'm 22 and just starting out, that's a good start. I'll have to remember this, though.
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$3,376,500.00? Which conservative calculator came up with that number? That would be equivalent to an initial yearly draw of $138,436.50 (at 4.1% of your nest egg, then increased yearly indexed to inflation). Seems like a lofty number, but I guess you'd want a lavish retirement after living a stingy working life.
My parents are actually in that boat right now. They maxed out at a yearly income of around $200k and can draw about $150k/year w/o ever running out, but they are so used to cheap living that they will probably never spend over $50k/year even if they have the money.
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$3,376,500.00? Which conservative calculator came up with that number? That would be equivalent to an initial yearly draw of $138,436.50 (at 4.1% of your nest egg, then increased yearly indexed to inflation). Seems like a lofty number, but I guess you'd want a lavish retirement after living a stingy working life.
That doesn't seem too lofty if you consider Boston Gal probably won't retire for thirty years and inflation will reduce it to .48 of today's spending power, e.g. roughly $66k/year. That's not an insane amount of money to retire on in Boston.
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Yes, I've reached that point and more and more than 50% of the value of the accounts is now derived from investment earnings. It's certainly a good goal to achieve. Now I know I'll have a decent amount there even if future contributions are not as great.
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Very interesting concept. I will have to do some spreadsheet magic with this, but not at 1:40 in the morning.
I am at the crossover point according to this right now, so this really does interest me.
Thanks for the post!
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Amazing concept. Though I balk at posting a savings goal that is 2x my salary, I think I might have to do some focusing on this number while still paying down my debt.
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Awesome...I'll aim to hit that in another 6 years. We're at 50% of our income in about 20 months of saving for retirement. We started late 26 and 28 because we were in graduate school.
But with maxing out Roth IRAs and 401ks we're going to hit it fast hopefully.
Plus we're going to try and hit that in taxable accounts by 40, I think it will happen.
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I think I'd have to slap my 20-something self. Especially when she cashed out her first retirement plan.
What bothers me is that even if I had 2X my income in my retirement plan, it wouldn't feel like much. My husband makes over twice what I do, so technically I've gotten used to a higher standard of living than would be possible on my salary alone. Therefore, to be on the safe side, I feel like I need to save as much for retirement as will allow me to continue my current standard of living.