Boston Gal's Open Wallet

i'm guessing the 10x salary is in liquid assets(cash, stocks, bonds, etc), not necessarily just in a 401k/ira...

 

10x? That seem unattainable for most of the working class. Going by the article's formula of 10x salary at retirement, I'm at 5% of what I should have after 20-30 years, thanks to the stock market taking a crap last year. I would have been around 10%, otherwise. So at that pace, I might reach 30-50% of 10x my salary after 30 years, with average returns of 4-5%. Doesn't seem possible within this time frame. If I retire at 65, I'll have worked 45 years with a 401(k). I think most people will be working to age 65 or 70, perhaps beyond.

 

Seems rather high. I am a significant saver(usually max out), but I have also gotten significant raises over the years.

I am I guess 13 years into my career, and my retirement savings are about 1X my current comp, and 2X my average comp.

 

Compounding is your friend. I just ran an Excel model where 15% of each year's salary is saved, salary grows at 3%/yr, and retirement account grows at 8%/yr.

After 20 yrs, the retirement account balance is 4.9x the salary of year 20.

After 30 yrs, the retirement account balance is 9.7x the salary of year 30.

Of course these results depend heavily on the rate of return on retirement account investments.

 

Rainydaysaver's last sentence is what should be the new truth. People should not plan to retire at 57, 60 or even 65. Traditional svings models won't get you to where you need to be. Especially when people are living much longer than most models predict.

Just plan on working until 72.

 

Who the heck can retire after just 20 years of working when they are relying just on what they can contribute/invest in a 401(k) plan? Even after 30 years it would be a stretch. Don't most of us assume it will take 40+ years of working and investing to fund a retirement these days?

Did you notice that this is essentially a union group? The "crisis" they're responding to is that unionized folk can no longer retire in their early forties. What a tragedy!

 

My wife and I are what 'the millionaire next door' would refer to as PAWs (prodigious accumulators of wealth).

We have maintained a reasonably frugal lifestyle and now, with both of us 32 years old, have a net worth of about 4x our current income.

Our budget is approximately:
30% goes to taxes
30% goes to living expenses, including mortgage
5% goes to charity
35% goes to savings

Unfortunately our savings have seen only minimal growth, since we entered the saving game in the late 90s, just in time to get majorly whacked.

I do believe that we are on track to meet this formula, but I do not think it's reasonable to expect most people to save at the same rate we do. That rate is possible, in part, because of unusually high income for people our age.

 

The formula she is referring to is that at retirement (or at any given time you are living off your investments) you need to have 10x the amount you plan to withdraw each year in order to safely withdraw it and not run out of money. So if you want to withdraw $40K a year from investments, you need to have at least $400K invested.

That doesn't seem high to me at all; in fact a safer ratio is higher than that.

But the fact that she's making it sound like you have to physically save 10x your salary is bogus, as is the "fact" that you have only 20-30 years to do it.

First of all, you also don't need 10x your final salary - you need 10x the amount you need to withdraw annually. That amount should be a lot less than your salary once you back out the amount you were previously saving, the amount you'll be getting from social security, and any other debts you no longer pay on, such as a mortgage.

Still you don't need to save that much; most of the final investment value will be the result of compounding in the last few years before retirement. So when you're half way to retirement that doesn't mean you need to have 5x your salary saved, for instance - it should be more like 1-2x.

And most of us also have a lot longer than 20 years in which to accumulate assets. Nobody should expect to work only 20-30 years and then live off savings for another 40 or more - unless you're saving a ton.

Sounds like she's hyping fear to make you to buy into whatever she's selling.

 

@MEG:

I think you're mis-remembering the formula. The 'safe withdrawal rate' formula is generally 4% of principal.

That means that you need to have 25X the planned withdrawal amount saved.

 

This 10x salary benchmark doesn't make much sense to me: the important number for your retirement needs isn't what you earn, but what you spend (and what you'll spend in the future). If you're happy living below your means, you'll need a lower multiple of your income than if you're straining your budget every month.

Also, "20 to 30 years" is a way-too-broad category for any useful analysis. Even with very conservative calculations (level contributions and 5% growth), your retirement should double from year 20 to year 30.

And the answer to "Who the heck can retire after just 20 years of working" is "government employees."

 

Beware of those, especially in the financial industry, who will try to "scare" you into thinking you need millions of dollars to retire. Think about this: When you retire, you won't be saving that 6-10% of your salary for retirement. You won't pay into Social Security at the rate of 7.65%. You should have paid off your mortgage, another 20-30% of your income. Those factors alone say you can retire on 50% of what you make now. Social Security should replace 30-35% of your salary and savings (at 10X your salary) will replace another 25%. Add those numbers up and viola...you have enough to retire. To be fabulously wealthy? No. But to retire in some comfort, yes. Sound familiar? That's what your grandparents did and they probably made out just fine.

 

10 times salary isn't that much really. Using the 4% withdrawal rule of thumb that means you can only withdraw 40% of your pre-retirement income. Now in the US with social security this might be enough to replace most of your income (here in Australia our equivalent of social security is means tested so there is a trade off between being dirt-poor on a government pension and really saving whereas in the US the higher your income the more social security you get). But 20 years isn't very long at all. With a 5% real rate of return you need a 30% savings rate to achieve it.

 

could work, but sounds really difficult!

16.5K/yr for 10 yrs = $165,000, in 3 years, maybe it'll grow to $1 mil.

But, what if you earn $500,000 a yeare? It's impossible to grow it to $5 mil only being able to contribute $16.5k/yr!

Financial Samurai

 

I've been working full-time for about 25 years now. My NW is currently about 10x annual gross salary, but the amount sitting in my retirement account is only about 4x current salary. My retirement account balance is slightly less now than it was two years ago, so I plan on working another 20+ years if I remain healthy (and don't get forced it 'early retirement' through job loss when I'm over 50).

 

I do, but only because of my extremely small income (full-time mom, very part-time cartographer), and the 8 years of regular contributions to the IRA where I rolled my 401k.

 

There are so many pseudo-scientific formulas for calculating how much you'll need to save for retirement that it is ridiculous. The whole thing is a joke. Just save as much as you can. In reality, we can't know how much savings we'll end up with. Who knows if the US dollar will even exist as a currency in 30 years when I retire (hopefully) let alone what rate my investments will have earned over that time.

 

Google "Charles J. Farrell" + "personal finance ratios". It's actually a pretty rational (no pun intended) set of ideas and not at all non-attainable.

 

People are missing valuable earning time now by being unemployed during the recession, and with so many people behind on retirement savings because of years spent paying back student loans and other debt, a real glut of people who did not earn enough money during their working years looms for the future. It's hard to imagine who will hire all the older people who will still need to work past traditional retirement ages. They won't be the cream of the crop anymore. At the moment, even the cream of the crop is having a hard time staying employed. It will be interesting.

 

bostongal - i think you're still on track. keep in mind that your 401k will grow exponentially faster once your investment returns outpace your contributions, i.e. let's say you have worked 15 yrs and have $200k in your retirement account. assuming 7% returns a year and continued $16k/year contributions, you will hit $1 million in another 15 years. the power of compounding!
$200k in 15 years, then a 5x increase in the next 15 years after that!