All you need to know about saving for retirement

A couple of weeks ago, I wrote about the “Tyranny of the 401(k) Industry Complex.” The post was a commentary on an episode of PBS's “Frontline,” which argued that the current defined-contribution retirement system is failing the country; financial-services companies make money while working Americans don't, partially because these workers are getting ripped off, but also because the average American doesn't have the time, skills, or inclination to manage their own retirement planning.

There was a good amount of debate in the comments section about whether retirement planning is all that difficult. I can see both sides, but in this post, I want to make it as simple as possible. If you follow this advice, you'll be taking some big steps in the right direction. It's not a perfect plan for each individual — feel free to add your own tips below — but it's a solid strategy for those who have been frozen by “analysis paralysis” and have put off saving for retirement out of fear of making big mistakes.

Step 1: Save at least 10 percent to 15 percent of income, more if you're starting late

The typical American is saving around 7 percent or 8 percent; that won't be enough, especially for those who didn't begin saving in their 20s. To help workers determine a good savings rate, the super-smart folks at Morningstar's Ibbotson Associates came up with some good guidelines. Their assumptions:

  • Retire at 65
  • No cuts in Social Security benefits (Yes, it's very possible that benefits will be cut, but most people should also retire later than age 65.)
  • Inflation at 2.5 percent
  • Income needed in retirement is 80 percent of pre-retirement income after retirement savings (e.g., if your household income is $100,000 a year, and you save $10,000 a year, your required retirement income is 80 percent of $90,000, or $72,000)

It's an 11-page document full of fun (or not) charts, but since we're trying to keep this simple, here's a sample:

AgeIncomeSavings RateReduction for each $10,000 of portfolio
25$80,00011.2 percent0.40 percent
35$100,00017.6 percent0.57 percent
45$120,00028.2 percent0.31 percent

Here's an example of how to use this: A 35-year-old who has already accumulated $50,000 would subtract 2.85 percent (5 x 0.57 percent) from 17.6 percent, resulting in a savings rate of 14.75 percent.

Keep in mind that your savings rate includes an employer match to your 401(k) contributions, if you're lucky enough to have one. So if your employer matches 50 cents on the dollar up to a contribution rate of 6 percent, and you contribute 10 percent of your salary to your retirement plan, your actual savings rate is 13 percent.

All that said, if even looking at that chart makes you want to run away to Facebook, just do this for now: Save 10 percent to 15 percent of your salary if you're in your 20s or early 30s, and bump it up five percentage points for every five years you delay saving. Yes, that might be more saving than you're capable of. I'll address that in my next post.

Step 2: Choose the traditional 401(k), then the Roth IRA

Another speed bump along the road to retirement savings is the decision between a traditional and Roth account. The easy solution: Choose both. Use the 401(k) up until you take full advantage of the match, then use a Roth IRA for the rest. Two benefits: You're getting “tax diversification” by having both types of accounts, and you're not putting all your eggs in the 401(k) basket. The latter benefit is partially what that “Frontline” episode discussed. The sad truth is, many employer-sponsored retirement accounts stink. But opening an IRA with a mutual fund company or discount broker gives you more choices at better prices.

Of course, choosing an IRA provider and opening the account is itself a speed bump. So start immediately contributing to your 401(k), then resolve to do the Roth IRA thing later. But if you know you won't do it (self-awareness is a virtue!) then just get it all in the 401(k) — especially if you earn too much to contribute to a Roth IRA. (For 2013, the eligibility to make contributions phases out for single taxpayers with a modified adjusted gross income of $112,000 to $127,000, and 178,000 to $188,000 for married couples.)

Step 3: Choose a target retirement fund

Once you get your money into the account, you have to decide how to invest it. The easy answer: a target retirement mutual fund, which invests your money with a general retirement date in mind. The name of the fund always includes a year, and you choose the fund with the year closest to when you think you'll retire. Based on that time horizon, the fund manager chooses an appropriate asset allocation — some U.S. stocks, some international stocks, some bonds, some cash — and then rebalances the portfolio for you, making the fund more conservative as the target date approaches. It's essentially a one-stop-shop for hands-off investors.

While investing in just one fund may sound too risky, a target date fund is actually a “fund of funds” – i.e., a mutual fund that owns many other funds. Let's look at an example. Consider the T. Rowe Price 2040 fund, a fine choice for people who aim to retire in 25 to 30 years. It owns the following funds (according to Morningstar):

FundPercent of 2040 Fund
T. Rowe Price Growth Stock22.85
T. Rowe Price Value20.71
T. Rowe Price Equity Index 5007.48
T. Rowe Price International Stock7.16
T. Rowe Price Intl Growth & Income7.07
T. Rowe Price Overseas Stock6.86
T. Rowe Price New Income5.36
T. Rowe Price Emerging Markets Stock4.82
T. Rowe Price Mid-Cap Growth3.57
T. Rowe Price Real Assets3.56
T. Rowe Price Mid-Cap Value3.43
T. Rowe Price New Horizons1.59
T. Rowe Price Small-Cap Stock1.57
T. Rowe Price Small-Cap Value1.54
T. Rowe Price High-Yield0.89
T. Rowe Price Emerging Markets Bond0.89
T. Rowe Price International Bond0.68

Given that the year 2040 is a few decades away, this target retirement fund is mostly invested in stocks. As 2040 gets closer, the fund will gradually move from stocks to bonds all on its own. You don't have to do anything.

Now, two caveats about target retirement funds:

  1. Like all investments, they'll drop in value. The T. Rowe Price 2040 fund dropped 38.9 percent in 2008, when the S&P 500 dropped 37.0 percent.
  2. Investing in a target retirement fund doesn't guarantee you'll be able to retire on the target date. You still have to make sure you're saving enough.

Step 4: As you get closer to retirement, monitor progress

Once you reach your 40s — and certainly your 50s, and definitely right before you retire — you need to do some number-crunching to make sure you're on track.

You can use an online retirement calculator, and fiddle with the variables to see what has the biggest impact on your chances of success. You can also hire a financial planner who charges by the hour (such as some of the folks at the Garrett Planning Network and NAPFA) to give you an objective, professional analysis.

A fine start, but…

Voltaire is credited with the quote “perfect is the enemy of good.” Don't put off saving for retirement until you know everything and feel that your plan will be perfect. After all, “perfect” retirement plan doesn't exist, partially because there are too many variables that you don't have control over (e.g., investment returns, inflation, the future of Social Security). But you can increase your chances of success. The advice in this post will get you going in the right direction. Put these wheels in motion, then take time to learn more and customize the plan for your situation. Maybe you need to save more or less. Maybe you can do better than a target retirement fund. Maybe you should have all your money in a Roth. The good news is, none of this is set in stone. Just start doing something now, and change later as you learn more.

More about...Retirement

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Slackerjo
Slackerjo
7 years ago

Can I have the 25 year old’s 80K income? I am 46 and I certainly don’t make 80K let alone 120K.

Robert Brokamp
Robert Brokamp
7 years ago
Reply to  Slackerjo

Sorry, I should explained that better. The Ibbotson report has different savings rate suggestions for different levels of income at different ages; I just pulled out a few examples. So look at the report, and then look at the tables to find the line that has your approximate age and your approximate income.

Also, we’re talking about household income, so you’d include your spouse’s income, too, if you’re married.

Politely Vegan
Politely Vegan
7 years ago

We’re almost to our 30s, not making 80K, but saving as much as possible of what we do make. Thanks for the reminder that even though it’s not exactly exciting, saving for retirement is important at any age.

A-L
A-L
7 years ago

A few questions:

Do those calculations hold true for people with pensions? And does it differ for government pensions vs. private ones? And what about if one is not contributing to Social Security?

I a teacher in a state with a defined benefit pension. I contribute 8%, the school system does 6% (plus an amount for unfunded accrued liability). Granted, we save in addition to this, but didn’t know what recommendations were for people in situations like ours.

Henry
Henry
7 years ago
Reply to  A-L

I’d like to see this topic in a stand alone post. I have been trying to figure out an easy way to incorporate a defined-benefit pension into the wide variety of online calculators out there. You can take the present value of your pension and treat it like a 401K account, but it should be easier.

Rail
Rail
7 years ago
Reply to  A-L

Hello, all. I too wonder how my retirement fund will stand compared to the U.S. “normal”. I work for a class-1 railroad and don’t contribute to S.S. but instead have Federal Railroad Retirement. About 12% comes off the top of each check for tier-I and tier-II and 7% cont. to a 401k that the company DOES NOT MATCH. I’m agreement, non salaried so my income fluctuates but I also try to put 400-800 month in a savings account/emergency fund. Being 43 with a young daughter at home and trying to pay off the house takes a lot of the paycheck… Read more »

David
David
7 years ago
Reply to  A-L

I have advised educators with state pensions for over 10 years and the way you should look at the defined benefit plan is based on what percentage of your income it will replace at retirement. First,take 100% and subtract the percent of the salary your state pension will replace at your retirement age (60% for a 30 year educator in Georgia for example), subtract you current state pension contribution percentage(5.75% in GA) and subtract Soc. Sec. contribution (7.65%) if in a SS system.If you contribute to a 403b/457b plan, subtract that percentage. You now have the percentage of your retirement… Read more »

Johanna
Johanna
7 years ago

Was the transphobic joke really necessary? It’s kind of offensive and not all that funny.

Jen G.
Jen G.
7 years ago
Reply to  Johanna

I made it one sentence, then came here to say the same thing. Not to mention that the T-word is extremely offensive to transgender people (and their allies). I’m a fan of this website, but can’t believe this slipped through editing. Gross.

Robert Brokamp
Robert Brokamp
7 years ago
Reply to  Jen G.

I apologize to anyone who is offended by the term, and I’ve requested that it be pulled from the post.

Johanna
Johanna
7 years ago
Reply to  Robert Brokamp

Thanks for removing the joke.

Just to be clear, though, it’s not just that some people are offended by one word. The myth that trans* individuals’ sole purpose in life is to trick unsuspecting cis* folks into seeing them with clothes off has done a lot of real harm to real peoples’ lives.

KT
KT
7 years ago
Reply to  Robert Brokamp

It wasn’t the term that was so offensive, it was the sentiment.

Melissa
Melissa
7 years ago
Reply to  Johanna

Thank you, Johanna.

Mrs PoP @ Planting Our Pennies
Mrs PoP @ Planting Our Pennies
7 years ago

This is almost exactly what we’ve done with our retirement savings. Though we’re in Vanguard 2045 (we’re 30 now) for our Roth IRAs, which has a much lower expense ratio than the T.Rowe Price fund mentioned. Google finance has all the expense ratios and morningstar ratings for all of these common mutual funds these days, so it’s worth checking since it’s so easy!

rjack (Mr. Asset Allocation)
rjack (Mr. Asset Allocation)
7 years ago

This is great conventional wisdom and makes sense for most people.

However, I think people should be aware that if they can increase their savings rate to the 30%-50% range, then they can retire early if they want. This sounds hard, but it really is a matter of adjusting your lifestyle to your income. Anyway, it worked for me.

Also, Target Retirement Funds are a good start, but a self-managed asset allocation can yield significantly better results with less risk.

KT
KT
7 years ago

I was no longer interested in reading the article after the tranny joke. That’s just not appropriate and is unnecessarily cruel. If the author didn’t know any better, the editors certainly should have.

TB at BlueCollarWorkman
TB at BlueCollarWorkman
7 years ago

“Just start doing something now, and change later as you learn more.” — This is exactly what my wife and I did after we got married. We had no debt, but also nothing saved. We quickly decided that we needed to do something so we starting slapping our money into this retirement account at our bank. Later we figured out better options, but the first step is to just start. Just DO SOMETHING. Get a T Rowe online account, do the target retirement fund, transfer some money in. Boom, you’ve done something. Congrats. Perfect what you’ve done later, but just… Read more »

John S @ Frugal Rules
John S @ Frugal Rules
7 years ago

Great point on the tax diversification and one that all too many miss from my experiences with investors. I also like the Target Date fund recommendation, so long as they’re ones that are low fee and fitting with your risk profile.

Dianth
Dianth
7 years ago

We never even came close to making 80K a year. I saw the chart and I am not even going to bother reading the article. Get Rich Slowly needs to Get Real.

Slackerjo
Slackerjo
7 years ago
Reply to  Dianth

Oh and don’t forget to be married.

Johanna
Johanna
7 years ago

Anyway, back to the topic at hand… I know that everybody’s “helpful additions” go against the goal of keeping it simple, but I think something needs to be said about the importance of fees. As John Bogle said in the Frontline show, a 2% fee (which may sound low to many people) can eat away two-thirds of your nest egg over 50 years. Which means that, compared to a low-fee fund, you’d have to save THREE TIMES as much to achieve the same results. That’s no small issue. What this means in real life is that if the fees are… Read more »

Ramblin' Ma'am
Ramblin' Ma'am
7 years ago

“Perfect is the enemy of the good” is great advice in this situation. I think a lot of people feel so paralyzed by uncertainty about the world’s economic future that they think their personal security is totally out of their hands. But in the long run, those who start saving early will come out ahead of those who don’t.

Matt Becker
Matt Becker
7 years ago

This is a great post and could be followed exactly as is with great results. With that said, here are my tweaks. For your retirement need, take your currently monthly expenses and multiply by 300. This will get you a ballpark need. Then head over to Vanguard’s calculator and play with the monthly savings until the “Estimated balance” matches this need: https://personal.vanguard.com/us/insights/retirement/saving/set-retirement-goals. As for the Target Date fund, I think it’s an excellent suggestion and I agree with Mrs. Pop that Vanguard is a better choice than T. Rowe. I will also say that you don’t have to pick one… Read more »

partgypsy
partgypsy
7 years ago
Reply to  Matt Becker

Great according to this I will only need to save 1.2M, far higher than any other estimators I’ve used.
It makes it sound like you have to save that 300X amount, without taking into consideration that some expenses may be lower (mortgage, saving for college) that you will collect from SS and possibly from a pension.

Ann Taylor
Ann Taylor
7 years ago
Reply to  Matt Becker

Where does the 300 come from? I find both that and the 80% of your expenses to be strange guidelines. When I retire, the kids will be out of the house; right now, expenses related to them are quite high (childcare is 10% of our budget; they eat half our food budget; taking them on vacation with us doubles all the ticket prices and affects what kinds of accomodations we choose; the amount of driving we do to shuttle them between activities is crazy; etc) So living on 80% of our budget will seem quite luxurious when the leeches are… Read more »

Johanna
Johanna
7 years ago
Reply to  Ann Taylor

300 times monthly expenses equals 25 times annual expenses, which equates to a 4% withdrawal rate, the number you often see floated around for the amount you can withdraw from your nest egg that will give you a reasonable chance of your money lasting 30 years. So that’s probably where the 300 comes from. You’re right that your expenses may decrease in ways that you can foresee. However, they may also increase in ways that you can’t foresee (medical costs, for example). And partgypsy is right that the calculation doesn’t account for Social Security, which is probably not going away… Read more »

Matt Becker
Matt Becker
7 years ago
Reply to  Johanna

Johanna’s right about where the 300 comes from. And yes some expense might go down, but others might increase. Tax rates also might increase, they might not. Social security may still be around in full force, it may be decreased, or it may be gone. Or the retirement age could be increased. A 4% withdrawal rate may be too aggressive. Or maybe too conservative. There are millions of variables and obviously this suggestion doesn’t account for all of them. The 300x current monthly expenses is a ballpark estimate. It is not precise and it does not factor in your individual… Read more »

Phoebe@allyouneedisenough
7 years ago

I think the last paragraph is extremely important: “don’t let perfect be an enemy of the good.”

For the longest time I held back from opening a 401K and investing on my own because I was overwhelmed by the many options and choices I didn’t feel qualified to make.

Then I read numerous articles stating that how much you save is way important than which investments you choose. Because of that I save a bit more than is recommended in this post (~80%) but I don’t worry that I’ve selected the wrong investments.

mikeraw
mikeraw
7 years ago

I have a very dumb question…

I already contribute 8% of my salary to my 401K… I kinda started late, at 30.

On top of that, I save (by that, I mean pure savings, in a bank account) a particular amount each month.

So when trying to break up your income proportionally and experts recommend saving a certain percent, do they mean 401K savings or the type of savings that go into the bank?

mary w
mary w
7 years ago
Reply to  mikeraw

Generally they mean all long term savings so this would include 401k, IRA, and other savings. You shouldn’t include savings that you intend to spend in the short run (cars, vacations, etc.).

Sloane
Sloane
7 years ago
Reply to  mikeraw

I was given this piece of advice that works well for me – save 30% of your gross income, full stop. Some of this should always go toward retirement, but when you’re just starting out, aim to get the match or save as much as 10% of gross income toward retirement. When you are just starting out, priorities like paying down debt and building an emergency fund make up the remainder of the 30%. As you make financial progress, increase the retirement savings to a total of 15-20%, and save the other 10-5% for short and long-term goals like education,… Read more »

Jake
Jake
7 years ago

This is great advice. I particularly like the advice about doing a traditional up until your match and then open a Roth for everything after that. This is exactly the strategy that I will be using.

WWII Kid
WWII Kid
7 years ago

Am I alone in asking that future articles talk about people making $25k – $50k? Not everyone is in the six-figure category, and it would be nice to see calculations based on an “average” person’s income.

Tim
Tim
7 years ago
Reply to  WWII Kid

The link to the Morningstar article (which wasn’t working for me, as it had an unnecessary “source” tag in front of it) contains a wide variety of scenarios. Fortunately for people with 25-50k household incomes, Social Security will make up a far larger percentage of retirement income, and thus the additional savings requirements are much lower. From the Morningstar report, a 30 year old with a $20k income will require only a 7.0% savings rate, with a 1.65% deduction for each $10k currently invested. A 30 year old with a $40k income would require a 10% savings rate, with 0.79%… Read more »

SavvyFinancialLatina
SavvyFinancialLatina
7 years ago

This is great advice! We are currently about 15% of our income for retirement. We are also saving for short term goals.

joan
joan
7 years ago

I’m reiterating KT (Commenter #9) in saying what a sorry attempt at humor the tranny joke was. You may have pulled it from this article, but it was still front and center in the email. Of which I am now unsubscribed. Bad form, GRS. 🙁

“KT says:
15 May 2013 at 5:48 am

I was no longer interested in reading the article after the tranny joke. That’s just not appropriate and is unnecessarily cruel. If the author didn’t know any better, the editors certainly should have.”

SLM
SLM
7 years ago

When you recommend saving 10-15% of income, does this mean gross family income?

Debi
Debi
7 years ago

I have two pieces of advice on retirement saving: Save as much as you possibly can early in your working career. That way, if you need to, you can lower the amount you’re saving each month once the expense of raising children begins.

Don’t prepay on your mortgage. Put any extra money into your retirement savings. Time is money.

My Financial Independence Journey
My Financial Independence Journey
7 years ago

The big thing to watch out for with 401k’s is the fees. Some of the funds available can be total rip offs.

I save in my 401k up to the match. Then I dump 50% plus of my net income into a taxable brokerage account and invest it myself. This is proving to be a great way for me to build wealth, but it’s only something that I would recommend to someone who is willing to put the extra effort into monitoring their investments.

Jenny
Jenny
7 years ago

I am just curious. My husband has a 401K (he contributes 7%)that matches 6% dollar for dollar….also they put in an additional 2%. They started phasing out pension plans and gave him that instead. So in total he contributes 15%? Also they give us 3K a year for his HSA….Should we put more into his HSA or open a Roth? The HSA would be helpful in the next few years when we decide to start a family.

mike
mike
7 years ago
Reply to  Jenny

I personally would fund the roth first, as contributions to roth can be removed anytime penalty free, just not the earnings. Your HSA money is tied up for health care expenses only and you can’t assume your future situation. You can use HSA after 65 for non-medical expenses but you will have to pay taxes on it. Its up to you though because the HSA money would be prior to taxes. The nice thing about the roth is it will give you tax diversification in case rates shoot up in the future, you can pull money from it and not… Read more »

Juli
Juli
7 years ago
Reply to  Jenny

My company does the same thing — match up to 6% and just started adding an extra 2% due to phasing out the pension plan. I wonder if we work for the same company!

krantcents
krantcents
7 years ago

I was always a saver and you can pick an index fund that covers the total market as a start.

Ely
Ely
7 years ago

Looking forward to your next post, how to save enough when you can’t. I’ve got me covered, but my husband is much older, still in debt, working for a non-profit, and pretty much doesn’t believe in saving – as in, there’s no point, it’s too hard. If he is unable to work until the day he dies as he has planned, I don’t know how I could take care of him and still have savings left for the 30+ years I am likely to live after he is gone.

mike
mike
7 years ago
Reply to  Ely

It doesn’t sound like you got yourself covered, very few people work until they die. They get sick and cause lots of expenses. You can’t have yourself covered if you are living in the kind of situation, you pretty much said it yourself. If he get sicks or ends up retiring at 65 you will be paying his costs, which is not unusual for partners. So either you both will have to save more, your stuck or you have to move on.

Tiara
Tiara
7 years ago

I am not sure I am calculating this correctly. Looking at the chart, it says if I am 50 and making $40,000 and want 80% income replacement, I should save 22%. Then I deduct .97% for each $10,000 I have already saved. So since I already have $430,000 saved, I reduce the 22% savings rate by 43 x .97% which equals 41.71, which is greater than 22% and implies I have already saved enough. This does not jive with another commenter’s reference to a Vanguard calculator, which is 300 x monthly expenses – a calculation which says I need to… Read more »

Tim
Tim
7 years ago
Reply to  Tiara

Tiara,

You’re looking at the chart correctly. However, the chart assumes retirement at age 65. The growth of your $430,000 over the next 15 years is expected to be enough to cover your 80% income replacement. A quick check of the math confirms this – if you think you’ll need $600,000 at age age 65, then with no additional saving your portfolio will need only 2.2% annual returns (after inflation) to reach your goal. You look like you’re in great shape!

Tiara
Tiara
7 years ago
Reply to  Tim

Aha! Thanks Tim, that is very reassuring. 🙂

Bethany
Bethany
7 years ago

Very helpful, and I really like the guidelines you linked to, but I’m having one slight problem: these calculations were based on an individual, not a couple, so I’m not sure how that affects our personal numbers. On the one hand our joint income, current savings rate, and current savings balance suggest that we are doing quite decently, but perhaps the expenses for two retired people will need more than an 80%-of-net replacement? On the other hand we’ll be drawing two SS checks not just one, so that will presumably make up some of that difference?

Elizabeth
Elizabeth
7 years ago
Reply to  Bethany

Wouldn’t your expenses in retirement be less than a single person, not more? I’m single, and I pay more for housing, telecommunications, etc. on a per person basis than my married friends.

For instance, my married friends have nice homes while I have an apartment, but they pay less for housing than double what my rent is. They pay less for food when you consider unit price because they can buy in bulk and throw out less. Their telecommunications plans cost more, but again, said plans aren’t double what I pay.

Am I being as clear as mud? 🙂

Bethany
Bethany
7 years ago
Reply to  Elizabeth

In a one-bread-winner situation, you have to calculate with the income of one – but the expenses of two. And while you are totally right that the expenses are often significantly lessened per person-unit (due to cohabiting, bulk-buying, etc), once you double that to find the total expenses for the couple it can add up to significantly more than a single individual’s expenses would.

rr2
rr2
7 years ago
Reply to  Bethany

You are correct that the article is is geared towards single individuals. It says: “Our calculations are for a single individual. The savings rate we have calculated will be different, however, for a couple because the couple has a longer joint life expectancy than a single individual and the retirement income for a couple must last longer than for a single person. This is somewhat offset by the positive effect of spousal Social Security benefits, which decreases the need for accumulated capital. We suspect the spousal benefit more than offsets the costs of longer life expectancy but this will require… Read more »

Bethany
Bethany
7 years ago
Reply to  rr2

Thanks for pointing that out. I’d only had time to skim through the tables and not all the text. Mea culpa!

rr2
rr2
7 years ago

The one thing that concerns me just a little is the returns that they expect which is listed in Table 5. They are expecting that stocks (S&P 500) will return 10.96% nominal. Since the inflation rate they use is 2.5%, this translates to a real return of 8.46%. This seems rather high to me. On page 56, they comment in a separate box called “Returns in Real Life”. This implies that if you just followed their numbers as is, you may end up with smaller income than predicted. I would be interested if there is a separate study that takes… Read more »

bill3
bill3
7 years ago

How about a table that has more combinations of age and income, for those of use that fall outside the range (in either direction). It appears a generalized equation doesn’t exist due to their use of monte carlo simulations. And yes, I am talking about the pdf, not just the post here.

John
John
7 years ago

What ‘trany’ joke does everyone have their panties in a wad about? I read the entire article and I don’t see anything remotely resembling humor of any kind?

As far as the article, I have to agree with the writer. I save about 25% of my income not including my pension and sometimes I feel like I am not saving enough.

rosarugosa
rosarugosa
7 years ago

John, I believe the joke was removed before we got here.
I thought this was a great post. Where were you Robert, when I was 20 years old? Oh well, I probably wouldn’t have had the sense to listen back then. 🙂

Ryan
Ryan
7 years ago

Robert, is it just me or are the panels in table 6 swapped? Shouldn’t the 90% probability require the higher capital as opposed to the 50%? Also, these simulations seem to lose all reality as they extend to the extremes. Because the authors used net income, when you take a 55 year old earning 100k with no prior savings, 97% of income is required. This would be fine if the authors didn’t then use the remaining three percent to base the future withdrawals on. This dawned on me when I was comparing the results in the 80% column of Table… Read more »

Jim
Jim
7 years ago

Those income assumptions are way too high. The sad reality is most of us will not make $100k, ever, in our lifetimes. Find a job/force employers to go with a defined benefit and forget this calculation nonsense.

Mike@WeOnlyDoThisOnce
7 years ago

As you point out, it’s easy to push back long term goals in favor of spending more in the current moment. Great considerations here.

Debt Blag
Debt Blag
7 years ago

I like the way you look at this and I like that target funds have started coming into fashion to take away some of the intimidation some folks might feel about getting started. It’s as you say — the primary problem for the majority of people is that they’re not investing enough, not that they’re not properly allocated 🙂

Tristan
Tristan
7 years ago

Regarding Robert’s mention of tax diversification… My employer’s match on my Roth 401k is pre-tax. So there is built in tax diversification, except still have to deal with the limited fund selection and could-be-better expense ratios.

Greg
Greg
7 years ago

I’ve always felt (and vast reams of data back me up) that when selecting investments, expenses associated with funds are a major consideration. Aren’t these targeted retirement “funds of funds” at the high end of the expense range?

Tracy (the Other One)
Tracy (the Other One)
7 years ago
Reply to  Greg

Generally speaking, the index funds have the lowest expense ratios because they aren’t actively managed. There are discount brokerages like Vanguard, Fidelity, etc., that have index funds with very low fees.

Brianne
Brianne
7 years ago

There was a great interview about 401Ks on 5/16/13 on Fresh Air. I never knew how 401Ks came about; the IRS was looking for a way to tax executive bonuses. I’m a text book example of someone who’s too lazy to take full advantage of the Roth. I only put $200 in my Roth each month and I’ve got it all in the boring T. Rowe Price target funds. I went with T. Rowe Price because they used to let you start with a smaller investment as long as you had a recurring monthly contribution. Otherwise, I’m sure I’d be… Read more »

Dan
Dan
7 years ago

I would suggest GRS follow up with a stand alone post on expense ratios. A lot of people do not understand how they work or consider them when making investment choices and as a few posters here have pointed out they have a major impact on long term growth of retirement accounts. The age targeted funds have some of the highest ratios around. they may be easy but you pay for the convenience. Frankly many savy investors know it is a rip off to pay over 1% on a managed mutual fund when there are indexed funds with similar or… Read more »

wearsunscreen
wearsunscreen
7 years ago

My employer uses Fidelity for 401k admin and I want to shout out to their low-cost option that they don’t give any coverate.

So at fidelity I get low cost index bogle inspired accounts with the name spartan in them. 4 of them with in different indexes $10k+ in each for advantaged institutional class are way cheaper than the L2040 and to this lay person they seem diversified enough.

So the allocation doesn’t auto-shift, like a target date. I can stomach that and adjust them at least once a decade.

Jay
Jay
7 years ago

Those T. Rowe Price funds are awfully expensive. I’d encourage those interested in the concepts here to look into Vanguard funds. Extremely low expenses. For example, VTSAX, .05 vs. .29 for a comparable T Rowe (PREIX) fund.

Expenses are what prolong years to retirement. Be careful and do your research.

Cat
Cat
7 years ago

I haven’t been in a place where I’ve had a “real world” job that offered me a retirement fund up until now, and I have to wait a year to get it. That being said, I try to save up on the side now, but I know I’m not saving as much as I could… and probably wont be until that fund becomes realistic.

Mark ferguson
Mark ferguson
7 years ago

I think the traditional retirement model is a giant gamble. 1. You have to guess how log you will live after retirement. 2. You have to rely on what the stock market does with very little control. It’s very hard to know hat your actual returns will be to plan how much to save. 3. You have to sacrifice now to save enough to have a modest life in retirement. 4. By putting your money in retirement accounts it is not liquid. If you need that money for an emergency or opportunity you are facing huge tax consequences. My philosophy… Read more »

Matthew
Matthew
6 years ago

So where is this chart that includes different guidelines for being 23 and not making anywhere near 80,000 (no spouse)? I make 35,000 with 3% of my check put into a “simple IRA” with my boss matching 3%. Should I put more into it? Or get a Roth IRA? I dont understand the difference in IRA’s and 401K.

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