Dissecting retirement savings

When I finally and completely quit my once-full-time job in May, something changed: Neither my husband nor I have access to an employer-sponsored retirement plan. With a significant drop in income, we're looking at maximizing our now small retirement account contributions. So, how can we get the biggest bang for our buck?

Before we talk about that, let me fill you in on my retirement contribution history. I did some things right and some things wrong. When I turned 21, I was allowed to start contributing to my employer-sponsored retirement plan. While I wasn't completely finance-savvy, I had heard that I should contribute enough to get the maximum employer match, so I did. Six percent of my paycheck went into my 401(k) and another 3 percent came from my employer.

I had also heard that when I got a raise, I should increase my contribution. I did that too, all the way up to 10 percent. And when I left that position (and subsequent positions), I rolled every retirement plan into IRAs or Roth IRAs (I have both) that my financial adviser relative recommended.

And our retirement savings has kind of run on autopilot ever since.

Now that we have experienced the significant drop in income I mentioned above, I am focused on the 7 percent we currently save for retirement. I have lots of questions.

Do we need to continue to save for retirement at all? I can't believe I am even writing this question on a personal finance blog, but have you seen the charts that compare two people and the magic of compound interest? One person started at, say, age 20, and saves a reasonable amount each year for 10 years. The other person started at age 40, saves a lot more money and still has less money, significantly less money, at traditional retirement age.

My husband and I started our retirement savings early. While we didn't always save even 10 percent of our income, our retirement savings has already grown to a significant amount. By plugging numbers into retirement savings calculators, it seems like we would have a comfortable retirement, using conservative returns and a 3 percent inflation rate, especially considering our low cost-of-living area.

So, do we continue to save or not? First, I wrote an article asking a similarly crazy personal finance question: Should you have an emergency fund? In that article, one of the readers said that she would have used my post for an excuse NOT to have an emergency fund. I don't want you to use this post as an excuse NOT to save for retirement because Americans already don't save enough for retirement. But I do want to share our thought process about our future.

The answer, at least at this time, is that we do need to save for retirement. There are simply too many unknown factors: What will inflation be? Will we live more than 20 years after retirement? Will our retirement expenses be higher than expected?

Should we be contributing more than 7 percent of our income to retirement savings?

By only contributing 7 percent of our income to retirement savings, we're well below the 2014 IRS individual contribution limit of $5,500. Since the U.S. tax code currently offers a full tax deduction up to the maximum contribution limit for traditional IRAs, we are missing out on some tax benefits.

Still, we intend to have a conservative retirement, so again, thanks to our early start, we should be fine.

Is our current method of retirement savings the best we can do?

Had I known about index funds, fees, returns, and that nobody cares about my money more than I do, I would have done some things differently. When it was time to roll over my old 401(k)s, I asked a financial adviser for advice. I rolled them over, signed the paperwork, and have contributed a small monthly amount ever since. Only recently did I actually check more closely — and, naturally, I found two issues that I should have caught years ago. (Please ignore the fact that I write for a personal finance blog.)

First, my mutual fund company charges a 5.75 percent sales charge off the top of all my original contributions. So that means a $100 investment is immediately whittled to $94.25. How did I miss that?

Second, the return for our mutual funds is lower than the stock market.

Why didn't I roll them into index funds? Well, for years, I didn't know what an index fund was. But I know now, and I still haven't done anything about it. So no, our current method of retirement savings is not the best we can do. When you're only contributing 7 percent of your income, it seems really stupid to give up a 5.75 percent sales charge.

My plan is to cancel our future contributions to this mutual fund while (for now) leaving the rest of the money in these mutual funds. After all, we've already paid the sales charge. But for the future contributions, we're planning to invest in index funds.

Should we be investing in something else?

“I don't have an IRA or a 401(k) or anything,” one of my friends confessed. “Instead, we keep investing in our businesses.”

She's my age, with a significantly higher net worth than I have, even though they don't have any traditional retirement savings. It made me question our methods: Should we have some additional diversification? Rental property? Businesses?

Then I had a reality check. If I don't have enough time to pay as much attention to the investments we do have, I certainly don't have time to manage rental property. At least, not right now. Perhaps this will change in the future, but I need to optimize what we already are doing.

As you can see, retirement savings can be complicated. However, even though I made several mistakes, the important things are still to start saving as early as possible and save as much as you can. Those two things should cover a multitude of (but not all) errors.

Have you ever found yourself questioning your retirement planning?

More about...Budgeting, Planning, Retirement

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Tina in NJ
Tina in NJ
6 years ago

If she were my friend, I would encourage your business owner friend to add a SEP IRA or some such thing to her retirement planning. All I can think of is all those Enron employees who only invested in company stock and when the company collapsed had no job and no savings. Investing in your business is good, but you need more diversification. Especially the way entire industries are disappearing these days (of course I have no idea what business they have, but still…)

getagrip
getagrip
6 years ago
Reply to  Tina in NJ

If the friend’s business isn’t a business without them being there and directly providing the service, then they will have little to nothing in hard assets to sell and all the more reason they need to have retirement accounts set up. Otherwise they are fooling themselves.

Johanna
Johanna
6 years ago
Reply to  Tina in NJ

Another thing to consider is that retirement accounts (401(k)s, IRAs, and the like) are protected in bankruptcy. Nobody plans to end up in bankruptcy court, but a lot of people do anyway.

Jon @ Money Smart Guides
Jon @ Money Smart Guides
6 years ago

I think it is good to have other assets for savings – like a business or rental property – but you can’t go wrong with retirement savings. It’s a nice tax deduction or tax free growth that will help you out in the long run. I have my own business and make it a point to save the max for a solo 401k. At the end of every month, I send a check out to Schwab to invest in my account. I’d love to have the extra money to pay me a higher salary, but I know that what I… Read more »

CIWOOD
CIWOOD
6 years ago

I have found very few load funds that are top performers. You should use Morningstar.com to investigate your existing load funds and you will probably change to lower expense no-load funds or ETFs like Vanguard offers. The fact that you have already paid the up front load should have nothing to do with your decision to choose investment vehicles going forward. That sounds like a sales pitch. Your salesman is still making a small commission off of your old mutual funds. Compare the expense ratios and I am sure you will pursue a custodial rollover of your tax deferred assets… Read more »

FI Pilgrim
FI Pilgrim
6 years ago
Reply to  CIWOOD

+1 for this, with you being in a lower tax bracket it seems like Roth IRAs are perfect for you. Also, index funds are almost like diversifying, especially if you are comfortable with the long-range returns.

Johanna
Johanna
6 years ago
Reply to  CIWOOD

But if all your retirement assets are in Roth accounts (Roth is not an acronym – only the first letter is capitalized), and all your retirement income is tax free, then you’ll be in the lowest tax bracket, i.e., you’d have done better to put at least some of your money in traditional accounts.

Laura
Laura
6 years ago

“Still, we intend to have a conservative retirement, so again, thanks to our early start, we should be fine.”

“Intend to” and “will” are not always the same thing. This sentence says to me, “Bad things happen to other people but I’m doing the right things so I’m immune.” My $0.02: If you’re in a financial pinch right now, 7% savings is fine. But if you can swing it to do more, it’s your insurance against the unknown.

Beth
Beth
6 years ago
Reply to  Laura

Totally agree. Maybe your kids and grandkids live across the country, or in another country. Maybe you’re forced to retire early due to illness, disability or job loss. Maybe there are new technologies or lifestyle options you want to take advantage of. If you plan to “age in place”, you’ll need extra money to renovate your home as you age. Maybe you want to help your kids out in college.

Things can change so quickly. I think unless we’re financially independent (a la J.D. or MMM) then there is always room for more savings.

Larry Bob
Larry Bob
6 years ago

Do we need to continue to save for retirement at all?

The answer is if you are set on retirement, then feel free to take the foot off the gas a little. Invest in retirement hard when you are young, and once you build up some significant assets, ease back a little and start to invest more in life experience.

nicoleandmaggie
nicoleandmaggie
6 years ago

Have you checked out the annual fees on that mutual fund too? Chances are they’re also higher than an index fund, meaning you should ignore that sales charge as a sunk cost.

Another vote for saving more than 7%, especially if you still have room in your IRAs. Like Laura above says, who knows what’s going to happen, even if you’re frugal.

I hope this series will talk some about SEPA and other options for additional savings.

Eric
Eric
6 years ago

I too found myself questioning our retirement savings. Mostly due to the forms of employer retirement savings available to us (a 401k with bond or stock index funds). I just was not comfortable having any money in markets (stocks to unpredictable for me, and concerned that bond funds only stand to loose in years ahead as the FED slows it’s bond buying). In the end my wife and I did not sign up for the 401k. There was no employer matching, so we figured we would apply the money we would have saved in the 401k to pay down our… Read more »

Marsha
Marsha
6 years ago
Reply to  Eric

There’s no such thing as “guaranteed cash value.” Hope this doesn’t disturb your rest, but insurance companies sometimes go bankrupt. State guaranty organizations take over, and there are upper limits on what can be paid out. If you’re going this route, make sure to diversify your policies. I’m not an insurance expert, but it seems to me that you’re investing in the markets anyway, through your premiums to the insurance company. They invest the excess they don’t spend in paying claims and administrative costs. So you’re basically just paying a huge handling cost to put your money in the market.… Read more »

mysticaltyger
mysticaltyger
6 years ago
Reply to  Eric

What Marsha said is spot on. There’s no way to avoid the effects of the stock and bond markets on your life unless you have absolutely zero need for money (which is close to impossible).

Eric
Eric
6 years ago
Reply to  mysticaltyger

Bond rates change, and if you hold bonds in a fund, you are subject to market risk and could loose money. One can stay out of the market by purchasing bonds directly from the US Treasury and holding them until maturity, thus protecting their principal. Other than that, there is no way to eliminate the middleman from the equation that I could find, so the task is to find the right middleman. In my case it seemed the life insurance company was the only middleman that would protect principal over time with a cash value that as Marsha notes has… Read more »

Curtis@PayOffMyRentals
6 years ago

“Landlord” and “Real Estate Investor” are not synonymous. The former often requires much more time and headaches than the latter.

Generally speaking, if you purchase your real estate correctly and manage it efficiently, there is a better ROI than for the same amount invested in an index fund or even a dividend growth fund. I wouldn’t be too quick to rule it out as an viable passive retirement option (if you decide on the more passive option of investing vs. investing/land lording).

Bugs Meany
Bugs Meany
6 years ago

I am currently in the same predicament. I am happy with my retirement savings, but I don’t want to work until I am old enough to access this money without penalty. At some point I think you have to slow down on retirement savings and work on building a bridge between the day you retire and the day you can access your retirement funds. But deciding the best point to do this is the hard part.

Danielle
Danielle
6 years ago
Reply to  Bugs Meany

I’m in the same boat. When does it make sense to stop contributing to retirement funds? And how do I build the gap between ending full-time employment and actually collecting on my retirement? Would LOVE to see an article here on this topic.

Johanna
Johanna
6 years ago
Reply to  Bugs Meany

Bugs and Danielle: You can withdraw from your retirement accounts without penalty before age 59 1/2 if you do so as part of a “series of substantially equal periodic payments.” Look up “72(t) distribution” for more information.

stellamarina
stellamarina
6 years ago
Reply to  Bugs Meany

One thing I did was set up about a dozen CDs a few years before I retired. (There was better interest then) They were to use for travel after I retired and I limit myself to one a year for the more expensive long exploring trip overseas.

Wendy
Wendy
6 years ago

As a CPA and CFP I have a lot of thoughts about this, but the short version is that you should NOT be doing a tax-deductible retirement contribution if you are in a 15% or lower tax bracket and you have no other employee matching.

In that scenario you should be funding your Roth IRAs to the extent you can save. The Roth IRA will do double duty as an emergency fund or college fund as the need arises, and if no need arises, then be there for retirement.

Sally
Sally
6 years ago

Maybe you will have enough doing 7%, maybe you won’t. However, my philosophy in planning my retirement is to consider my kids. If they have enough now, and I have spare cash, I owe it to them to do everything I can to be financially sound in my retirement. While it’s admirable that you started at 20, you cannot forsee the cost of living when you retire. What if…health, accident, etc? IMO–Aside from their education, and providing for their early needs, the best gift you can give is to let them start without the burden of you. If it is… Read more »

Nick
Nick
6 years ago

You could always save more and retire earlier. Or at least be able to retire earlier if you want or need to for personal or health reasons. The more you have saved the more resilient you are in the event of trouble – health, financial crisis, personal issues, fear fire flood, family needs. The one thing that has me concerned right now is watching a friend of mine spend insane amounts of money to keep his very elderly (and very ungrateful) father in a care home. His dad needs 24 hour care, and it is expensive. I am watching my… Read more »

A Frugal Family's Journey
A Frugal Family's Journey
6 years ago

I think it is normal to question your retirement planning from time to time, especially if your circumstances continue to change or evolve. That is why I think it is important to speak to retirement planner or financial planner once a year to go over your portfolio and make sure your on track to meet your retirement goals. If change must occur, it is much easier to change course if you find out early on.

Best wishes to all! AFFJ

Diane C
Diane C
6 years ago

Wow, I see lots of good input here, but I am surprised that no one has asked you WHEN you want to retire. To decide how much is enough to save, one must first determine how soon the money will be needed and how long it will have to last. DH and I are no longer saving actively for retirement. I retired at 54. DH is 2/3 of the way to a defined benefit pension (with COLA) and loves his work, so he plans to continue working until he’s 60. He still puts a token amount into his 401k and… Read more »

Laura
Laura
6 years ago
Reply to  Diane C

Diane,

I’m interested in your comment that said you are still contributing to a Roth IRA every year – but you retired when you were 54.

I know I must be missing something here, but your comment piqued my interest because I am a young, recently-widowed retiree, not working, and I would love to be able to put some money into a tax-deferred retirement account (but since I’m not working, I can’t figure out any way to do it).

Diane C
Diane C
6 years ago
Reply to  Laura

Oh Laura, I am so sorry for your loss. I got married for the first time very late in life (at 54, to be exact), so I was prepared to finance my retirement alone. I got in the habit of contributing to a Roth years ago.The reason for continuing to contribute to a Roth in retirement is to avoid taxes. I am not sure of all the details, but I believe what I have done for the last few years is called a spousal Roth, based on my husband’s income. Since your situation is different, it may not apply. Please… Read more »

Laura
Laura
6 years ago
Reply to  Diane C

Thank you for your kind words and your comments. I will be meeting with a CPA, as this new chapter is scaring the bejeepers out of me! (I have a pension and some other money coming in, so it’s not “How will I eat?” scary – just “I don’t know quite what to do next” scary.)

Having said that, I HATE that you consider 54 to be “very late in life”. 🙂

Money Saving
Money Saving
6 years ago

Wow! A 5.75% sales charge?!?!? That’s highway robbery. Too bad you didn’t catch that at the time.

I agree with Diane above. Even though you will have a modest retirement, when you want to retire is a key variable as to how much you will need to save. I hope to have the flexibility to retire early if needed, so we are saving much more than 7%.

Anna
Anna
6 years ago

I think it’s good that you’re asking this question. Personal finance is personal and if you’ve run the numbers and feel confident as to where you are it makes sense to decelerate retirement savings somewhat. I would maybe make a commitment to myself that for every 1% sustained increase in pay you contribute a third to retirement savings, a two for one ratio so to speak. Then reevaluate your position again once you’re back up to 12-15% contribution rate. However, again, I believe that if you ran your numbers you shouldn’t let rules of thumb keep you from making changes… Read more »

getagrip
getagrip
6 years ago

I’m sorry, this article gave me a flashback to a Saturday Night Live skit where they’re playing “who wants to be a millionaire?” and the guy gets the first question right, still has all his lifelines, and quits. “I’m good!” he declares. “I’m taking the money and I’m done.” I guess part of the way the article came across to me is there are no financial goals. I can see not putting more money into “retirement” accounts and funding something else, but the whole article left me with a feeling of “Yup, I’m good, nothing else to do but keep… Read more »

Marcella
Marcella
6 years ago

I think it’s great to be thoughtful about your retirment savings, but I feel like half the information is missing in this equation.

I didn’t get a good sense of whether or not it’s a stretch or really hard for you to maintain the current level of retirement contributions? Can you afford to keep saving at that rate?

The other missing piece is what else you’d like to be spending your money on. Are you forgoing other things or opportunities because you’re saving? If you don’t save for retirment, where will the money go??

JoDi
JoDi
6 years ago

“My plan is to cancel our future contributions to this mutual fund while (for now) leaving the rest of the money in these mutual funds. After all, we’ve already paid the sales charge. But for the future contributions, we’re planning to invest in index funds.” I’m surprised more people haven’t commented on this. The sales charge you paid is a sunk cost. By leaving that money where it is, you are only losing more money. I’m sure the expense ratio is high so these funds are still costing you money in fees, and they’re underperforming! You should move them over… Read more »

carlyt
carlyt
6 years ago

The key is to start saving/investing early in life, be consistent, take advantage of any employer matching plan, max out contributions when possible, eliminate debt, avoid risks with your nest egg and plan for multiple streams of income once retired (social security, pensions, dividends, part time work, etc.). There is a great deal of information about retirement available on the web. I use several sites including the site Retirement And Good Living which provides information on finances, health, retirement locations, part time work and also has a great blog of guest posts about a variety of retirement topics.

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