Monthly Archives: July 2015

Retirement: What’s the magic number? And how on earth do you get to it?

OK, retirement. This isn’t a pleasant topic for most of us, because we know we’re way behind where we should be. This is and isn’t our fault: Company pensions used to be very common, and social security more secure, so our personal retirement was only one component. These days retirement is much more of an individual responsibility, and it’s a big complicated responsibility that many of us aren’t equipped to deal with.

Besides that, many of us are dealing with stagnating incomes that don’t keep up with inflation, and student loan debts that would be inconceivable a couple generations ago.

But at the same time, it is our responsibility to try and put SOMEthing away for retirement, and many of us Americans just have our heads in the sand. We’d rather spend our money on gadgets, data plans and avoiding our kitchens. Even if that means racking up credit card debt and neglecting retirement savings.

Pulling your head out of the sand for even a moment to try and gauge how your current investments look can be enough to make you want to run away forever. But that’s only going to make things worse. What I’ve done is resolve that, even if I never reach a magic number of retirement savings, or even figure out what that number might be, I’m going to try harder to build my retirement fund. Because at least I’ll be closer to where I need to be than if I just ignored it out of a sense of futility and fear.

So, OK. How do you calculate how well you’re doing? There are any number of calculators out there, using different algorithms and data and giving you different results (usually either monthly income projected/needed in retirement, or total amount projected/needed upon entering retirement).

I chose to start with three sources I trust: Vanguard, Kiplinger and Fidelity.

Vanguard has a neat retirement calculator that lets you slide numbers up and down and see how close you are to what you need monthly in retirement, adjusted for inflation; a bar graph on the right-hand side of the screen adjusts whenever you adjust a number. It even links to a Social Security Administration tool that can help you estimate what your monthly Social Security income will be. (Of course, that annual letter you get from the SSA is more accurate, but this will work for a rough calculation.)

Kiplinger also has a simple calculator that produces a “nest egg goal” as well as a number of how much you should be saving per month to get there (noting that this number will need to increase over the years to get you where they reckon you want to get).

Since they use different data and produce different results, it was a bit tricky to see if they matched up. But once I slid the Vanguard ticker to where I’d be saving enough annually to meet what Kiplinger said I should be saving monthly, I could see that they both said about the same thing. To retire at 65 and have 80% of my current household income in retirement, I need to be saving about 35% of our current gross income. We are currently saving less than half of that. Yikes!

The third site I trust, Fidelity, has an interesting way to think about retirement. They use a simple rule of thumb: Make your goal to save 8 times your ending salary by the time you retire. They tell you to get there by trying to save the amount of your current salary by age 35, 3 times your salary by 45, and 5 times your salary by 55. (Note they mean your current salary at each age, so if you earn more at 45, you should try to save 3 times that amount.) The article goes on to detail factors that could affect the “rule of thumb” number.

I like this third calculation because it gives concrete goals to reach by certain ages–just the kind of financial goal that keeps me motivated. But in the end, it’s telling me the same thing–my family needs to be saving much more than we currently are.

Still, it gives me something to work toward, and even if I don’t ever reach these ideal numbers, I’ll be better off chasing them than pretending I’ll never get old or sick or want to stop working.

It’s a bit more complicated since I have three working adults of different ages in my household. But I didn’t let that stop me. Anitra is 36, I’m 41 and Neil is 42. Since the rule of thumb says you need to be at 1x by age 35 and 3x by 45, I figure you should be at 2x by age 40. So if I pretend Anitra is 35 and Neil and I are both 40 (ah, to be that young again!), we need 1x Anitra’s salary and 2x my and Neil’s salary to be on track. (Are we on track? Oh heck no!)

Since we already missed that milestone by at least a mile, I decided to make an aggressive goal to get caught up by the next big 5-year mark. In 2019, Anitra will be 40, I’ll be 45 and Neil will be 46. That means we should have 2x Anitra’s salary and 3x my and Neil’s salary saved up.

Do I think we can do that? I’m doubtful, but determined to try. It’s an astronomical goal in my mind right now: We’re basically only halfway there, which means in four years we’d need to save up as much as the three of us have saved up over our ENTIRE WORKING LIVES.

But then again, it’s not as crazy as it sounds. We no longer have consumer or education debt. We now have a substantial amount in retirement that means growth will be dramatic whenever the market takes an upswing. I don’t think we’ll make the goal, but I think we’ll get closer than seems possible right now.

So what’s my plan? Well, first off, we already contribute the amount needed to get the max 401(k) match at our jobs. Second, we have Roth IRAs that have been neglected over the past year, but I’m planning to max them out (or get as close as I can). (You can contribute up to $5,500 per person per year to Roths.)

If I succeed in maxing our Roths, I’ll up my and Neil’s work contributions so that, with our match included, we’re each putting aside 10% of gross. (I already put away 10% of Anitra’s gross freelance income.)

If I get all that set up, so we’re all maxing our Roths AND putting away 10% of our gross income, I’ll see how much we’re short of our goal. Maybe I’ll be able to stretch and put away even more. I’m not sure where we’ll put it then. Maybe up our 401(k)s and SEP (Anitra’s freelance version of a 401(k) a percentage at a time until we’re on track.

Of course this is all pie-in-the-sky thinking, since I haven’t even gotten halfway to maxing our Roths for the year and the year is more than halfway over. But it’s good to think pie-in-the-sky. Eight years ago, I set my sights on becoming debt-free except for mortgage. I didn’t really think we’d get there, but I figured any progress was better than none. And now here we are, on the other side of that seemingly unattainable goal. So you just never know.

financial future

Drastic shift in finances = new focus and priorities

It’s been six months since I last posted, and probably the most financially dramatic six months of my life so far. First a quick catch-up, and then on to the new focus in my life.

When I last posted here, I was in a period I called “temporary parsimony.” My family had stretched mightily beyond our means to buy the perfect home for us. As with many purchases like it, the process contained several pitfalls that meant we were stretched far thinner than we’d intended. Several unexpected costs around closing, plus the condo was taking forever to sell so we were covering two mortgages and sets of utilities. We knew we could do it, but only if we were extremely careful.

So we entered the most disciplined, strategic and conscious stage of our finances that we’d had since our near-meltdown in 2007. Our new home was furnished with loaners, alley castaways and Freecycle finds. Fun money was cut to the bone, debt payments kept to the minimum and retirement contributions reduced. Our entertainment consisted of cooking for friends and watching movies on Netflix. Our Xmas and birthday gifts were the money we’d saved up for those holidays so we could buy long-deferred wants (and it was thrilling, let me tell you, to suddenly have new T-shirts, socks, slippers and pajama pants!).

Our income was increasing during all of this; Neil and I got raises, and Anitra’s freelance business turned out to be much more lucrative than she’d predicted. But all of the money went to filling gaps, such as saving up to try and cover the big loss we knew we’d suffer on the condo if and when we finally sold it.

Even with all the saving and scrimping, we had to take out a 0% credit card to carry some expenses and use that money to buy  our way out of the condo. (The check we took to closing was nearly three times as much as what we’d brought to closing as a down payment when we bought the place!)

We received an opportunity to refinance the mortgage on our new place and save a ton of money monthly, but it involved paying off a smaller second mortgage that we’d taken out with the seller. We saved up as much as we could but also ended up taking out an unsecured line of credit to cover that payoff.

Even with the big checks, once the condo mortgage/dues were gone and the new home mortgage was reduced, I could see that our monthly cashflow looked much brighter. We’d still have to be disciplined, but there was light at the end of the tunnel.

Then we got unbelievably good news: A long-hinted-at windfall, a big chunk of money gifted by my dad, was coming to us. Sure enough, a few weeks later it was in my bank account.

I promptly paid off every non-home-related debt: the new credit card, the line of credit and the last of Anitra and Neil’s student loans. For the first time since I was 18, I had no student loan or consumer debt to worry about. There was even a good bit of money left over to start renovations on our shabby-looking (but very promising) home.

So six months since I wrote about all the ways we cut back, I could write a volume about all the impulsive and not-at-all-necessary purchases we’ve made! I’m still tracking every penny to make sure we don’t overdo it; we haven’t even come close, but I’m well aware that “lifestyle creep” doesn’t take much time at all to take over.

For the first time in a long time, I’ve shifted gears from how much I could reduce and save to thinking about what I want to spend our money on. It’s exhilarating, strange and a little scary to be honest.

But there’s another priority besides kicking up my heels and enjoying the sudden freedom: Retirement. I’m 41, and I realize that I haven’t ever given retirement savings my full attention. First I was too busy being young and irresponsible, and then I had to spend years digging myself out of the hole that irresponsible version of me had put me in.

Now I’ve always put a bit away for retirement, at least since my mid-20s, and I occasionally upped it incrementally. So it may be that I have more retirement savings than many Americans. But I’m not on track to have enough to live comfortably in retirement, nor to deal with expensive long-term care solutions, should I be one of many people who develops a disability late in life.

Especially now that I have enough money to have a bit of fun, traveling and fixing up the house and shopping, it would be a jarring thing to suddenly find myself scrimping and scraping again when I’m old.

So I’ve got to try and tackle this monster of a topic, retirement. Unlike budgeting and paying off debt, it’s not a simple calculation. It involves uncertain growth rates of investments, certain (but indefinite) inflation, and the mystery of just how lucky I and my spouses will be in the aging gamble: Will we manage to stay fit and mentally unscathed and wanting to spend money on fun, or will we be hit with debilitating ailments that take money to take care of? Either way, how much would those two futures cost?

Whatever the answers are (and I’m not sure I can answer them with any degree of accuracy), one thing is clear: We need to be saving more. Even if we don’t manage to get to a magic number that I may or may not come up with, we need to get closer to it than we are now.

My next post will show you my first rough attempt at calculating what we’ll need in retirement. Then we’ll just have to go from there.

NT water