That means, we hope to put $15,500 in his Roth 401k, and an additional $5,000 in a Roth individual retirement account, for a total of $20,500 stashed away for retirement in 2009. In a year’s time, that’s about $1,700 per month going toward retirement.
Why?
Why in the world would we try to do that? Simple. Compound interest is on our side. In 2009, Shane and I will turn 24. We’ll have about 35 more years until we can tap those retirement accounts without penalty.
At 10 percent average annual growth, that $20,500 will turn into $576,099.66 in 35 years. At 11 percent, that’s $790,784, and at 12 percent, that’s $1,082,392. These are doable rates, I think.
His company gives a generous 100 percent match, up to six percent of Shane’s annual salary, for the 401k, so that’s a nice little bonus that compounds nicely over the long haul.
By the way, Shane and I probably earn a lot less money than you’d expect. We’re comfortably in the 15 percent federal tax bracket (meaning as a married couple filing jointly, we earn less than $65,100 in 2008).
Our priorities have changed.
Awhile back, we decided to save a six-month emergency fund. That’s on track to be completed around August or so. Then, we were going to pay off the car. After that, we’d put our savings efforts toward a down payment on a house. Aggressively saving for retirement wasn’t exactly a part of the equation, though we were still contributing enough to the 401k to get the full company match.
We’re still going to finish our emergency fund–that’s a non-negotiable. But, believe it or not, I think we’re going to delay paying off our car. By not paying off our car in 2009 (and just making regular monthly payments), we’ll actually have more money to throw into our retirement savings in 2009. Essentially, we’ll use what we would have put toward the car loan, and put that in our 401k/IRA. I know, I know, that’s sooo unlike anything Dave Ramsey would tell you to do. But, I think that’s what we’re going to do.
Finally, we’ve decided that we’re not going to try to become homeowners in the next couple of years (originally, we thought we might try to buy a house in 2010 or 2011). We feel too mobile right now, and we realize it could be several years before we end up in a city that we want to live in for a few decades. And, at this time in our lives (and in the near future) we do not want to deal with mowing the lawn, shoveling snow, making repairs, paying property taxes, homeowners insurance, and the other assorted expenses that come with owning a house. There’s nothing about home ownership that appeals to us right now. Nothing.
We’ll be happy renters for the next 3 to 5 years or so, and possibly try to move into a house at that time. Maybe.
So for us, the best decision (financially and fitting with our priorities) is to put the bulk of our efforts toward saving for retirement.
Can we do it?
We think this max-out goal is doable because we’ve consistently been saving about 40 percent of our income (sometimes more), and we’ve just got one debt (a car note that costs $277/month). If we had to, we could probably live on less than $1,800 per month if we suddenly lost all income.
We anticipate that within the next few months, Shane will move to a new position within his company. With that change comes a possible pay raise. If we have to move, we’ll seek a cheaper apartment, if possible. Even if those two things don’t happen, we think we can still do this.
Need to investigate
I have some logistical questions. Rather than $1,291.66 deducted from each monthly paycheck ($15,500 divided by 12 months), I think I’d be more comfortable with making a few big contributions toward the end of 2009, for the sake of having the option to change our plans if we decide that’s in our best interest. I need to check with the HR department to find out more information on how we can do it. Ideas, anyone?
Why tell you?
I like being accountable. Putting these goals in writing helps us to become more accountable to ourselves and to others. I’ve got to admit, this post is a bit scary for me to publish. What if we fail? It stinks to have an audience when you fail.
Cuz ya know what? If we can pay off our credit cards, have an emergency fund and max out our retirement contributions on our income–anyone can.
I’m not sure how you’d make the 401k contributions in big chunks rather than it coming out of each paycheck, since the money coming out of your paycheck is pre-tax (and matched by the company, but presumably you’re contributing beyond that limit) and the money you’d be holding in a bank account then contributing later would be post-tax (and would get taxed a second time when you withdraw it in retirement) So, let me know what you find out from the HR department- I’m interested! With the Roth, you can easily contribute as much as you want, whenever you want, up to the limit, no problem.
Great goal! The magic of compounding interest favors the young!
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This is an awesome goal! Your retired, 60-year-old self will thank you for this someday!
My HR people hate me as I’ve people slowly put surely creeping up my contributions by .25% with each pay check. They just had a form I needed to fill out and fax on over to the office.
The one nice lady on the phone said it’d really wasn’t an issue unless I was contributing underneath my employer match. Since it’s just my money I’m sending over, it doesn’t affect their budget.
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What an awesome goal, Kacie! I think it’s totally doable, and totally worth it.
David and I are in the same boat as you guys as far as homeownership goes. My parents rented until I was born (seven years into their marriage), and I kind of have the same mindset: wait until we’re in a place where we’ll be for many years to come and wait until we have kids and thus need extra space. No need keeping up with the Jones’!
You go, girl!
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Hey Kacie,
That is so awesome. I am sure you guys can do it. Take advantage of the company match as much as you can too, our companies match nothing…
This is why we haven’t completely decided where to invest for retirement. No point in being set with our companies people if there are no bonus’ right?
On the house issue, you have to do what is going to be best for you in the long run. For us, I think it was owning a home in this town. Only time can tell!
We did that with home ownership ourselves. I’m 27, been married 7 years and have two kidlets. We just purchased our first home because we had to move anyway and it was a steal. Otherwise we’d still be renting. Our cousins were on the buying bandwagon as well as a sibling. Three have lost homes, others are on the verge. Especially when we are in a state thats so mobile I definetly think renting is the way to go financially and freedom wise. I love our new house but the expenses just keep increasing! I have to laugh when people tell you that when you buy you aren’t throwing money away anymore. What do you call property tax, homeowners insurance, repairs, mortgage interest, PMI and everything else. Oh and don’t forget your time, every Saturday is now gone!
That sounds so great. I’m glad you guys are so into planning for these things — it inspires me to do the same!
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You can do it! I think that would be awesome and it will pay off long term! Keep us posted on how it shapes up in 2009.
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That is wonderful!!! A very valid goal for sure. Compound interest is super important. We need to contribute more to our 401s, but we’re working to pay off our credit cards and car payments. And saving to buy some land.
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Sure, you can change your 401K amount at any time–you just have to make sure you make it in the right time frame. For instance, at my place, you have do it more than 30 days in advance for it to come out of the monthly paycheck. (I usually forget and think it’s less than 30 days. Then, I have to make a phone call instead of doing it online and they always are able to do it. But it’s a hassle.)
There IS a problem with doing it in large chunks however: You lose out on dollar cost averaging. What if the market goes up during the year? Then, you put your entire $20,000 in at a high point. If you do it throughout the year, you might fluctuate prices–some high, some low, some in between.
You probably cannot do it with money in your checking account as another commenter implies. You usually can only contribute to the company-sponsored plan through paychecks. So you also have to be sure that you have enough in each paycheck to cover your amount. You can’t do it all in one or two months. You can, however, wait on the Roth IRAs, instead, and just do them lumpsum at the end of the year. You still lose out on dollar-cost averaging, but it gives you some flexibility.
Remember, if you start out at the high amount you really hope for, you can always change your mind and change the 401K withholdings to a lower amount.
I applaud you for making this goal and publicly announcing it so you HAVE to stick to it!!
One thing I will caution you on is expecting 10-12% consistently in the future. Most economists/high-end investors (Buffett, Bogle, etc.) seem to think that stocks will keep growing, but not at the same rate we’ve seen in the past century. Personally, I’m planning on 7-8%, and if I get more than that, I’d be thrilled.
You are already doing the best thing possible for your retirement, which is to start saving early. The next thing that will help you most is asset allocation - you can afford to be aggressive since you are so young, but make sure you mix large/small/value/growth in both US and Int’l stocks, and have some bonds for a safety net as well. Other than that, just be very mindful of “load funds” and expenses - remember that expenses eat away your returns every year.
Lump sum vs dollar cost averaging could go either way in any given year, so I wouldn’t fret that too much.
To the first commenter: I believe they are talking about a Roth 401k, not a standard 401k, so it would be post-tax money.
Hope I helped, and again, great job!!!
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Good for you! You guys are so good at preparing yourself in advance for anything that comes your way: you’re a great team:)
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Kacie,
I applaud your efforts! You guys will be ready for retirement when it comes! I appreciate your diligence in planning for the future!
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Thanks for being so honest and sharing this info…it is inspiring to see what you guys are able to do at such a young age…I wish I had half of your money smarts when I was your age! Keep up the great work! :)
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