Archive for February, 2009:
As our car loan payoff date is approaching (kind of), I’m crunching numbers on our next steps: Saving for retirement, saving for Jonathan’s education, and saving for a down payment on a house. I’ll discuss these three savings goals in separate posts.
The often-tossed around figure for retirement savings is 15 percent of your gross income. Since it is only meant as a rule of thumb, it’s important to actually crunch numbers to see if that figure is enough for you to reach your goals.
If you haven’t started saving for retirement until your mid-30s or earn a low salary, then 15 percent might not be enough.
- We’ll wait until age 59 (and a half!) before we make any retirement account withdraws, since doing so before that would be slapped with penalties.
- We’d live to be 100. It’s certainly possible. Today is my great-grandmother’s 98th birthday, and Shane’s grandfather will turn 90 next month.
- An 8 percent rate of return during the working years, and a 6 percent return during retirement.
- We’re not counting on any money from social security.
- In retirement, we’ll have no mortgage.
Given these many assumptions, it does look like saving 15 percent of our current income is appropriate.
Right now, thinking about saving that much is a bit daunting. But we have to do it. You see, even if Shane never gets another raise, that 15 percent contribution will still be enough. With inflation and (hopefully) pay raises, in a few years, that same $xxx contribution won’t feel like much.
A raise or a company match would just be gravy. How cool is that? I love compound interest.
So while investing $xxx each month right now seems like a lot, pretty soon, it’ll feel automatic. We won’t miss the money. And, I’m pretty sure that Shane’s salary will go up over time, and maybe once the economy gets better, a company match might make a comeback and sweeten the deal.
I guess it was inevitable, given the economy. As of March, Shane’s company will no longer offer a match on his Roth 401k contributions.
First, I’m grateful that he had a good match in the first place. I know that many people have jobs without retirement benefits. And, there are people who are struggling to find a good job. So I don’t want to sound like I’m complaining.
What will this mean for our finances?
Well, right now, we’ve been contributing about 9 percent of his gross salary to a 401k. The 6 percent company match gave us 15 percent total, which is the often-cited rule-of-thumb target. Whether that is too much or too little, I don’t know at this point.
I don’t think we’ll be changing our contributions right now.
If you follow Dave Ramsey, he says to hold off on investing for retirement until your debts are paid and you have an emergency fund. I’m not certain, but I think he means to wait even if you have a company match.
Personally, I think that if your company is going to give you free money, you should at least take some of it.
We’re on baby step 2 (pay off all debts) but we already have baby step 3 (3-6 months emergency fund) completed.
We’re still on target for paying off our car debt by the end of 2009. If we…
- Stopped saving for retirement and put that money to the car loan
- Contributed no other funds to the car
- Paid $1,662 as our last payment (this figure equals six months worth of car payments in our emergency fund)
We would have the car paid off in September, and would save $704 in loan interest.
- Put our retirement contributions
- Our budgeted $277 minimum extra payment (it equals a double-payment), and any additional funds each month toward the principal. Let’s say we come up with $100 extra each month.
- $1,662 toward our last payment
If we do that, we’d have it paid off by July and save $743 in loan interest.
We could continue as we are, which is putting at least $277 extra per month toward the loan, and any extra funds we can scrape up. Assuming we only can do the double payment and the $1,662 at the end, we would still have it paid off in October, with a total savings of $685.
So, at best, halting our retirement contributions could save maybe $58 in interest and get us out of debt maybe three months earlier. Eh, that doesn’t sound that amazing.
By comparison, if we make 5 months’ worth of retirement contributions, assuming 8 percent annual growth, at retirement we’d have between $20k and $40k (depending on when we withdraw the funds.
To me, it makes much more sense to keep on saving for retirement during these months instead of getting out of debt a few months sooner.