Mar 14 2012

Retirement series wrap-up: Debt & college vs. retirement and more

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Thanks for sticking with me on this retirement series! It can be complicated stuff and I hope I treated the subject matter with the clarity it deserves. This is big bucks we’re talking, after all.

When should you start funding your retirement account while getting out of debt?

As with all questions, the answer is “it depends.” Some financial advisors suggest not contributing to retirement until your debts are paid and you have a starter emergency fund.

Dave recommends stopping your contribution to retirement plans and investments for as long as it takes to get rid of your debt (excluding mortgage payment). Do not withdraw from your retirement plans; just let them sit while you conquer your debt. Then, after everything is paid off, start contributing toward your retirement plans again. — Dave Ramsey

I disagree. I think it’s risky to miss out on an employer match, especially if if takes a year or more to pay off your debt. Dave reasons that if you’re throwing all of your money at debt, it’s a bigger debt snowball and you’ll be out of debt sooner because of that. Maybe.

If you truly are struggling to make traction with your debt pay-off, then maybe it does make sense to be aggressive with debt and hold off on retirement for awhile. But if you’ve got a small emergency fund and are making steady progress with an end in sight, I think it makes sense to at least contribute enough to get the full company match if available.

For most of 2011, we only contributed enough to Shane’s 401(k) to get the full match. Beyond that, we were saving like mad to have enough to put 20% down on our house. In 2012 we’re trying to catch up. I’m glad we didn’t stop our entire retirement contribution.

Where does retirement fit in with saving for kids’ college?

Retirement should trump kids’ college. Well-meaning parents don’t always see it that way. I think of it like this: Kids can come up with a variety of ways to pay for college — part-time jobs, scholarships, testing out of certain classes, loans and more.

The same can’t be said for retirement. You might not physically be able to work into your 80s+. It’s better to prepare for your own retirement over your kids’ college.

Final things to keep in mind

  • Don’t put off planning for retirement. Seriously! If you can’t contribute right now, come up with a plan for how you’ll get to that point, and when.
  • If you can’t invest as much as you’d like right now, at least invest something. It’s easier to gradually bump up your contributions than it is to go from 0 to 10% at once. Plus, the contributions do add up.
  • Pay attention to fees. Keep your expense ratio under 1% and avoid paying front or back-end loads.
Two books you might be interested in:
I obtained Saving for Retirement Without Living Like a Pauper or Winning the Lottery* when it was free for Kindle. It had a great run-down on a lot of retirement topics in an easy-to-understand way. It was a bit condescending in places, unfortunately.

Next, I borrowed the audio and Kindle version of I Will Teach You To Be Rich* from the library. It’s now on sale for $2.24 for Kindle right now, so I bought a copy since it contains material I will probably want to reference later. The title is arrogant and if you don’t like the blog then you won’t like the book.

This book features more financial basics and it doesn’t focus on the entrepreneurial aspect of money like his blog is doing lately. Despite the tone, I think the author has a lot of good info and 20-somethings will probably learn from it.

Posts from the series, in case you want to go back:

Go here to see our retirement calculator, created by my husband, Shane.

  1. Series intro: From drugstore deals to retirement
  2. How do you want to spend your retirement years? This part is about planning your time spent; not planning the financials.
  3. How much money will you need to retire? This post will help you figure out your hypothetical retirement expenses. From there, we’ll calculate how much that will be in inflated dollars, and we’ll also factor in pensions and Social Security to get a final ballpark of how much we’ll need in our nest egg at retirement.
  4. How much should you save with each paycheck to reach your goal? For some people, 10-15% will be plenty, but it’s a rule of thumb that won’t fit everyone’s situation.
  5. Where should we invest our retirement funds? Talking about 401k and IRAs, and setting up your IRA
  6. How to choose your retirement investments in your portfolio. What’s a large cap fund? Are index funds a good choice? How can we decide on specific investment options in our 401(k) or IRA?
  7. How to choose your asset allocation. How much of your portfolio should be stocks or bonds? Breaking it down further, how much should be large cap, small cap? Here are some ideas to get you started.

*Amazon affiliate link. See disclosure policy


Posted under Retirement | 4 Comments »
Feb 15 2012

How much should you save with each paycheck to reach retirement goals?

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{This post is a part of my retirement series}

Last week, I walked you through one way to calculate how much money you’ll need to retire.

Today we’re going to run some numbers to determine how much we’ll need to invest with each paycheck to reach our retirement goal.

Some rules of thumb suggest investing 10-15% of your gross income for retirement. Perhaps financial planners figure many people should be able to put aside 10-15% of their income without really missing it.

Related: The Save 10% for Retirement Rule is Stupid @Provident Planning

Some folks figure if they are “maxing out their retirement accounts” (putting in $5,000/year in an Individual Retirement Account, and $17,000/year in their 401k this year if you’re under 50) that they’ll be sitting pretty in retirement.

Both of these scenarios — maxing out accounts or saving 10-15% for retirement — can miss the mark.

If you are starting to save for retirement at an older age, maxing out your accounts might not be enough.

The rule of thumb doesn’t take your specific situation into account. It doesn’t factor in when you start saving, how much you’re investing, how long you have until retirement, how much income you’ll want to draw in retirement, pensions…and so on.

So, we’ll need to consider our own situation to determine two things:

  1. How much should we invest for retirement with each paycheck?
  2. Will it be enough?

For many, saving 10-15% will indeed be enough. If you find that you’re not currently on track for the retirement you envisioned, you can take steps now to change that. Better deal with it now, than have a nasty surprise later on, you know?

Start with this overly simplistic calculator to get a ballpark idea of where you’re at. It asks three questions: Your age, how much you make right now, and how much you already have saved for retirement. It makes a variety of assumptions regarding how much you’ll spend in retirement, your retirement age, Social Security, and more. But it’s a start.

That calculator thinks I’ll be fine socking away around 9.4% of our annual income. Ok.

I think that calculator’s assumptions are a bit kind, and that reality could be much harsher. I don’t think its 2.5% inflation assumption is realistic. So I’m going to assume the minimum we can save will be 10%, but we’ll likely need to do more.

Next, try a few more retirement calculators.

Plug in your numbers and fiddle around with different scenarios on inflation and your investment return. Plug in how much you’re currently contributing (along with your company match if applicable) and see if you’re on track.

Right now, we’re doing about 18% of Shane’s gross, including company match. I’m also going to calculate what would happen if we decreased the percentage (say if we lost the company match, which has happened before). It looks like we should hit our goal and then some.

It’s worth running a few different calculators because they each have varying assumptions. We can’t calculate the exact figure we’ll save, so it’s good to get a broad target.

If you keep on doing what you’re doing, will you have enough to retire when you want to? What percentage of your income does it look like you’ll need to invest, minimum?

If your calculations are showing that yes indeed, you are most likely on track for the retirement you want, then yay! Stay the course!

What to do if you discover you’re falling short with retirement savings

Say you just ran the numbers and it looks like you’re coming up short. Don’t panic! Turn that fear into action and come up with a plan to turn this thing around.

    • Increase your 401k contributions. If you have a traditional 401k, your money is going to that 401k using pre-tax dollars. You can put more money here, but your take-home won’t be reduced by as much as if you funded it with after-tax dollars like in a Roth IRA.
    • Increase your retirement savings every time you get a pay raise.
    • Pay off all consumer debt ASAP to increase your cash flow. Once your debts are gone, funnel that money into your retirement account.
    • Are you getting your employer’s full 401k match? Increase your contributions so you hit this mark.
    • Consider delaying when you’ll retire. Working full-time for just an extra few years does two things: It increases how much you’ll be able to save, and it decreases the amount of years you’ll need your retirement income.
    • If you’re debt-free, funnel your windfalls into your retirement accounts. Think pay raises, bonuses, “extra” paychecks if you’re paid biweekly, tax refunds…do all you can to boost your contributions. You don’t *have* to invest 100% of every windfall from here on out — just consider investing a solid portion so you’ll get back on track.

See if there is room to decrease your retirement expenses.

  • Some contributions are always better than no contributions. If you are totally overwhelmed with saving your “required” percentage, at least do something. It will add up, and you never know if a windfall or pay raise could come along later to boost your progress that much more.

Posted under Retirement | 14 Comments »

Hey! I'm Kacie, wife and mother of 3. I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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