The credit card debt of $9,500 just makes me shudder.
Thereâs no information here on why they have credit card debt. Maybe it was one of those zero percent deals, maybe they blew it on a vacation. Who knows? Debt is just a tool in the financial toolbox, it isnât necessarily bad.
With 20 years to go before retirement, they should be looking a $1.5mil+ in their retirement accounts by the time they retire if they keep contributing and invest well. Plus, that level of income should provide them each about $22K or so in SS (assuming each makes about half of the $127K. So they should be looking at about $90-100K/year when they retire.
Credit card debt is bad as there is no interest deduction and the rates are pretty high.
One of the questions I have about these rules of thumb (e.g., 12 times income at 65 and 7 times at 40) is whether the savings they are talking about is after tax or before tax. If you have $X MM in an IRA or 401(k), that is worth only 65% to 50% of $X MM after tax. [Actually, that is if one had to take it as a lump sum so it is worth a bit more since there is tax-deferred accumulation over time]. Do we assume that the rule of thumb is for after-tax dollars?
Also, why does the rule have to do with income and not living expenses? Isnât the most relevant instruction to have an amount sufficient to cover oneâs living expenses for quite a number of years after tax and inflation?
I plan on being retired by 65 with no earned income. 12 x 0 = 0. Hurray! I donât need to save anything!
I think they are always before-tax, since most retirement savings is before-tax (I could be wrong but I think tIRA and 401K assets dwarf Roth assets, but Iâm too lazy to google it.) Incomes that are discussed are always before-tax.
It makes for an easy soundbite. It also makes an implicit assumption about living expenses, which is that you are basically spending every penny you make. 12x your salary, using the 4% rule looks like it would provide about 50% of your pre-retirement income, and SS will provide about 25%. 75% of your pre-retirement income lets you keep the same expense level in retirement as before retirement - you need less income because you are no longer saving for retirement (10%+) and donât have to pay FICA on anything any more (7.65%), and donât have to pay Fed income tax on the missing 25% (another 6-7%).
I do not disagree at this number, $1.5mil+. But I do not think our family can make it. I know some CCers here can accumulate that much (or have already had.) But I doubt the majority of CCâs family could manage to achieve this.
The hypothetical familyâs $127K income is for one person. The wife does not work. The wife stays at home currently to be with their teen aged kids, and consider going back to work soon â maybe this is the major reason why the FP thinks their family could âmake itâ when they retire in 20 years.
Re: the credit card debt, it was explained that it was because 1) the husband has had some pay cut (127K is AFTER the pay cut.) not long ago due to the oil bust 2) the wife stopped working some time ago (did not mention when she stopped working.)
I was off quite a bit when I recited their 529 number from my memory. They have had 7500 in their 529.
But still, I think they really do not save enough, considering the fact that the husbandâs income used to be, say 5% more than $127K and the wife used to be working (maybe used to be a nurse in a surgery room? Definitely not as an unskilled labor.)
Overall, I was not impressed by their progress toward their retirement so far. They have not paid for their childrenâs college education yet! Our familyâs income has never been so high and it was always one-income. I think I might be doing better than this hypothetical family when I was his age. But to be fair, they have 2 kids and we have only one. Raising kids could be expensive (depending on how you raise them, though.) Our problem is mostly that it could be a daunting task to work till 65 yo in the field of my work. Very few percentage of people in my field could manage to work till 65 yo.
If your estimate of 22K income due to SS is correct, I think this couple could get $22K + a half of $22K = $33K SS when they retire, assuming that the wife did not work long enough. (The financial planner always assumes that a person who might had been working only, say, 20% of their time before they were 46 yo, and they can all of a sudden work 100% till their old age. WellâŠmaybe the wifeâs previous working experience does give her this option. It is good for them if this is the case.)
I am also curious to know when people refer to their nest egg, it is a pre-tax amount like pre-tax 401K or deductible tIRA, or after-tax amount.
1.5mil after-tax amount is next to impossible for most retirees, I think. People living in the high COL cities on the coast often rely on the accumulated equity on their house to claim that they have so much assets set aside before their retirement.
Iâve joked about this before, but from the opposite side it also makes no sense. My wifeâs income recently went up. Are we now way behind in retirement savings?
I guess it might be helpful for some people who have no idea what they need in retirement. Hopefully they listen up and start saving if theyâre way behind. For the most part, I think itâs clickbait.
I assumed they were each making half of the $127K, so each would get $22K, or $44K for the couple. If only one spouse works, and has been at or above the FICA max for most of their career, they will get about $30K from SS and their spouse can get half of that, or around $45K.
I always use pre-tax, because it is impossible to predict what will be left after-tax.
If you start early enough and put away 10-15% of your income every year, itâs feasible for many people.
Thatâs what I tell my kids. My guess is that 2 of 4 will do as recommended. Not perfect, but probably better than the national average 
Your explanation in the last paragraph in post #4743 is very good to a beginner like me. I finally understand the relations among these numbers: 12 times final annual income, 4% withdrawal rule, and 75% of your pre-retirement income. Thanks.
I will be very happy if I could achieve 60 % of my pre-retirement income. More likely than not, I will be at 50 % only. 75 % is a pipe dream for me; it ainât going to happen in my life time. This is why I recently talked to my wife about the possibility in some lower COL country â at least in a super low COL area in this country.
One of my coworkers plans to retire at Stockton, CA. (Isnât it a city which declares bankruptcy a few years back or I am mistaken?) At least his parents are living there due to its lower COL. This coworker seems to be much more frugal than me â he rarely spent any money for his lunch! (The company provides some very bad Raman noodle free to us and he lives off that almost every day over the past few years. I do not know an engineer has to have this skill: living with such a low meal cost. WellâŠI heard of another even more extreme case: a person, also an engineer, did not have to pay any money for his housing either even when he owned a house (he rented it out) - he lived in with some old people to take care of them and received not much compensation but got a free room to live in. Also I have once met several ânewâ engineers (who worked for a contractors-for-hire company A but was assigned to work on a project for company B while camping within company B â this practice becomes more popular these days.) They live with many semi-related people in a house to lower the housing cost (the house was officially leased by company A.)
These superly frugal people could possibly accumulate 1.5mil even if the company forces them to retire at 50 yo â unless they are ripped off by company A. The productivity is high from the company Bâs shareholdersâs POV so both the shareholders and the executives are financially rewarded.)
I think everyoneâs discussion points are very good. We have a lot of things in place that are great for retirement, like excellent long term care insurance policies that are no longer available (newer plans have a lot more limitations and a lot higher cost) - however we are paying those insurance premiums every year too.
I also agree about how one can be very smart about the tax situation which can be a big help in retirement planning.
About 8 years ago, Hâs company which had both a retirement pension and a 401k plan was sold and we âlostâ the company retirement pension (we got the current value of cash and stocks to roll into an IRA once the IRS/govât approved the company sale). So essentially we lost the past 8 years and our potential 7 future years until retirement of that âcompany benefitâ. That was a big retirement loss for us, but nothing we can do about it.
I suspect some of the reasons financial planners have so much more indicated for younger peopleâs retirement savings is that you have to become more and more self-reliant.
I do think people have to think about saving reasonable amounts early enough. Those expensive annual vacations or other luxury items may come at a heavy price down the road. However many people have also consciously been able to clean up their debt and focus on saving, focus on maximizing earnings and earning years, and do OK.
There are a number of financial calculators out there. You can include SS or not.
If one is use to a particular earning level and spending level, it is a big adjustment when you stop the job earnings. Some people out of financial necessity and some for other reasons do continue some part time work.
H had âwishful thinkingâ about retiring before 65. I pointed out his annual earnings, our current expenses (including college students), health care insurance costs, etc. Talked about how good of a position he is in with his work situation - job security, decent working conditions, people he enjoys working with, etc. How much our retirement savings would be drawn down in those years before 65.
Bachelor uncle retired right before he turned 59. His savings were fine (because he was quite frugal), but he didnât realize he would have a tax penalty withdrawing $$ from 401k before age 59.5 - he had to scrimp by and re-plan how to juggle his funds and expenses to avoid the penalty.
"I suspect some of the reasons financial planners have so much more indicated for younger peopleâs retirement savings is that you have to become more and more self-reliant.
I do think people have to think about saving reasonable amounts early enough. Those expensive annual vacations or other luxury items may come at a heavy price down the road. However many people have also consciously been able to clean up their debt and focus on saving, focus on maximizing earnings and earning years, and do OK."
I quite agree. Everything I have learned about financial responsibility and retirement planning, I plan to pass on to our D in measured fashion. No one taught me about personal planning for retirement. (And Iâm an Econ major who attended law school and worked in corporate and securities law. There was always some mention of ERISA and employee benefit plans during my transactional work but it was in one ear and out the other.) Early on, I just read the WSJ personal finance section and made sure my bills were paid. That was about it. I wish I had those late 20âs and early 30âs years back when I lived more lavishly than cared about IRAs. One close colleague talked about Vanguard and the S&P 500 Index fund to me in 1988. I did not pay much attention to him and now I certainly wish I did. He was the only one planning for retirement in his late 20s, mostly because he detested practicing law!
I agree with @attorneymother about educating our children. We started Roth IRAs for them. Putting in what we can based on their earnings (and what we can spare, so DD1 earned $700 in 2013, we were able to put in $700 into a Roth IRA for her) - so the time value of money can work for them and build up their nest egg. H and I hope to live a long life, but there should also be some form of an estate for them, just like my parents had for my four siblings and me.
We stretched our money. We did spend on things along the way.
Hindsight is 20-20.
Accepting where one is and how one can use the years before retirement to prepare to âretire with dignityâ is key. H and I are very keen on staying healthy - it is much more difficult to âenjoyâ retirement savings when you have very bad health issues. I soon celebrate being cancer free 5 years (after stage III disease, so I am very fortunate to have responded very well to lots of treatment). Being careful enough - think about staying safe from crime, traffic safety, safe vehicles, risky travel time, etc. You never know how much time one has, but I think positively about living a long, relatively healthy life and try to take care of things accordingly. As the saying goes âif I knew I was going to live this long, I would have taken better care of myselfâ. Some people under-appreciate their good health until they have a health crisis.
^^^ Amen on the good health!
DH just got his annual 401(k) statement and I was appalled at his investment options. I spent some time yesterday preparing some options for new investment allocations and moving around between funds. He seems agreeable, but now he actually needs to DO it, as I canât log in and take care of it for him. After following this thread for a while, I have started assembling a document with all our accounts, 12/31 balances, etc. I had a pretty good idea of where we stand already, but we both tend to think weâre two weeks from financial disaster (remnants of our childhoods), and it would be good to get a real grasp of where we are.
@countingdown - I totally manage my Hâs 401k stuff. You can have H sign a permission form to allow you access, and you can then also talk to them, log in and manage account just fine (for example, Hâs is with Principal). Once they have that signed form, they are fine with talking to you and having you âmanageâ Hâs account. I set up the passwords, review all the details of the fund choices, etc. H and I have been married 35 years - we have similar risk profile/risk acceptance. I show H the stuff; he likes the results. We have an outside financial planner for other things, and H learns things from him (we meet with financial planner Don together). In January, I did a very thorough review/analysis and shifted money accordingly. Confirmations did go to Hâs email address, which is fine 
The spouse that is strong on this can take the leadership on this - it doesnât matter who brings home the bacon. H is a talented engineer. I have two graduate business degrees and was a CFO of a physician group - I was the contact person for our company sponsored 401k, and I enrolled and advised employees on how the plan worked; we were a âtop heavyâ plan, so employees got extra match each year. During my years there, I built up a nice 401k account for myself.
We âsimplifiedâ by having consolidated retirement funds through our financial guy - we have several through him H Roth, my Roth, etc. Hâs 401k is a very big chunk that we have to continue to manage under employerâs Principal account choices; that account is very sizable because he has been there a long time, in early years we put in max amounts, and we made pretty good investment decisions (within the parameters of the account choices). When we meet twice a year with our financial guy, we also review the Prinicipal information. It is always nice for Don to say that I have done an excellent job with that fund - H has to hear that too.
I encourage you to keep moving forward with how you can best manage your retirement funds. Being able to look at the real time online can also give you some peace of mind when you hear about market fluctuations.
@CountingDownâ
Good for you! I have been taking extra time while preparing for taxes this year going over our accounts and record housekeeping.
The good thing about being seasoned investors is that we know the world doesnât end (knock wood) even if it seems to get very bad. We can see 20 years worth of financial experience and hope to see 20+ more. Thatâs what has helped me when I compare account performance against broad market benchmarks. Another good thing is that with 401(k) and IRA accounts, investment moves are (obviously) tax free so there is no reason to delay.
Suggestion: If your H is a slow-starter, perhaps you should ask for his log-in information and look at the account with him online. Itâs a good idea for estate planning that one spouse not have exclusive access to online log-in information. Then both of you can discuss and take action accordingly.
DH works for the govât â I canât get on his account online. Iâm a former 401(k)/pension administrator, so I generally have my finger on the pulse. DH went to Wharton, but doesnât care about investing (other than that the returns are positive). He didnât totally screw up anything (and we didnât move a time when the economy tanked), but I would have made different investment choices. I am not crazy about putting large proportions of contributions into an international fund and nothing into a common stock fund index! At the time he made those elections, he was trying to diversify, so he had some $$ already in the stock fund, but we should have reviewed it a year or two ago. Live and learn!
S1 has been throwing $$ into his 401(k) since he started working. His employer has Vanguard institutional funds, and he has heard me sing their praises for many years (Vanguard was my first job after college).
In Jan we totally moved all the 401k money out of International. Both our international choices lost money in 2014, and hearing everything I was hearing, prioritized my time to move and redirect investment choices was key (several hours of analysis and navigating the system on-line, which was easier than the last time I had done it, and also utilized phone-in help to do it the easiest) in getting the 401k redirected ASAP. We had a positive result for 2014, but it would have been better except for the international funds. I went through all the retirement exercises too - never hurts to cover the bases.
@CountingDown it sounds like the best you can do is to understand Hâs options and choices, evaluate the accounts to the benchmarks, discuss with H and âdecideâ where to shift and direct $$. Then however often you can get him to look at and print out things for you to see. If you have the rest of your stuff up to date in your partitioned binder, just keep asking him for that last piece of information so you both can know the whole picture. One needs to pay attention A-B-C (A accounts are the large ones, so you keep up more with those, whereas C is very small, so you pay less attention to those). Some may have studied A-B-C (like with dealing with manufacturing inventory). Hope got Hâs govât account redirected. Oh well, you will stay keen on things nowâŠ
I joke that a few extra zeros behind my name when I die wonât make a difference to meâŠ
There is a pop business book called The Millionaire Next Door, that while breathlessly telling you in each chapter that it is going to give the secret to life in the next chapter, there were three key insights of the book:
- The people who accumulate wealth are not necessarily people with high incomes but people who spend less than they make (who often turn out to be small entrepreneurs like dry cleaners, etc.) like @mcat2's co-worker;
- Your spending is highly influenced by the folks around you. For example, people tend to adjust their spending to their neighborhood. If someone buys a house in an affluent town to get the good public schools and if his/her neighbors have gardeners come in once a week to mow and landscape and then replace their cars fairly regularly, he/she is likely to do that also without thinking consciously as that level of spending seems normal;
- If you subsidize adult children's lifestyles, they will never learn to save because they never have to adjust spending to match income.
I figured that our spending would be in large party by roughly three big choices one had to make on spending:
- Where to live;
- How to vacation; and
- Whether to send kids to private school or not. The latter would be affected by number 1.
Trying to get those largely right and generate savings was my goal. With the big things in place, my hypothesis was that we wouldnât have to be tense about shopping for food or going to the movies. We succeeded at 1 and 2 and partially at 3.
My advice to kids in addition to saving regularly is to have a plan to match your expenditures to your income (factoring in saving). If you arenât saving, change something. For most it would be spending. For a few, it will be income and they need to find a way to make more. But, for most people, operating on the spending side of the scissors is what will work.
Robert Shiller (Irrational Exuberance) has been advocating the European market recently, as those equities are cheap compared to the overvalued (his opinion) US market. He argues that the US market is artificially inflated due to low yields on fixed income investments. He has a point, but itâs hard to ride out the swings of international markets. The situation in Greece will probably get much worse before it gets better, perhaps even spreading to other EU countries with high debt. He hasnât used the word âbubbleâ, but he believes retirement savings will not grow at the historic rates that are factored in to most calculators.
One other comment I heard at a recent conference: investing in European equities does not mean youâre investing in Europe. Some of the strongest European companies derive the bulk of their revenues from areas outside of Europe.