For people trying to estimate your expenses, please note that tracking for a year or more is much better than estimating. I admit I spend significantly more than I estimated I spend. For the last year or so, I’ve been spending even more than normal, so that we can get some of our big expenses out of the way before retirement (new roof, bathroom redo, things like that).
Better to be realistic than to learn after retirement that you can’t afford to do what you were hoping.
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Yes, tracking will give you a much better estimate.
However, be sure to account for the following adjusting your estimate:
- Saving up for occasional large expenses (cars, appliances, high end electronics, house maintenance, etc.) every several years.
- Variable large expenses (e.g. travel), which you can note what they were over several years and use an estimate at the higher end of the range to be conservative.
- Medical care and insurance costs once you leave employer subsidized insurance, particularly if you retire before becoming eligible for the government subsidized insurance (Medicare).
- Income taxes to be paid on money currently in pre-tax (traditional) IRA and 401k accounts.
- Subtracting any work-related costs like commuting to work.
- Adding any costs associated with any activity you will do (more of) during retirement.
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I know property can be transferred to the next generation with a fractional discount if it’s to multiple parties without being part of a trust. That is helpful to reduce the gift amount for the givers estate. I also know that the property will lose some tax benefits that would have come if it was given after death. Though with the exemptions likely changing I know several people who are gifting real estate now.
We have real estate and rentals and I’m interested in looking into if we should or can put them into some sort of trust for estate planning.
I also admit I know nothing nor have I thought about the tax consequences once we need to begin to take IRA distributions.
So I have a question for you all that I was asked by a younger relative who’s kid is just starting his first real job.
How much do you recommend for your kids to set aside in savings/Investments/retirement?
My oldest is a first responder and 10% automatically gets withdrawn for pension.
Fully funds Roth IRA and puts another 5% in a 457 deferred account. So about 20-23%
Younger son puts 15% into 401k, fully funds his Roth IRA and another 5% into mutual funds. So about 25% of income
Those are the automatic amounts taken from paychecks. Both also do pretty well at squirreling away money in savings accounts.
What advice would you give?
As much as they possibly can as soon as they can with the goal of fully-funding any 401k program available to them, topping off a ROTH annually, discharging all debt, and building up an emergency fund ($5k+).
Personally, I like the idea of saving 50% as a goal. We did that with any money our son received from the time he was little; half for today, half for “tomorrow.” He has stuck with that until he bought a house this past summer. Then, a couple of months ago, he decided to get a housemate so he could get back to that ratio. Not sure where that leaves us when we can finally visit him (looks like he’ll have to sleep on the couch 
), but these are his decisions now, and they will pay off handsomely for him down the road.
My advice to all kids and young adults is to pay for your future first and adjust your lifestyle to live on the remainder.
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@bmac I would tell my kids that it is easier to save in the present when you are young than later when you have a family.
Even if they have to work a second job ( to pay student loans or just to have extra), saving in your 20’s creates an updraft over a lifetime. But I’m a numbers person so I wouldn’t tell them I’d show them. Spend an hour showing how money saved early can affect when they retire, when they can start their own business and even buying a second home. Even small amounts like 5k have huge ramifications.
The 15k I invested in my 20’s when a business I worked for was sold was split into two equal parts of 7.5k and invested in microsoft and IBM. Both split so many times. It was used to start my first business ( borrowed against it), buy my first investment real estate and I still have about 400k ( yep) in MSFT stock left which collects good dividends. The people whom I worked with who bought nice cars made a big mistake IMO. They got short term satisfaction, no biz and no stock. I’ll never sell the microsoft stock. It’s nostalgic. Plus I think it’s a decent long term investment.
Thats the power of compounding. And $ doesn’t have to be invested weekly. When you get a bonus, buy a stock.
I’m also not a fan of mutual funds ( I love dividend stocks). But I did have lots of mutual funds in my 401k in the early years.
I don’t think its about saving a %. Some people have variable income. It’s about saving at least 10% then throwing extra money into investments.
I would also not think of real estate as an investment ( unless it’s rentable). Our experience has been that costs are high and you rarely want/need to move wgen prices are high. But we’ve never really been real estate investors per se. some do quite well. I’d just steer my kids to stocks. Easier and you can control things if the money is needed or borrow against stocks in a portfolio without selling.
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As much as possible.
The current US economy rewards capital much more than it rewards labor (and federal income taxation also favors capital income over labor income). Therefore, saving as much as possible in order to eventually be able to invest capital for growth and income for future needs (including the capability of living through a lengthy period of unemployment during an economic or industry downturn, or being able to choose early retirement or lengthy retraining for re-entry into a new profession in case one’s profession is obsoleted) is the path to avoid the scarcity treadmill of being $400 away from financial disaster, feeling that one has to compete for every financial scrap that may be in reach, or having to forego long term benefits in favor of short term money when making career and other choices.
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One technique that can help is to make the default payroll deposit to a savings account, then manually move money to checking / spending accounts as needed. This makes spending more visible (because you look at it every time you need to move the money).
Back in the old days when you did not get instant online access to your accounts, when paper checks you wrote took several days to post to your account, and funds from checks you deposited could be held for several days (i.e. not usable until after the hold period), this technique also made tracking your accounts (including balancing your checkbook) easier. But this is less of an issue now.
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and as you think about RMD’s and tax brackets, don’t forget that when the first spouse dies, the tax brackets change, but the RMD’s keep coming. Thus, the surviving spouse could be in a much higher tax bracket than when you were MFJ.
(just another plug to consider tIRA conversions into Roth before you start collecting SS.)
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Good point on RMDs.
It is also important to consider various scenarios on surviving spouse benefits for SS and pension. For example, some couples where there is a much older husband (who is major wage earner) opt to defer SS so that younger wife/widow would have higher survivor benefits. Since you really don’t know the future, this kind of thing involves some guessing and playing the odds… picking a plan that is in comfort zone for various outcomes.
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I have suggested that the kids maximize their 401k contributions to get matching and save 10% of their income beyond.
ShawSon is probably saving more than that. Unlike ShawD, he explicitly doesn’t want to own or buy things. [We asked what we should get as a present for his new GF and heard that she doesn’t want things either, but that she really likes wine. So we are going to give her one of the great wines we brought back from our last trip to Italy.] In addition to a pretty decent salary (what VCs give to co-founders after a Series A funding), he has his equity in the venture-backed firm that he co-founded. As a guy who doesn’t like to buy things (with a GF who also doesn’t like to buy things), with a pretty good salary and his equity in his company, I’m not worried about his saving.
ShawD and her BF share a house with ShawSon and one of ShawSon’s business school buddies. I doubt she could save last year (it took a while to find a job when they moved to SF) but now she can. I don’t know how ShawD and her BF share costs, but he must do pretty well as a senior software engineer at Big Tech. I’ll check with her on how her savings is going when she visits.
Yes, but it takes a lot of discipline to not spend your take home pay and invest it properly. The other issue is taxes, if you don’t maximize your 401K contributions you will be taxed on 40% of it anyways (if you live in a state with both federal and state income taxes).
Since I started working, I have tried to max out my 401K contributions. If I don’t see the money, I don’t spend it. Also, over the years I have occasionally taken out small loans from my 401K and you pay yourself back with interest instead of taking out a personal loan from a bank.
Already the Trump tax plan reduced donations significantly because by giving everyone a higher standard deduction and limiting the SALT deductions, the middle class are better off taking the standard deduction as opposed to itemizing and thus they are giving a lot less to charities. There are numerous articles on this issue. This year the CARES act allows for $300 "cash’ donation to be made to a charity (certain requirement) that can be deducted in addition to the standard deduction since charities were hurt so much.
It will be great when this part of the tax act expires and people can start to take their deductions and reduce their taxes. I am not part of the >400k club, however, I got killed due to the SALT tax because I pay way more than 10k in property taxes, etc. Seeing the year over year difference in how much more I had to pay in taxes because of these tax changes was depressing.
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kids should really max out and open Roth IRAs especially while they’re in the lowest tax brackes. My teen kids have all done this and there are so many benefits to the Roth including no penalty for taking out any of the contributions if they ultimately need to take those out for any reason.
Also agree if a job offers a 401k they should definitely take the full match if offered as that is free money.
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Perhaps the technique of directing the balance of your payroll deposit (after 401k, taxes, and other deductions) to a savings or investment account, rather than a checking or spending account, can help. In addition to “hiding” the money from being immediately visible to spend, if you have to actively move money into your spending account as needed, it may create greater awareness of your level of spending.
A variant of this technique is to direct a fixed amount portion of the payroll deposit to a checking or spending account, with the fixed amount being the budget you set for yourself, with the rest going to a savings or investment account (many employers or payroll services allow multiple accounts for payroll deposits). Then any need to move more money from the savings or investment account to the checking or spending account is an alert that you are going over budget.
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Note that some employers offer Roth as well as traditional 401k plans.
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Our S has been saving and investing his money for years. He started with a bank savings account in grade school, then transitioned to a brokerage account in middle school (index tracking funds), and in High school he purchased individual stock from a few companies. He’s learned much over these years and is in very good shape as he looks to start his career this summer.
We’ve reviewed his budget planning for when his job starts and he has a sound plan bucketing money into operating funds (all monthly expenditures), safety fund (6 months of living expenses), mid-long term money (brokerage account), and retirement (maxing out ++ in 401k).
We’ll look into Roth more, but I think he exceeds the income limit.
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@ucbalumnus Wow, I hadn’t thought of it like that. But that has proved true for us over the last 25 ish years. It used to be that high income jobs were available assuming you had a college education and were in the right field. Today, income can be wildly variable.
Much income at the higher levels is based on performance, stock options and things which are often out of one’s control (such as trajectory in a particular field) or the sale of a big project.
I feel as though there are fewer people who work in industries such as medicine or for a law firm where the income is similar from year to year. I think is particular true at the higher income level.
We’ve had wild fluctuations and have had to weather quite a few unexpected storms (9/11 start up funding cancelled (check due 9/12); , multiple crazy business experiences (patent lawsuits and more); and most recently, the pandemic of 2020). If we had waited until we were older to save we would be in a world of trouble.
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The loans on a 401k are great. We’ve only taken out a tiny one once ( 20K). But it also isn’t available at many companies. Of all the many companies we’ve worked for, there was only one that had it available. I wish they would let one do on all retirement vehicles ( esp those used by people who work for themselves). Oh well.
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My only question is when I withdraw the 401K funds in retirement, will I be taxed (fed/state) on the interest rate I paid back into the 401K account? Right now I have a loan and I’m paying myself back the principal and 5.75% interest.