<p>I think it's all ultimately a percentages game. Someone that makes $100k a year is probably going to be saving more each month for retirement than someone who makes $50k a year, but percentage of their monthly budget breakdowns should still be quite similar. To continue living the same lifestyle in retirement as you do now one needs to set aside about 10-15% of their monthly income each month into their 401k or other retirement funding. </p>
<p>One should also have some additional funds set aside in non-retirement accounts for a rainy day... most experts suggest that be 3-6 times your monthly income.</p>
<p>If you're saving for college then there should be an additional percentage set aside to fund those accounts. The amount set aside to be determined by how many kids there are and how long until the funds will be needed. The earlier you start saving, the less you have to set aside each month. </p>
<p>Then there's housing... an area where some folks go overboard on. As a lot of folks are finding out the hard way right now, you're really not doing yourself a service by buying a house that takes up most of your monthly income in mortgage payments. This problem is further compounded by the fact that many of these mortgages were 100% funding (instead of the traditional purchase with 20% down) so they started off with zero equity and now after several years probably still have essentially zero, or maybe even negative, equity. Also, a lot of people make the mistake in thinking that they can not bother with saving too much for retirement because they'll just rely on their McMansion to provide that funding. There are a long list of fallacies with this line of thinking:</p>
<ul>
<li><p>First, the most obvious is that you only get the money built up in your house if you sell your house (or sign over the rights to it to a bank, eg a dodgy reverse mortgage scheme). Some people seemingly forget that if they take this plan they'll have to substantially downgrade their house to pay for retirement funding. In many cases that essentially amounts to downgrading your lifestyle because you don't have sufficient funds to keep living your previous lifestyle... which is generally what people are trying to avoid by saving a sufficient nest-egg for retirement. </p></li>
<li><p>Second, unlike most retirement funding you essentially have no control over the risk of money invested purely in real estate. A 401k can be setup to get increasingly 'safer' as you near retirement so that there is very little chance of you taking a big hit during the last few years before you plan on using the money. Compare that to real estate where the market can go up and down, but there's really no way to make your house 'less likely' to follow those market trends. Think about someone who's nest-egg was their house 2-3 years ago when they were over the moon about prices going up and up... now maybe their house (and nest-egg) has lost a third of it's value (or more!)... oops. </p></li>
<li><p>Finally, people forget that compared to normal retirement funding, a house is an expensive investment to own. Think about real estate taxes as 'brokerage fees', compare that to what you're paying for your 401k in fees and you'll see what I mean. Historically, real estate and stock retirement funds earn on average about the same annual rate of return (year to year can be very different, but on average over a career they're essentially the same) but the charges you incur on your real estate investment are always more than what you incur on, for example, a 401k. Imagine if, for example, when you sold something in your 401k you got charged a 5% 'commission' and had to pay $10k per year in '401k taxes'. </p></li>
</ul>
<p>So my take home message is that real estate is a good investment and a part of a healthy financial life, but it's not your retirement fund nor is it a replacement for having one.</p>
<p>If you can comfortably afford that McMansion AND still set aside 15% a month for retirement, and have a rainy day fund, then well done... you can sleep well at night. But most people I know in McMansions can barely keep up with their monthly credit card payments (for all the other flashy stuff they buy to show off) let alone do any of the above... they should be very worried about what the future holds.</p>