Good amount for a 401K?

[Tarheel Tink]

brerrabbit, thank you so much. You have given me much food for thought and I really appreciate it. I really had not thought about annuities or reverse mortgages and it will be to my benefit to research before meeting with the planner ( I work better that way).

Everyone has been so generous with their thoughts. I really love the Disboards!

 

[DisneyBill]

May want to spend some time on bogleheads.org. Lots of solid investment knowledge over there. Including strong opinions on advisers/planners.

 

[rumrunnergirl]

 

[SuzanneSLO]

This is what I've heard, too. You should have enough put away so that between pensions, 401(k), SS, etc., you will be bringing in 80% of what you need to live on now, and it will need to last for 20-30 years (since we are now living longer).

Rather than using a rule of thumb for your estimated change in living expenses, you can do some simple back of napkin math that will be more accurate. The 2 biggest changes are likely to be for retirement savings (i.e., if you are saving 10% of your income now, you can obviously live on 90% of your earnings) and mortgage expenses if you will have your mortgage paid off by the time you retire. For some, communting expenses can also be significant and will be another deduction. Best of luck -- Suzanne

 

[amcnj]

Yes you can multiply the amount you expect to need each month/year by 25 instead of dividing it by .04, as 25 = 1/.04. realize if you use some percentage other than 4% then 25 is no longer the correct factor (it will be 1/the interest rate desired).

As for annutities, some people want to at least cover their fixed expenses with annutities so they know they can meet them each month. Be aware that both your age and interest rates affect the annuity amount you will receive for a given sum invested. Also, there are fixed and variable annuities. As with any investment you have to consider the effects of inflation should you opt to receive a fixed amount of money for the rest of your life. To counter inflation, you can invest some money in other investment types, use variable type annuities, or ladder annuities (purchase them in several lump sums at various times so you can benefit from any rise in interest rates, as well as from your aging effect). The correct route for you depends on your level of risk tolerance. Also, you may not know exactly how much of an annuity you need in retirement. You could start with one investing only a portion of the total you ultimately want in annuities, and then as time goes on, get another, should you deem it necessary.

 

[crisi]

Rather than using a rule of thumb for your estimated change in living expenses, you can do some simple back of napkin math that will be more accurate. The 2 biggest changes are likely to be for retirement savings (i.e., if you are saving 10% of your income now, you can obviously live on 90% of your earnings) and mortgage expenses if you will have your mortgage paid off by the time you retire. For some, communting expenses can also be significant and will be another deduction. Best of luck -- Suzanne

Also, most of us should be done raising kids and saving for college. And many of us will sell our larger "raise a family in it" home for a smaller retirement home.

But there are adds as well - supplemental medicare insurance, prescriptions. Early in retirement there tends to be a lot more travel and entertainment expenses than you previously had. My parents are staying in the same home, but they are starting to have to hire more of the upkeep - my dad won't spend many more years mowing or snowblowing. We are planning to go condo when our kids move out - but that will add association fees to the budget (but I won't have to hire someone to mow).

 

[Tarheel Tink]

I am definitely printing this thread out for us to study and refer to. You are all awesome and so generous with your time in responding! Thank you.

 

[crisi]

I don't think I saw IRAs mentioned. They are a great investment vehicle, especially Roths with their tax benefits. We're planning on closer to 2-3 million in retirement because we're in our 30s and don't think there will be much SS left for our generation, and neither of us have pensions (but I doubt there will be any of those left either). My plan is to save TONS now, let it grow, and move it to more secure investments in my 50s.

I'm not picking on you, but I'm going to use this because there is something really important here.

$2M sounds like a LOT of money. Using that divide by 25 formula, that's $80k a year (plus you'd leave money behind). I can live off $80k.

But if you are 30 years old right now, and retire at 68, in 2049, that $80k a year will be eaten away by inflation - its only going to be worth $17,665 2011 dollars (assumes 4% inflation, which I personally think is high). That's harder to live off of.

If you don't protect the principle, which is what that divide by 25 does, you can take more money, but risk running out.

 

[QVCshopper]

If you don't protect the principle, which is what that divide by 25 does, you can take more money, but risk running out.

So, are you saying I need more than $2-3 million in retirement due to my age? Because I doubt that will be happening with many 30 somethings. We have almost 1/3 of that saved up already and I think we are probably not even close to the average people our age. Some of my friends have nothing saved for retirement or for their kids education. I bet we're doing better than the average baby boomer even; we have more saved than my parents who are in their 60s.

I'm just confused by your post. I am going to protect the principle, that's why I said we'd go into more secure investments. I will continue to add to it, but will have to scale back when the kids go to college, etc. We also don't have have a mortgage and saved $40k in the last year. So, I'm confident that we are doing quite well. Oh well; I'm just not sure where you are going with this...

 

[crisi]

So, are you saying I need more than $2-3 million in retirement due to my age? Because I doubt that will be happening with many 30 somethings. We have almost 1/3 of that saved up already and I think we are probably not even close to the average people our age. Some of my friends have nothing saved for retirement or for their kids education. I bet we're doing better than the average baby boomer even; we have more saved than my parents who are in their 60s.

I'm just confused by your post. I am going to protect the principle, that's why I said we'd go into more secure investments. I will continue to add to it, but will have to scale back when the kids go to college, etc. We also don't have have a mortgage and saved $40k in the last year. So, I'm confident that we are doing quite well. Oh well; I'm just not sure where you are going with this...

Yep, and I agree. Not many people will manage to do as well as you'll do. What I'm saying is that $2M sounds like a lot of money, and the $80k it will give you as income per year sounds ample by 2048 it won't be that much money at all. I do think you are doing great - but I think when we talk about saving for retirement, few people understand how much inflation is going to matter.

By protecting the principle I mean that you'll only take out 4% a year - if your money grows 8%, you'll keep the other 4% as growth, That way in year one you take out $80k and in year two you take out $83,200 (because things will cost more) - and your inflation adjusted 401k balance will remain the same - when you die, you end up leaving millions behind. If you treat that $2M as an annuity to last 20 or 30 years, you'll have much more per year, but a $0 balance at the end of the annuity.

(I think that balancing these two is probably the right approach - spend down your principal, but not with the intention of running OUT of money during your lifetime. Its hard to time your own lifespan).