Not looking for a detailed plan, just a quick
August 3, 2012 8:29 AM   Subscribe

Saving for retirement - the advice and calculators out there are too complicated and I constantly question my assumptions. Is there a good rule of thumb to use until I visit an advisor?

My fiancee and I are in our late 20s, and we’re looking at our retirement savings. We are going to find a fee-only financial advisor this fall to make sure we have ourselves on a good path. But in the meantime, I'm seeking a rule-of-thumb (hopefully to put our minds at ease more than anything else, or maybe to give us a target until we get some professional advice).

I realize that there are lots of variables that go into retirement planning, especially at our age. How much do we make? How much do we spend? When do we want to retire? Do we want to travel in retirement? Will we have kids? etc, etc. But honestly, that’s why I’m seeking a rule of thumb - there are too many unknowns, and honestly I find some of the questions suspect because they sound like they were just dreamt up by the financial services industry to get us to invest more money.

I've done quite a few online simulators, and I had a commission-based advisor do a simulation too (eh, it was free and we didn't make any decisions based on it). But I have no idea how to evaluate whether my assumptions are any good, so I don't find them to be helpful in planning my savings. That's why we're going to an advisor, but in the meantime I'd like to know if there's a quick rule to apply.

So is there some kind of simple guideline? Something like “If you put away 5%/10%/15%/20% of your income in an untouchable retirement fund, you’ll probably be alright (depending on your particulars).”

I'm not looking for something to guide my every saving action, just a general "do this and you'll likely be in the ballpark" rule.

This is not a general "how to save for retirement" thread. That's been done many times before, so leave out anything besides "how much to save" rules of thumb. Here are examples of things that have been said elsewhere and don't need to be rehashed:
-Max out your 401k/IRA
-Always get the highest possible match from your employer
-Invest in index funds / etc
posted by Tehhund to Work & Money (16 answers total) 11 users marked this as a favorite
Put as much away as you can afford. If you can do 20% (or more) now, even if you have to scale back later in life, you'll have the magic of compound interest working for you, making that money grow.
posted by Ruthless Bunny at 8:37 AM on August 3, 2012 [1 favorite]

I don't have a rule that fits this, I can tell you what I have always done, and lately shifted to doing. It's my own experience though.

I have endeavored to save, since I was about your age, 10% of pre-tax income in a tax deferred bucket in the 401k, these days I've shifted to 10% of pre-tax income and am now putting it in a Roth bucket in the 401k plan.

I've been told that will probably be alright by starting this about 10 years ago with my desired target retirement income.

Thinking about this a bit more, my suggestion would be put away as much as you can comfortably afford to until you've met with that financial planner. It will be motivation to have the meeting and get advice, but also won't ding ya in the long run either. Apologies if this is the opposite of what you are looking for.
posted by iamabot at 8:37 AM on August 3, 2012 [1 favorite]

Honestly, if you're only in your 20's, I think that the maxim "anything at all is better than absolutely nothing" may be a good enough place to start, because you've got a LOT of time. I was worried about not being able to afford the [foo]% I was being recommended all over the place, and saw a very wise piece of advice -- "if you can't do that, well, look - if all you can do is 1%, or even 0.5%, then just do that, because even 0.5% is better than 0.00%. You can always change it later when you know more about yourself and what you want, or your finances change."

So maybe just sit down with your budget, figure out what you have to spend on expenses, and then figure out how much of what's left over you want to put towards savings and how much you want to put towards just goof-off money. Whatever percentage of your income that ends up being doesn't matter right just yet, because you've got a LONG way to go and you're giving yourself a MASSIVE head-start (more so than lots of other people). When you understand what you want to save for later, or your finances change or anything else changes, you can always change that figure too.

So "anything at all is better than absolutely nothing" is my uneducated rule of thumb.
posted by EmpressCallipygos at 8:37 AM on August 3, 2012

This is sort of an impossible answer for all the reasons you mentioned. There is no rule of thumb other than figuring those things out and thing picking a rate of savings vs consumption that allows you to achieve those goals (or sometimes realize those goals aren't achievable) given a conservative assumption for long-term returns. The other thing to keep in mind is that the more liquidity you need for travel, kids, homes, the lower the rate of return you need to assume.

(don't over think the fee-only thing. A commission guy is fine as long as you know what the commissions are and how they compare to other options out there. Paying a few basis points to a guy you really like isn't so problematic)
posted by JPD at 8:38 AM on August 3, 2012

Response by poster: Adding to the list of things that don't need rehashing: "Put away as much as you can afford." That's not a rule of thumb, that's a platitude. And it's been said elsewhere already.
posted by Tehhund at 8:40 AM on August 3, 2012 [1 favorite]

The book I started reading and was referred to many many years ago was Ernst and Young's Retirement Planning Guide

It still gets opened and absorbed now and then. Good luck!
posted by iamabot at 8:43 AM on August 3, 2012

My rule of thumb is absolutely as much as you possibly can. I see a lot of advice geared towards the 50+ crowd that talks about how, at that point in their life as the kids leave the nest, you have the opportunity to do "catch-up contributions".. This is the dumbest advice ever because a) it gives people the impression they can put saving off until they are 50 and, b) the years between 50-retirement are the years you have the least to gain by compound interest.

If you do not have kids I would suggest saving absolutely as much as you possibly can - you may have kids some day and they will be a drain on your finances. If you are in the lower tax brackets - and even if you're not - I would suggest saving as much as you can in a post-tax manner (Roth IRA or 401).. The tax implications are complicated and nobody has a crystal ball, but by paying the tax up front that is one less thing to worry about at retirement. The rule-of-thumb with seems to be that you should have a mix of pre-tax and post-tax retirement investments so that you have flexibility in retirement to control your tax bill to some degree.

Finally, Tehhund, if you think "save as much as you possibly can" is a platitude, I think you're approaching this with the wrong attitude altogether. That is a rule of thumb. Every dollar that you do not save is a dollar you spend - which means you are increasing your daily/yearly expenditure budget. If you do that, you are increasing the amount of money you need per year to live your life at the level you are accustomed.. So for every dollar spent, that is -$1 in savings and +$1 in future yearly budget needs at retirement (ignoring inflation and all that).. So that $1 spent now is, in many ways, costing you $2. If you get used to spending $1 less a year now, when you retire, you won't miss that $1, and therefore you will be able to live on less... hope that makes sense?
posted by mbatch at 8:51 AM on August 3, 2012 [2 favorites]

Adding to the list of things that don't need rehashing: "Put away as much as you can afford." That's not a rule of thumb, that's a platitude. And it's been said elsewhere already.

Well....then....I don't know what to tell you, because there's a REASON why those "platitudes" get mentioned so much, and that's because coming up with the bottom-line number depends on so many specific variables that there IS no way to come up with a general number.

Case in point - I see that you have favorited TPS's answer about how you'll need $2 million if you ear $100,000 at retirement. But - how do you know TODAY what you will be earning for an annual income forty years from now?
posted by EmpressCallipygos at 8:55 AM on August 3, 2012 [4 favorites]

Best answer: Retirement readiness is a key focus of mine in my job as head of employee engagement at my company. A very recent industry study which is getting lots of play says: You need 11x your salary at retirement. You can expect to spend $250K on healthcare post-retirement.
posted by thinkpiece at 8:55 AM on August 3, 2012 [3 favorites]

You'll probably be fine putting away 10%, especially since you are starting early. If you can do 15% the added money will compound over more years and you can put your mind at ease if you have years of under employment or expensive years (starting a family, etc) cut into the savings rate down the road.
posted by dgran at 8:59 AM on August 3, 2012

EC, you have to project. Of course, variables abound and it may very well all come crashing down, caveat caveat, but it's important for people to at least start to get a picture of what they need to get from here to there.

Not to mention! What does retirement mean to you? Living in a house? With your adult kids? Rocking on a porch? Jetskis? Traveling the world? Watching TV? Those ideas/aspirations are heavily influenced by culture. African Americans and Latinos typically save less "for retirement" because they tend to embrace living multi-generationally, they are not obsessing over being "independent" (a fallacious cultural construct!)
posted by thinkpiece at 9:01 AM on August 3, 2012

Best answer: One rule of thumb is that you want to end up with 25X your desired annual income. So if you think you need $100K per year in retirement income, you want to end up with 2.5 million in your retirement account. The idea being that in retirement you can then withdraw 4% annually to live on, and hopefully you can average 4% returns in retirement, thus keeping your nest egg fairly steady at 2.5 million. So, figure out that number, plug it into the calculators with a realistic rate of return, and get a number you need to be saving today. To be safe, assume you need to provide all your retirement income from savings. If social security is still around for you., it'll be a bonus.
posted by COD at 9:05 AM on August 3, 2012 [2 favorites]

You are so far away from retirement that it is impossible to predict what you will need to retire comfortably. Interest rates, your income etc. all play into this and are essentially unknowable. Even the tables that financial advisors will use with you are nothing more than wild guesses, but they sure sound comforting. At this stage of life you really should have two savings goals - getting a good start on retirement saving to take advantage of compounding over time (this of course assumes that your investment will actually grow, and that is a very big assumption in today's environment) and establishing some personal savings now to buy a little financial freedom, such as the ability to withstand a period of unemployment or to purchase a house, etc. The more discipline you can establish early on the better you will be as your earnings increase. Somewhere between 10% or perhaps even 20% should go to savings, about evenly split between retirement and personal savings. Where do these figures come from? They are about as much as most people are comfortable with. It's all a balancing act. You don't want to put off all the fun in life for decades, but you want to make sure you can have some fun when you get there. Most people can comfortable put 10% (pre-tax) away, but more is harder. You cannot rely on others, financial advisors, internet cranks, trusted friends and family. You have to make the decision yourself what fits your needs and desires. While I am a big proponent of starting early on retirement savings you have to be realistic about it. Right now your income is low compared to what it will be as you approach retirement and also there is little or no investment growth for the average investor. Still you are establishing a discipline and investment returns are likely to go back up in the not too distant future.
posted by caddis at 9:31 AM on August 3, 2012

You say you've played with the simulators, but I found this one to be really helpful in visualizing things, especially the gap between retirement and Social Security.

Sounds like you're stressing though. Keep in mind that retirement is more of a process than an event. We're all in the same boat, including a couple million members of the military that aren't going to allow their retirement savings to vanish. Buy some real estate if you're spooked by the financial industry's shenanigans.
posted by RobotVoodooPower at 11:08 AM on August 3, 2012

The reason there are so many different answers to the question of what you will need is that a lot of it depends on the lifestyle you currently live, the lifestyle you want in retirement, and when you personally want to retire.

There are a lot of other personal factors at play, too. For example, look at COD's answers about trying to live off the income and never touch the principal of your savings. That is how my grandparents saved for retirement, and even when my grandmother was 90 years old, she still was panicked about the idea of touching the principal. Do you want to die with 2.5 million dollars that you never spent? Maybe you do, maybe you really want to leave 2.5 million dollars as an inheritance to your children or to the World Wildlife Fund or something, but if you don't feel like you need to be sitting on a mountain of money when you die, you could plan your retirement finances quite differently.

I think you ought to examine your attitudes towards savings, too. You suspect that financial services are just trying to get you to invest more money, so you don't want to invest more money? You're only hurting yourself. The investment is for you, not for them.

The way you get around being taken advantage of in the financial services sector is to use fee-based financial advisors rather than commission-based (which you hinted at being aware of), and to minimize the fees you pay on your accounts, like by investing with a company like Vanguard - not by investing less for retirement!
posted by treehorn+bunny at 11:40 AM on August 3, 2012

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