How much is enough (retirement savings)?
November 9, 2012 7:58 AM   Subscribe

How high was your gross income when you felt able to make the maximum contribution to your 401(k)/403(b)? Is contributing close to half of my already modest income a bad idea?

I recently eliminated some recurring expenses, cutting my absolutely non-negotiable monthly expenses (rent and utilities, food, medical insurance, student loan payment) to below $850/month. My monthly gross income is approximately $2350. I already contribute about 13% to my 403(b), but I worry that, even though this is smack dab in the middle of the common-sense-recommendation range, the absolute amount isn't enough. I'm thinking about establishing a small emergency fund and then increasing my contribution to somewhere in the $13,000-16,000/year range.

A few other points: I'm in my mid-thirties. I haven't ever made much money, and have only been able to afford a retirement fund in the past year or so. I currently have about $4000 between my 403(b) and an IRA. I have $40,000 of student loans, and I'm currently on the IBR plan. My job will qualify me for public service loan forgiveness in eight years, so I am mostly comfortable with the fact that I am only paying enough to cover the interest.

I realize that the correct advice is to increase my income, but I'm not sure that's a realistic option--I'm already approaching the peak income age bracket, and the only thing on the horizon is my annual 2% COL adjustment. That said, I'm accustomed to fairly severe financial discipline. I commute by bike, buy everything used, prepare most of my food and coffee at home, don't buy electronics, live with roommates (currently my girlfriend), don't have and don't plan on children, etc.--but I recognize that this will be difficult, at least until I get used to it. I regularly spend $30-60/week on...stuff...which I don't track too tightly, and I would have to rein this in.

I know that if things do go pear-shaped and I need more liquid cash, I can always modify my contribution and the money will be there in my next paycheck. But, I'm afraid that I'm not thinking this through very well, and this post reinforced my suspicion that I may have different (and potentially unhelpful) ideas about money than most people do.

Would I be better off spending the money on therapy to address my anxiety about being destitute in my declining years? (For reference, after my grandfather developed Alzheimer's, my grandparents burned through the better part of $1M USD, and this has, obviously, had an impact on how I think about retirement savings.) Is this a horrible idea? Have you done something similar? How did it work out?
posted by anonymous to Work & Money (15 answers total) 3 users marked this as a favorite
If you are able to build up an emergency fund and keep within your current budget, that's great. There's little reason to worry about putting away too much.

I'd recommend you start fully funding a Roth IRA. You put in after tax dollars, but when you withdraw, it's not taxed. It's a great way to balance your current 403(b). You can also withdraw your contributions to a Roth IRA without penalty. So if life changes, and you need to free up some money, you can do that. It's an amazing resource for those of us a long ways from retirement.
posted by advicepig at 8:24 AM on November 9, 2012 [5 favorites]

You don't need therapy if you're worried that you might not have enough at retirement -- the vast majority of people under-save, and I think I read that something like 30% right now retire with only 30k in the bank, a grim scenario. Also, if you're planning to set up a rainy day fund, that will help with buffering you if circumstances change later.

Does your employer match contributions at all? You obviously want to get at least up to that, but it's perfectly reasonable to contribute substantially more than that -- however half your income sounds pretty extreme, even if you can swing it, and I'm not sure you want to eliminate all your pocket cash and ability to have fun. Why don't you try upping it to 5 or 6k to start, adjust to that for a bit, and talk to whatever financial planner your office provides (or suggests). You could always inch it upward in subsequent years (maybe sinking the COLA for a few years), but even this would give you closer to 150k-200k in 30 years, which isn't bad given how little you apparently need to live!

Just my two cents, I am not a financial advisor, etc.
posted by acm at 8:28 AM on November 9, 2012

I can really relate to this, because it's something I've struggled with over the past few years. My current retirement savings rate is probably well above where it needs to be, according to conventional wisdom, statistical models, etc. I have other goals I'd like to be able to prioritize more. But it's hard to back off retirement savings; it's a huge black hole of not knowing what I could need in the future, and like you, I've seen elderly family members who didn't have what they needed. It's hard.

I think you need a budget. Your numbers seem reasonable. Your stress levels do not. Can you try something like YNAB (haven't used it, just know a lot of people love it)? Can you use some retirement savings calculators to see if your numbers are reasonable?

I would also worry more about an emergency fund. You don't have a car, so you don't have to worry about replacing/fixing/insuring that. But if you haven't gotten seriously sick or injured before, do you know what your annual medical deductible is? Having that amount in the bank before you get sick is worth its weight in gold.

And I would keep spending the $30-$60/week on stuff. Given how far you've already cut your budget, it sounds like this is stuff that enhances the quality of your life. That's worth something, too.
posted by pie ninja at 8:46 AM on November 9, 2012

Do 17,000/[your current salary].

Can you afford to contribute that percent of your paycheck to your retirement plan? If so, then you can afford to contribute the maximum.
posted by 3FLryan at 8:48 AM on November 9, 2012

In general, I wouldn't hurry on this too much. Save the money, sure. But 401ks are quite illiquid, and I'd think through your other goals first before dumping all your free cash into one. The other thing to think about is that 401ks are not guaranteed - they're stock market investments, and they can lose value. My dad's retirement fund lost about 50% of its value during the dot-com crash, and he and my mom are still working in their late 60s with no real end in sight. Make sure you're being savvy about how the actual resources are allocated within your 401k, and contemplate other investment vehicles too.

I would recommend not raising it until you have six months' expenses in the bank - I'm not sure if that's what you mean by "e-fund," but that's the minimum I'd set. I didn't have quite that much and I ended up closing out one of my 401ks during a period of unemployment to get the cash to live on (and paid some hefty penalties to get it, too.)

The other thing I'd wonder is if you have any intention of buying a house in the foreseeable future. This is less a given than it was for a lot of people before the crash, but if you do, saving up cash for that purchase is also a good idea. (The wisdom of buying vs. renting is a whole other question.)
posted by restless_nomad at 8:56 AM on November 9, 2012 [1 favorite]

Generally speaking a prudent move is to save at least 10% of your income and if your employer offers a match on the 403(b) then invest at least to the match point before putting money elsewhere. As far as liquidity concerns about putting money into the plan, you can make hardship withdrawals on the contribution amount (not the investment gains) and you can also take out loans on your retirement account.

Most people don't get serious about saving until their 30s, so you are doing the right things.
posted by dgran at 9:09 AM on November 9, 2012

Have never not maxed it out, though for many years this was a struggle (meant making serious compromises on lifestyle). When I started the max was lower than it is today.

Tax advantaged growth is awesome and 401k is pretty much the only vehicle for normal people. Take advantage of it if you can.
posted by rr at 9:44 AM on November 9, 2012

I realize that the correct advice is to increase my income, but I'm not sure that's a realistic option--I'm already approaching the peak income age bracket, and the only thing on the horizon is my annual 2% COL adjustment.

I'd just note that increasing income is usually going to come from either a promotion, a side job, or a new job, not from waiting and hoping for COL or merit raises. In your case you'd have to weigh in your plans for getting your student loans repaid, but almost everything you list above would be made far, far easier with even a modest increase in income.
posted by Forktine at 9:56 AM on November 9, 2012

Personally, I would make a different set of trade-offs to achieve the retirement savings goals you've identified. It's the "increase income" scenario you identified. It would be worth it to me to get a small second job--like bartending two nights a week or something like that--to avoid living under conditions where I had to worry about tracking $30-60 in weekly walking around money and I'm no spendthrift. Then I'd sock that all away.
posted by carmicha at 9:59 AM on November 9, 2012

My gross income was 6x yours last year (1st full year of working full time) and I just maxed it out this year. But I also have a mortgage payment, a car payment, student loans (that will not be forgiven), and a short term 401k loan I took out to pay off my credit cards (which is in general considered a stupid idea). I'm also in my early-20s, so I'm barely thinking about retirement.

I'm not a financial planner and this is not official advice.

401k is good for 3 things: tax-deferred growth, tax shelter, and company match. At your income level, you don't really need tax shelter. You don't mention company match (mine gives me 50 cents for every dollar I put in). And whether tax-deferred growth is good or not depends on whether you expect to be taxed more or less when you retire. So it's actually possibly a toss up.

As you know, 401k is illiquid. It can be mismanaged (but so can all savings). There is also a required minimum withdrawal once you turn 70.5, so that IRS can tax it. So if you plan to have other savings or work until old age, it also might not be ideal.

If your company has Roth IRA, I'd definitely recommend that over 401k. You can borrow against your Roth IRA and also withdraw the principle amount (the amount you put in) without penalties. Roth IRA is put in after tax, so you don't get tax benefits, but the government also doesn't require minimum distribution. And anyway, the liquidity seems to be better for you right now, since you don't really have emergency savings.

I know you don't want this advice: but think of ways to increase your income. You have to be very proactive about it. Are you making as much as your peers in your field? If not, consider asking for a raise. Even if your employer is willing to pay you more, they may wait until you ask for it. Otherwise, what Forktine said.

Lastly, how much you need to save depends on how long you plan to live after you retire and how much you plan to spend per year (adjust for inflation, of course). Just because I want to retire at 55 and live on today's equivalent of $60k/year for 40 years doesn't mean you should need or want to do that. Maybe you enjoy working more than I do. Maybe you would be happy to continue living on $20k/year (yes, make sure to account for ridiculously high health/disability insurance). There are tons of calculators out there for this stuff. I'd encourage you to go look at those and get a more "real" number for what is "enough."
posted by ethidda at 10:24 AM on November 9, 2012 [2 favorites]

One basic dilemma is how to balance between a comfortable retirement and a comfortable present. You want to make sure you're not doing the equivalent of making yourself eat cat food today so that you can avoid having to eat cat food when you're 65. If your plan to put $13,000-16,000 away toward retirement is going to require, in your words, "fairly severe financial discipline" and require you to stay on a poverty-level monthly budget of < $1,000, is that really necessary? There's the question.

Let's put your numbers into a standard retirement calculator: current gross $30,000, 2-3 percent annual raises, expecting to retire on 50% of your current income [normally this is suggested at 70%, but since you're CURRENTLY suggesting you can live on 50% of your current income, let's use that number for now], current next egg of $4,000, contributing 50% of your gross toward your 403(b) and investing that in a moderately aggressive portfolio since you are quite young.

The result is that under current models, your social security earnings alone will provide you about the same amount of income to live off as what you are currently living on now (about $12,000 adjusted for inflation), and you will furthermore have a 90% change of accumulating a nest egg of around a million dollars to supplement social security. In other words, you will be able to enjoy a lifestyle that is significantly better than what you're enjoying now. In fact, my back-of-the-envelop calculation is that with social security and drawing on a $1M nest egg, your spending power in retirement would be about 3 times your current proposed budget of $12,000/year.

In other words, for your current spending needs, your retirement savings proposal far overshoots what you would need to support yourself after retirement "in the lifestyle to which you have become accustomed"; you are, in fact, talking about eating catfood now so you can afford shrimp when you're 65.

There are a lot of retirement calculators out there; try playing around with them and see what kind of answers you get. When I do that with your data, I find that you should only need to save about 15% of your income to be able to retire at 65 and have a post-retirement income of 70-75% of your then-income. A 20% savings rate might make you feel more comfortable and allow you to envision a post-retirement lifestyle where you don't have to be 80 years old and still riding your bike to the grocery store. But 50% of your current meager income is just, IMHO, overkill.

If you're still feeling anxious, I'd start by talking to a financial planner rather than a therapist.
posted by drlith at 10:29 AM on November 9, 2012 [5 favorites]

Unless you are getting a match from your employer, a MUCH better option is to save in a Roth IRA.

Do up to your corporate match in your employer's retirement plan, THEN do the max to your Roth IRA.

If you feel the need to do more, contribute to your IRA.

You have so many more options with a brokerage account than you do using the very limited choices in your employers plan.
posted by Ruthless Bunny at 11:22 AM on November 9, 2012 [1 favorite]

In general people under-save for retirement, and it's unlikely that your expenses (apart from the student loan) are going to go down in the future, so if it makes you feel more secure to really sock away money during this relatively unfettered time in your life, go for it.

I think you're over thinking this, though--you correctly noted that you will need a savings cushion for emergencies before you make this big change to your retirement allocation. Why not just try to allocate all the money that you would devote to your 401(k) to your savings account for a few months and see how easy it is to live on the remainder? If it makes you miserable, then you'll have your answer. If it makes your girlfriend miserable, that is also a problem you'll have to think about. But at that point it would be easy to adjust your savings targets--you wouldn't even have to change your withholding, just the amount you send to savings. Even if you do make a big allocation and subsequently decide that you have other short or medium term goals for the money, you can always change it without much difficulty. I agree that you should look at a Roth IRA apart from whatever you get matched since it's not tied to your job and you'd have more investment options.

It sounds like your real question is "Am I abnormal for wanting to do this?" I think that's a question that only you (and your girlfriend, since you live together) can answer. It's perfectly fine to live a life without many luxuries if you and your significant other are comfortable and happy that way, and if it reduces your concerns about your future. People can and do save large amounts of money on modest incomes this way. If, on the other hand, you're spending a lot of time worrying about your old age or denying yourself things that would significantly impact your happiness at comparatively little expense, like owning shoes without holes, you may have developed a skewed outlook.
posted by The Elusive Architeuthis at 12:05 PM on November 9, 2012

Unless you are getting a match from your employer, a MUCH better option is to save in a Roth IRA.

This is only true if you know that your tax rate will be higher in retirement than currently. For the majority of people that is very unlikely because their income, and their tax bracket, go down, not up in retirement. A Roth makes more sense if you are above the cut off for a deductible IRA and have already maxed out your 401(k) deductions because you have to pay tax on that income anyway.
posted by JackFlash at 12:57 PM on November 9, 2012

I started making the maximum contribution to my 401(k) when that was about 35% of my income. I had roommates and no responsibilities, and friends who were grad students and artists, so it never felt like a lifestyle compromise. And while other answerers make good points, I've always thought that if the worst financial mistake I make is having saved too aggressively for my retirement when I was young, I'll be able to live with that.
posted by teditrix at 5:24 PM on November 9, 2012

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