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May 16, 2014

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I read a similar report and I agree the results are staggering. The assumption that all of these requirements make is that the average person even has anywhere near that amount of money in the first place, let alone 'spare' levels of capital at this level to put aside!

What I think it also reflects however (I'm based in the UK) is the level of investment needed to maintain state based contributory pensions. In short, the state is going to run out of money quicker than we are. There needs to be a sea change in our views to finance.

Unfortunately we have lived in a world where nothing has had the true cost for so long, that it's going to be a very hard adjustment.

This is just nuts.

Most people are paid bi-weekly or even monthly. So adjusting to that you'd be telling people they need to save $1148 or $2460 (30 day month) out of each paycheck for retirement. I think a lot of folks would balk at that amount especially if they're only earning $50K a year, or $1923 a bi-weekly paycheck. That would be more than half their income and their takehome would likely be about quarter of their pay after taxes and healthcare. At $100K a year your salary would be $3846 every two weeks, so $1148 would be 44% of your salary. Again this is before taxes and other spending.

This is the kind of dumb advice that makes a lot of folks just throw up their hands with respect to saving for retirement and save nothing because the requirement is so overwhelming to them they can't see themselves ever acheiving it.

FMF,

I am focus on the income generation like you are. While I have my overall target number, my real focus is on the income generation in which I do not have to spend my principle. I am looking to have a level of retirement income that also throws off enough excess to continue to invest during retirement to address inflation as well.

Yeah pretty useless advice as the $82 per day is unattainable for the average person. In my area people are lucky to even make over a $120 per day. I feel the number most people can save for retirement if they are debt free would be around $20-30 per day. FMF please let us know what you think is the right daily savings number.

I took my investments for retirement and divided it by the years I have been working and I am at $71 per day so far. So the number is not too far off and achievable. I still have 8 to 15 years left to work so the $82 a day is a possibility.

A fallacy in this is who only works for 30 years? My dad worked 38. Father in law 36. Those extra years are important ones and high income for them.

I agree in save as early as you can as much as you can for as long as you can.

Because of all the uncertainties that lie ahead during a 30 year period there is no way that you can use a plan like the stupid one suggested here.

What you have to do to be certain of a happy & secure retirement is to save all you possibly can. This puts you in a position where you wil have to think twice before splurging on expensive cars, dining out at expensive restaurants, spoiling your kids rotten, paying for very expensive weddings, vacationing in very expensive hotels, developing a taste for very expensive wines etc. etc. etc.

At all costs you must be sure your marriage is going to last a very long time and avoid divorces at all costs since they can cut your savings in half in a single day, and then where are you?

Last but not least you MUST, at some point become a smart investor and totally avoid very risky investments, as well as learning how to use tools that help you search the many thousands of mutual funds, ETFs, and stocks for the ones that have the best risk adjusted returns.

There are also analytical tools that can warn you of impending bear markets and shelter you from taking heavy losses.

As the old saying "It takes two to tango" goes you also need a marriage partner that is on the same page as yourself as it is very counterproductive if one of you is a saver and the other is a spender.

I am speaking from experience since my wife and I are like two peas in a pod when it comes to money. We have also been married since 1956 and retired since 1992. We received more than our share of good luck and in retrospect we overdid our saving, but it's a lot better to end up with "Too much" than "Not enough".

The math of this response assumes 3% inflation (4% real return), but a static (non increasing) contribution of $82. If you also adjust your contributions by 3% inflation each year, it saves about 2~3 years. Depending on a number of factors, this type of earning history would result in $20k-$30k in SS Benefits. If you take the low end at $20k, and adjust for your contributions for inflation, you're down to around 17~18 years to create $50k in spending. Chances are a couple who had been earning $50k a year would not need that much spending as after 30 years, hopefully they've paid off a mortgage and any kids they've been supporting have left the house. Given all this, if an average family could actually save that $82 / day, they could probably save for a comfortable retirement in as little as 10 years.

Given all these adjustments, an average family if they saved for 30 years would probably need to have saved less than $20 / day. If they worked for an employer that did some sort of 401k company match (say 50% of first 6% of salary), just putting in the bare minimum for the match would be over 50% of the need, reducing additional contributions to less than $10 / day.

A comfortable retirement is not out of reach for the average family, but the sooner they get started planning for it, the easier it will be to attain. If the average family waits too long, they can still potentially make it up through an few years of work and extra savings.

Let's run some numbers:

Assumptions: 7% rate of return during investing, 4% rate of return during retirement, 3% inflation, 4% raise through career, retire at 65 and live on 50 k adjusted for inflation. Inflation starts at the starting age of contributions. No additional SS, pensions, etc

10k contribution starting at age 21: run out of money at age 79 ($27.40 daily)
10k contribution starting at age 21 and increased 3% a year with inflation: run out of money at age 88 ($27.40 daily start, $97.66 end, $55.45 avg)
15k contribution starting at age 21: run out of money at age 88 ($41.10 daily)
15k contribution starting at age 21 and increased 3% a year with inflation: $1.5 million left at age 100 ($41.10 daily start, $146.49 end, $83.17 avg)
50k starting salary at age 21, 10% investment of salary, out of money at age 78 ($13.70 daily start, $73.98 end, $35.93 avg)
50k starting salary at age 21, 15% investment of salary, out of money at age 84 ($20.55 daily start, $110.97 end, $53.90 avg)

10k contribution starting at age 30: run out of money at age 73 ($27.40 daily)
10k contribution starting at age 30 and increased 3% a year with inflation: run out of money at age 79 ($27.40 daily start, $74.85 end, $47.32 avg)
15k contribution starting at age 30: run out of money at age 80 ($41.10 daily)
15k contribution starting at age 30 and increased 3% a year with inflation: run out of money at age 88 ($41.10 daily start, $112.27 end, $70.99 avg)
50k starting salary at age 30, 10% investment of salary, out of money at age 73 ($13.70 daily start, $51.98 end, $28.83 avg)
50k starting salary at age 30, 15% investment of salary, out of money at age 76 ($20.55 daily start, $77.97 end, $43.24 avg)

10k contribution starting at age 45: run out of money at age 69
10k contribution starting at age 45 and increased 3% a year with inflation: run out of money at age 70
15k contribution starting at age 45: run out of money at age 72
15k contribution starting at age 45 and increased 3% a year with inflation: run out of money at age 73
50k starting salary at age 45, 10% investment of salary, out of money at age 68
50k starting salary at age 45, 15% investment of salary, out of money at age 69

The problem is that we have no way of predicting what the market will do, which is a huge factor for those who started early in their career.

My current track closely mirrors the $50k starting salary at age 21, 15% investment of salary. I'm 28 and have over-performed on the raise side, so my salary now is higher than "predicted".

My thought is I could very easily live on $50k a year inflation adjusted if I didn't have a mortgage, which should be very possible.

Jason:
I looked through my market database that started on 9/1/1988.
What stands out from a predominately Bull market are the two big recessions.

Using the S&P500 index this is what happened.

Period 9/1/2000 to 10/1/2002
The index took a -44.24% loss.

Period 10/5/2007 to 3/31/2009
The index took a -55.29% loss.

I know that the great majority of people that read this blog are Buy and Hold investors and believe that market timing is stupid. However if you had the ability to move from stock based investments into bond based investments and bypass a good portion of these two large market drops you would be way ahead.

In the first of these recessions I made 13.37% instead of taking a -44.24% loss.

By the time of the second recession I had already become a bond only investor and made 3.37% instead of taking a -55.29% loss.

Now that I am a bond only investor I receive income from each bond I owm and when a bond matures or is recalled I get back the coupon value of the bond, so it's a Win-Win situation for elderly investors like myself.

Jason:
I looked through my market database that started on 9/1/1988.
What stands out from a predominately Bull market are the two big recessions.

Using the S&P500 index this is what happened.

Period 9/1/2000 to 10/1/2002
The index took a -44.24% loss.

Period 10/5/2007 to 3/31/2009
The index took a -55.29% loss.

I know that the great majority of people that read this blog are Buy and Hold investors and believe that market timing is stupid. However if you had the ability to move from stock based investments into bond based investments and bypass a good portion of these two large market drops you would be way ahead.

In the first of these recessions I made 13.37% instead of taking a -44.24% loss.

By the time of the second recession I had already become a bond only investor and made 3.37% instead of taking a -55.29% loss.

Now that I am a bond only investor I receive income from each bond I owm and when a bond matures or is recalled I get back the coupon value of the bond, so it's a Win-Win situation for elderly investors like myself.

EL --

Ha! I wish I knew the "right" number. :)

To me the answer is that there are so many factors it really needs to be calculated on an individual case. Each person needs to set a goal for the type/timing/etc. of retirement they want, calculate what they need to make that happen, and then start saving accordingly. Using this method is what I thing the "right" answer is for others as well.

My plan (noted above) is a bit more aggressive than average, but I've planned for it and am working towards it. Others may approach it differently, but that's fine -- it's the plan that works best for them.

My autoinvesting plan which includes 401K contributions but no match (sadlY) puts me at saving about $84 a day. There is no way I could do that on an income of less than $100K. Probably not even on less than $120K.

1) YA gotta AVIOD debt, and 2) START at 15%+ of gross when young and increase as your income improves, but, 3)increase the expenses at a much lower rate as you age, be FRUGAL..4) Increase investments whenever you get a raise or have extra dollars (not SPEND it on a luxury you don't really need)...

I did JUST that, and retired at 47! Now, money/stuff doesn't matter, I can do what I want, when I want - bought a new Jet Ski last week, a lake is 1 mile from my front door. The $8500 is a miniscule % of my $2.85~ M portfolio. THe gas doesn't matter. I eat out often now, hardly ever in my 20's/30's. MY other car is 16 years old with 186K miles. My 5 year old Jeep is also fine for me. It's all just stuff. My stress level is zero though :) My home is my dream home I helped design, build and pay cash for at age 48.

Nuff said!

Start early and whatever you think you can do, do MORE! and think L O N G term when young!

I think $82 a day is crazy. I make just under 50K gross per year. But the thing is, if you save a high percentage of that 50K...then you don't NEED 50K in retirement. 14% of my salary goes to the pension right off the top. Another 28% goes toward my 457 plan. So right there, that's 42% of my gross income gone right off the top, and we haven't even talked about taxes yet. If I only need to generate 29K in income, then that's a lot more doable. Even if I give myself some wiggle room and say 35K, that should be doable and doesn't require $82 a day savings.

I agree with GETAGRIP, these kinds of articles just overwhelm people and cause them to give up before they even start.

Mr. Money Mustache did a much better piece on this subject called "The Shockingly Simple Math Behind Early Retirement"

Here's what your after tax savings rate needs to be and how many years it'll take you to reach Financial Independence:

5% - 66 years
10% - 51 years
15% - 43 years
20% - 37 years
25% - 32 years
35% - 25 years
40% - 22 years
50% - 17 years
60% - 12.5 years
70% - 8.5 years

Here's the link to the whole piece, including his assumptions (which are fairly conservative):

http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

It also turns out that the higher your savings rate, the less the rate of return matters.

Come on crybabies, grow a pair!:-) This is not so bad, and here is why...

Take the present day value of $50K, divide by 4%, and get $1,250,000. A 40 year worklife. 250 workdays per year. Divide by 2 to get the mid-point, accounting for the small earnings/savings of Year 1 compared to the large earnings/savings of year 40. The daily savings rate averages $62.50 (use a 30 year worklife, to get the USA Today figure). Now count in Social Security at $20K/yr (leaving a $30K/yr present-day need, 60% of $50K), so multiply the daily average by .6 and get daily savings of $37.50. Get a spouse or partner, and divide by 2 for a daily savings rate of $18.75.

$18.75 a day, averaged over 40 years. Come on, folks! We all know the big earnings and savings years are at the tail end of the worklife, and the last year or two of savings and market performance have the biggest impact on NW.

How much of my income should I save (S%) so that in N years, I can withdraw an amount equal to my income today?
Use real number for rate-of-return.
Suppose you save S=15%. Save for N=30 years;
For $1 of income, saving present value =0.15; future value =1.00; N=30; It turns out you need a real-rate-of-return =6.53%, which is realistic.

By saving 15% of your income for 30 year, you can withdraw equivalent amount in today's dollar in year 30. Next year's saving replace retirement withdrawal in year +1. So you can withdraw forever.

Assume you invest the amount once a year, for daily saving, it is 0.15/360.

This shows if you save 15% for 30 years. You then can retire forever, without social security. If you want to account for social security, just subtract the social security amount, and save 15% of the balance.

Stop buying that daily Starbucks and it's only $78 a day!!!

This post has really stimulated my thoughts on saving for retirement. Saving money is far from easy. Taking a realistic approach, how much you want to save depends on your plans for retirement. If you are happy to live watch TV for the rest of your life, $5 a day for 30 years should be sufficient. Saving for a life on a yacht on near a Greek Island then yes $80+ dollars a day.

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