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December 29, 2005


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I'm surprised 15% seem steep to you. To me, it doesn't seem like enough. I'm more in the 20% ballpark. 10% might be ok for an intermediate step, but as a *goal* I still think one should aim higher.

I guess it depends on 10% of what. I happen to be in a situation where I can live on (and plan to retire on) much less than I currently make.

Even so, I've seen "experts" recommend saving 10% of your income for all savings needs -- not just retirement. I guess that's why 15% for retirement only seemed steep to me.

That said, the more you can save, the better off you'll be.

For retirement saving I'm at 37.8% of my salary for this year. That's maxing my 401(k) and Roth IRA, which I do every year. My longtime girlfriend does the same, and we also pay an additional $500 towards mortgage principal each month. Oh and we don't do credit card debt either. I haven't carried a balance from one month to the next since 1998, and my girlfriend never has.

The way I see it, I have some catching up to do since I literally could not afford an IRA until I was 27 and a 401(k) wasn't even an option for me until I had already turned 31. Making great progress now though.

Yeah, this makes money a little tight for non-retirement account savings, travel, etc., but we're in our mid 30's and figure it's definitely worth it in the short term. At this rate we'll have the mortgage paid off only eight years from now (15 years early) and without missing out on 401(k) and Roth IRA maximization in the meantime. I know some people will say we're crazy for paying down a $100,000 6% 30-year fixed mortgage instead of investing all the extra money, but when I look at our country's massive fiscal and trade deficits, the approaching wave of baby boomers that will explode Social Security and Medicare spending, skyrocketing health care costs, and the fast approaching peak of global oil production and subsequent soaring energy costs, I'll take that advice under advisement and proceed as I am.

Happy saving all!

Just curious... Do you typically figure in your employer's match when figuring how much you save for retirement? Let's say you stash 10% in your retirement account, and the first half of that (5%) is matched dollar-for-dollar by your employer. Under those circumstances, would you say that you're saving 10% toward retirement, or 15% (i.e., do you include the match)?

I'm in a bit of a unique situation:

I put in the full amount into my 401k.

The first 3% is matched dollar for dollar, vested immediately.

The company then can make a discretionary deposit each year if it likes. (if it does well) The percentage is pretty significant.

So, in all, I end up with about 12-14% of my total income in my 401k each year. And yes, this counts the match.

BTW, good for you Chris!!!!

Wow I forgot... I wasn't even counting my employer's match but it would make sense to do so, especially if it vests right away and my employer's does. My employer has the standard 50% match up to the first 6% of my salary that I contribute but here's the kicker: they contribute 4% of my salary to my 401(k) ***whether I participate or not***. Needless to say, that rocks. =) They are also giving me an additional 1% “transitional benefit” for a five-year period due to their decision to freeze the pension plan two years ago. The transitional benefit percentage varies based on age and years of service; I get the least because I'm young and had been here only two years at that point.

The pension freeze sucks, but the decline of defined benefit pensions is only accelerating, brought on by global market pressures and demographics, and my pension freeze happened only two years after I started my job and I'm young, so it's not like I'm missing out on anything. Also, it’s not like I’ll even have the choice to work at the same company until I can retire and collect a pension; global market forces will probably cause a half dozen job changes between now and then anyway.

So I guess that means I’m currently at 45.8%. =) (37.8% mine + 8% from my employer)

> BTW, good for you Chris!!!!

Thanks. :)


I guess not having kids would allow you that luxury. I don't have any (I'm also back in grad school full-time, so retirement savings is on hold), but I advise friends of mine, and most of them with kids are unable to dedicate as much to retirement savings, given present tuition rates and tuition rate inflation (which I estimate at 6-8% a year!)

Retirement income requirements are tricky. What return do most of these rules-of-thumb assume on your retirement savings? I suspect it'll be closer to the 11% earned in stocks in the last 20 years of so, although looking ahead, this is the same mistake someone in say the 20s could have made. I would tend to favor expecting no more than inflation-adjusted 4% (real return, as economists call it) on a balanced portfolio, and use that to estimate your income requirements in retirement.

Those are my two cents anyway.


FMF, I don't know if 401(k) has the same rules as 403(b), but with the 403(b) there is a rule which says that, if you there are mandatory contributions to your account (i.e., if the employer makes a contribution whether or not you do), and you make contributions, the maximum allowed contribution is $42,000.00. This is a total, so it would be the $15,000.00 maximum before-tax contributions, all employer contributions, and then your after-tax contributions. As I mentioned, I don't know if the same applies for 401(k), but it might be worth looking into.

Regarding putting away 15% toward retirement: I'd go even higher and set a minimum of 25% if you want to retire without any loss in income. I can post something which walks through the math and assumptions if anyone is interested.

I'm sure people WOULD be interested!!!

For rule #10, I've heard 5% from other sources. And that's only for the first year--you increase it by the inflation rate each year to maintain a constant level of buying power.

FMF, ok I hope I can do it justice. :)

So a question many people have is how to make sure they save enough for retirement. I had these questions as well, and I have to admit I'm not the most mathematically gifted fellow. As it happens, my father teaches a few college courses on building mathematical models and projections. One of the exercises he wrote is how to estimate the savings rate needed to retire. He gave me a slideshow which went over this exercise, and I'll summarize them below.

Any mistakes below are mine. Hopefully I followed the math correctly and am explaining it correctly (I think I am, but as I wrote above, I'm no math whiz). Here we go:

People have a few sources of possible income in retirement:

Personal Savings
Winning the Jackpot/Lottery
Social Security

I've ranked those in my own personal order for what I think is most likely to be available. :)

I don't work for a company which provides a pension, I'm going to assume my own retirement comes from savings. Basically we want to save a fraction, f, of pre-tax income over a period of working years, k. Consider someone who is 22 years old, and who wants to retire at 65. That leaves them with 43 years to save toward retirement.

k = years to retirement
k = 43

Let us assume this person starts working today at $50,000 but eventually retires earning $150,000 in real dollars (in other words, adjusted for inflation). Given a starting salary S (50,000) and an ending salary E (150,000), we can estimate a real salary growth rate, r, over k years:

r = salary growth rate
r = (E/S)^(1/k) - 1
r = (150000/50000)^(1/43) - 1
r = 2%

So for the numbers below we assume a real salary growth rate of 2%. The final salary earned that year is


where 'A' represents the salary, an unknown. If we want to compute the fraction of the salary we are saving, s, we combine our savings rate, f, with the salary, A. This is the annual savings slice we are putting toward retirement:

s = annual savings slice
s = fA(1+r)^k
s = fA(1.02)^43
s = 2.34fA

Next we can compute the total accumulation for retirement, t, over 43 years of these annual savings slices:

t = total accumulation
t = (k)(s)
t = (43)(2.34)fA
t = 100.62fA

Next, determine how much money you need over your retirement years. I prefer to assume I'll be spending at least as much money in retirement as when I'm on the job. With that assumption, spendable income, i, in the year before retirement was our salary minus savings, and is our desired annual income for our retirement years:

i = spendable income
i = (1-f)(2.34)A

Now, how long are you going to live? If you need this salary for all your remaining years, you need to figure out how many years you are going to be kicking around. If we assume the purchase of an annuity, we can plug in an annuity factor. This lets us skip computing the cash draw-downs vs. growth of retirement funds, but keep in mind an annuity isn't always (usually?) inflation adjusted, and so this is a wild-card number.

The exercise I'm working from says a reasonable annuity factor for age 65 is 15. This assumption is an important number, it directly affects our savings goal, so it makes sense to do some research and see what fits you.

Anyway, let us plug in the annuity factor, x, to determine what our savings rate, f, should be. First compute the funds needed, given our annuity factor of 15, and our final spendable income:

n = funds needed for annuity
n = (x)(i)
n = (15)(1-f)(2.34)A
n = 35.1(1-f)A

So we have our total savings accumulation, t, of 100.62fA, and we have our funds needed, 35.1(1-f)A. So we can start to solve for f by saying that our total savings must equal the total funds needed for the annuity:

t = n
100.62fA = 35.1(1-f)A

Salary, A, cancels:

100.62f = 35.1(1-f)

so we are left with

f = fraction of pre-tax salary to save
f = 35.1/(100.62+35.1)
f = .258
f = 26%

So this 22 year old who wants to retire in 43 years, and who estimates an annuity factor of 15, needs to set aside 26% of pre-tax income in order to maintain the same level of income.

Some problems left to discuss would be how taxes and inflation affect your bottom line. Because we're using the assumption that we want our salary in retirement years to be the same as our final year of work, we are also guessing that tax rates are going to be the same. The same applies to inflation -- we assume that you are living comfortably in the years before you retire, and that you are tracking the real growth rate of your salary each year to make sure you aren't falling behind (if you are falling behind, ask for a raise or find a better job!).

Finally, we have to examine the growth rate of our investments, and balance that growth against the possibility of very high costs during retirement. For example, what will medical costs be? What happens if we have a surge in inflation? So the numbers above are conservative, which in my mind is a good thing when determining savings goals.

Jim -- Do you have a blog? If so, I'd like to publish this as regular entry and point to your blog. If not, is it ok for me to publish it anyway? I think more people would like to see it.

No, I don't have a blog. Feel free to post it, but maybe have some people you trust look it before for correctness beforehand. Like I said, I think I got the numbers right, but you never know. :)


I believe your math may be a bit off, or maybe I just missed it. As I see it:

Salary in kth year = A(1+r)^k
Savings in kth year = fA(1+r)^k
Total savings over 43 years = sigma(k=1:43,fA(1+r)^k)

This of course assumes a real (inflation-adjusted) return of 0%, if you assume a slightly better return of y, then your total retirement savings will be:

Total savings over 43 years = sigma(k=1:43,fA(1+r)^k*(1+y)^(43-k))

My knowledge of annuities is zilch, so I had to assume you were right there. Assuming I'm right, the values are easily computed using a sprea

Hope I made some sense?


You are absolutely correct that this assumes a rate of return equal to inflation. I did forget to mention that, though the example I was working from had a section on it.

The section I omitted basically walks through expected rates of returns from the stock market, and shows that tax-sheltered growth is important for reaching that even-or-better-than inflation rate of return.

D'oh, got a little over-zealous with the copy-and-paste there. The note above agree with Karthik is from Jim Robinson, not Karthik. :(

Chris is right on target with his strategies and techniques for retirement. One of the big things folks fail to do is pay off their home early. Given the rise in the cost of housing, the smartest thing you can do is pay off your home early. Between appreciation and equity purchase, your "savings" in your home is both tax free and quite large each year. As Chris is doing, when used in combination (e.g., real estate + savings or investing in a deferred program) with other savings techniques the outcome will be unbelievable. I too practice the same techniques Chris described and should in a few years have my home paid for and have a substantial savings in my 401K program...enough to add to my pension and make my retirement enjoyable praise God. Great advise Chris!

Hi, I am not eligible to join my companies 401k plan until 1.1.07. Can i open an IRA now? What can i do with my IRA once i join my company 401k? Can i keep both or transfer my IRA into my 401k? Please advise!

The ten tips to a prosperous retirement would be:
1. FIVE YEARS BEFORE RETIREMENT HAVE AN ACTIVITIY WHETHER FINANCIAL OR SOCIAL ACTIVITY. Persons after retiring usually get sick or simply fade away due to the absence of activity. Persons who used to go to work every morning and suddenly retires will have an abruft sudden change of work activities that means having no activity at all, hence becomes indisposable.
2. OUT OF THE INTEREST INCOME EARNED FROM THE RETIREMENT GRATUITIES TAKE A VACATION. They always say that a tour is educational. During retirement enjoy the fruits of your labor by taking a vacation to other places. Travel will temporarily change the environment that you presently have.
3. DURING RETIREMENT TAKE TIME TO EXERCISE SO AS TO FLEX THE MUSCLES AND STAY HEALTHY. Take time to exercise your body. It is the temple of your physical existence and soul.
4. AVOID FATTY FOODS BUT ALWAYS EAT FRUITS AND VEGETABLES. The fibers found in fruits and vegetables will make you healthy and stay longer.
5. DO SOME GARDENING IF YOU HAVE A SPACE THAT WILL KEEP YOU BUSY. To keep you busy during retirement always do some gardening to keep you busy and have some fresh flowers and vegetables from time to time.
6. READ BOOKS, MAGAZINES AND THE BIBLE. At night take time to read the Bible it will strengthen your faith. Read books and magazines to enhance and update your knowledge on some interesting topics.
7. JOIN SOCIAL ORGANIZATIONS COMMITTED TO PUBLIC SERVICE OR WELFARE. Always remember to join and support social organizations whose function is to protect the environment or whose intention is to serve the public. If you are a lady you can join or provide some help to the Girls Scouts Organization. You can also join the Clean and Green Movement Club designed to help protect the environment.
8. CREATE A HOBBY THAT CAN PROVIDE YOU SOME EXTRA INCOME. If you are inclined to art, do some paintings or sculptures it might possibly have the market. Take care of pets, it is a lucrative hobby.
9. TAKE TIME FOR SOLITUDE IT WILL HEAL PAST WOUNDS. Take time to be alone once in a while it will refreshen your soul and heal broken heart. Contemplate with nature, it will provide you with answers you never thought possible.
10. TAKE TIME TO PRAY. During retiremnt always seek the help of God and pray, it's the only way to commune with Him. Do things with enthusiasm at 98% and the 2% seek God's help. Remember store your treasures in heaven and not on earth.

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