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September 06, 2006


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Yes! Every article on retirement savings should have some advice on catching up. Even if you are behind in your retirement savings, or don't have any at all, you can make up for at least some of the lost time. Starting early is better than starting late, but starting late is still better than giving up.

While I compute my net worth, I quibble with some of the points in the article.

I base my retirement estimations on what I'm _spending_, not earning. My promotion and salary increase that I got last year didn't suddenly make my retirement prospects suddenly dimmer as the formula would imply. Since I didn't increase my spending with the promotion but rather increased my savings, my retirement prospects are brighter.

When calculating your net worth, $1 in a 401K or other tax deferred account should not be regarded the same as a dollar on which you've already paid taxes, whether that dollar is in a Roth IRA or other post tax account.

When I calculate my net worth, tax-deferred accounts are first reduced by my current marginal tax rate. Contrary to commonly held beliefs that your marginal tax rate will be lower in retirement, it can easily be higher since $1 of income can also result in taxing of $.50 or $.85 of Social Security benefits. So $1 tax-deferred now at a 25% marginal rate, and later withdrawn from a 401K at a marginal tax rate of 15% would be effectively 22.5% or 27.75%. Although the exclusion on taxing of Social Security benefits is $25K for a single person, after 15 years at a modest inflation rate of 3%/year would be equivalent to only $16K in today's dollars since the exclusion is not indexed for inflation. That's also assuming that Bush's tax cuts are really, really permanent. Since I already have substantially more in tax-deferred accounts than the average person, I'm looking at the realistic possibility of paying more in taxes when I withdraw the money than I'm currently deferring. I'm hoping that my employer will offer the Roth 401K as an alternative to the traditional 401K.

I calculate the worth of my titled property. I put the value of my house at 75% of the tax appraisal to account for the cost of preparing it for sale and paying real estate commisions, etc. Car value is the Edmunds wholesale value. Furniture and other possessions I don't bother with. How much could I really get for all my personal items if I held a garage sale?

This is one of the best articles I've seen in a long time. The formula does seem more fine-tuned than others for benchmarking your net worth. I also really like commenter Mike's idea, which was also addressed in the article, about calculating retirement needs based on SPENDING instead of on INCOME. By that measure, people whose savings rate is negative actually need MORE than their current annual income to maintain their lifestyle once they retire. Clearly, this is impossible. Yet another reason to keep spending down.

This benchmark doesn't really tell me anything new about my situation. At 29, I'm ahead. At 43, my spouse is behind. If we average out between our two ages, and look at our combined assets and liabilities, then we are a little behind but it's not irremediable (sp?). The numbers required for catching up are scary and out of reach, but these numbers are always scary. All I can do is increase my savings rate every single year, and try to get better and better at holding my spending down. I'm gonna need that skill in retirement.

It's interesting that he tosses off that 15% savings rate so glibly. Time was, 10% was considered enough. It reminds me of a Wall Street Journal article I read on the plane a couple months ago called something like "Why 15% is the new 10%".

im 65 and want to retire. I have 10k in the bank but ow 20k on my credit cards. Is there something the formula can help me figure out.

Tom --

Probably not. I suggest getting some financial advice from a successful friend, family member, etc.

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