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I know there is no exact answer for this but how much do you think someone in their late 20s should have in their 401K? If you don't know how much what do you think is typical? I have a little over $9,000 is that good? What should I aim for?
A good rule of thumb to consider is not how much you have saved now, but to consider the kind of lifestyle you live now and ask if you are prepared for the emergencies in life.
Do you owe any money on high interest credit cards? Do you like to drive new cars? These items drain your savings potential and create what is referred to as an "opportunity cost." The money you are not investing now is most valuable because compound interest is important. But don't fret, you are definitely on the right path.
A good rule of thumb is to invest at least 15% and perhaps as much as 20% of your income into retirement. Lets assume you make around $47000 dollars a year and save 15%. Assuming an 8% return on your money and you decide to retire at 65 years old, you would have approximately $1,965,000 in the bank. Assuming you live on 4% of that money annually, you would live on $78,600 dollars (not adjusted for inflation.)
If you were to wait until age 70 to retire, your nest egg would be closer to 2.5 Million dollars.
My advice is not to focus on what you have earned thus far (but what you have is great, IMO) but focus on where you are going and manage your lifestyle with as little debt as possible.
If you and your wife both saved this way, you both will retire very comfortably.
It's important to save as much as possible as early as possible, and you should always try to remember that when you're going out to eat because you're too lazy to cook today, you may be dooming yourself to being unable to afford that sort of luxury in your later years. That doesn't mean you can never spend money on yourself, but at least make an effort not to let your younger self deprive your older self of the happy things in life.
Another thing to think about is whether a 401K is really the best place to put your retirement money:
* Ask yourself if you really need the government to protect you from yourself by stealing 10% of your retirement if you don't follow their rules.
* Ask yourself if deferring taxes is really a good thing when our government is doing everything in their power to raise them. If tax rates go to 50% when you're ready to retire, you may kick yourself for passing up the 30% or so you're paying today.
* Think about the time you will want to buy a home and ask yourself which is smarter/safer:
a. Invest your retirement funds into paying for a house with cash (for a return that will most likely track the rate of inflation) so you'll never have to worry about foreclosure.
b. Take a gamble that you'll be able to stay working long enough to pay off a mortgage while you hope that Wall Street will gamble your 401K nest egg well enough to recoup your mortgage interest, stay ahead of inflation, pay for the taxes on your capital gains, and make a profit.
* Ask yourself if you can make better decisions for yourself than the politicians who will control the future of your 401K.
* Ask yourself if you really need the government to protect you from yourself by stealing 10% of your retirement if you don't follow their rules.
* Ask yourself if deferring taxes is really a good thing when our government is doing everything in their power to raise them. If tax rates go to 50% when you're ready to retire, you may kick yourself for passing up the 30% or so you're paying today.
* Think about the time you will want to buy a home and ask yourself which is smarter/safer:
a. Invest your retirement funds into paying for a house with cash (for a return that will most likely track the rate of inflation) so you'll never have to worry about foreclosure.
b. Take a gamble that you'll be able to stay working long enough to pay off a mortgage while you hope that Wall Street will gamble your 401K nest egg well enough to recoup your mortgage interest, stay ahead of inflation, pay for the taxes on your capital gains, and make a profit.
* Ask yourself if you can make better decisions for yourself than the politicians who will control the future of your 401K.
Its important to note that with all the funny money being drawn out of thin air in congress right now that a ROTH 401k or IRA (which is tax free at retirement age) makes a lot of sense. If I was betting on the guvmint raising taxes, I'm all in. I am not counting on social security, and neither should anyone age 40 or younger.
And it should also be mentioned that very few people pay 30% now in taxes. Your nominal rate is always much lower than your tax bracket (which is always too high anyway!)
{Insert savings here} is not enough. I thought I was in good shape, no idea if I really am or not. Glad I stayed "all in" after the drop though. Timing the market is not my specialty.
At a minimum, I would say contribute to the 401k as much money as you get a company match for (assuming you get any). This is true for all ages. Then, any extra money for retirement that you can afford should go into a Roth IRA/401k.
Why Roths? If you are in your twenties, you are hopefully in a lower tax bracket than you will be in your thirties and fourties, and the bottom tax brackets are as low as they have ever been. I don't care what political persuasion you are, I think most people agree that the USA will have to raise taxes just to pay off its current obligations. They definitely won't go below the current 10%/15% for the bottom rungs. So, pay the 10-15% now and have all the earnings tax-free in the future.
I think saving for the future and taking advantage of the tax breaks offered is great, however it seems senseless to plow too much into savings if you have a bunch of debt or a mortgage.
I tend to believe in Suze Orman's philosophy that you will always need a roof over your head. You can't live in a stock certificate. I'd rather focus more on paying off the house first.
I know someone that was bragging recently about having $100k in 401k's but also has at least $200k to go on the mortgage and another $100K in car loan and unsecured debt.
I know someone that was bragging recently about having $100k in 401k's but also has at least $200k to go on the mortgage and another $100K in car loan and unsecured debt.
The car loan and unsecured debt of $100k is stupid, but I wouldn't necessarily skimp on retirement savings to pay down a mortgage at a super-aggressive rate. Mortgage money is cheap and the odds are quite good that investment returns can exceed the interest expense of the mortgage.
I'm all for getting rid of debt, but when choices have to be made I would not necessarily agree with your advice.
The car loan and unsecured debt of $100k is stupid, but I wouldn't necessarily skimp on retirement savings to pay down a mortgage at a super-aggressive rate. Mortgage money is cheap and the odds are quite good that investment returns can exceed the interest expense of the mortgage.
I'm all for getting rid of debt, but when choices have to be made I would not necessarily agree with your advice.
Sure I've have heard a lot of people say that but markets go up and down and I'd rather have a roof over my head and only have to worry about upkeep and property tax then having a mortgage when I am 60. I've seen people lose plenty of money on investments before.
Life can throw some curve balls and you only have to look at the millions of people recently scrambling to make their mortgage payment.
Having seen what has happened around me in life, I think it's wise not to sink everything into one barrel.
Sure I've have heard a lot of people say that but markets go up and down and I'd rather have a roof over my head and only have to worry about upkeep and property tax then having a mortgage when I am 60. I've seen people lose plenty of money on investments before.
Life can throw some curve balls and you only have to look at the millions of people recently scrambling to make their mortgage payment.
I'll second this. The things our grandparents used to say, like "a bird in the hand is worth two in the bush", and "better safe than sorry" still ring true today.
I'll second this. The things our grandparents used to say, like "a bird in the hand is worth two in the bush", and "better safe than sorry" still ring true today.
That's actually what my mom said and she paid down the mortgages on the 3 houses my parents owned early. In the meantime the stocks and bonds had their ups and downs. But at the end of the day now, they have a nice retirement home and land all paid for in their mid to late 50's and it's just something they don't have to worry about anymore.
Some people say well the cost of carrying debt is cheap. I don't think so, because sometimes it's not a quantitative thing. When you have debt, including a mortgage, basically you have to wake up every morning to work for the "master".
We have seen with this depressive economy that there are millions out there with harsh stress in their lives now trying to pay for houses and cars they took out big loans for. That stress can fracture families and damage health.
I know of people that age and into their 70's that still have mortgages to deal with and I'd rather not have that hassle. In fact my grandmother is 76 and still working full time to pay hers. When she gets sick or really slows down what do you do then?
I'm not saying don't invest in IRAs, 401K's etc. By all means do, I mean I know I am trying to take advantage of every tax reducing or tax deferred deal I can, finances permitting. But I'd rather not waste money paying interest to someone else on debt.
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