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Are you saying that if you invest money in 30 years you will only have 8% more money then when you first invested it (I assume after inflation) or are you saying that it increases on average 8% every year? I know over the long haul home prices stay flat with inflation.
Please explain I don't know very much about investing.
What the poster meant is that the stock market, over the long run, has averaged an ~8% annual return. This amount is not adjusted for inflation. Post inflation return, therefore, is ~5.5%.
As for your situation, I would make sure to build up an emergency fund of ~4-6 months basic living expenses before making large contributions to retirement funds, especially since you've recently lost some people to whom you could turn for short-term help. Definitely get that last $500 in credit card debt paid off. If you have extra, pay off the car sooner if you can. If you have a ~10% interest rate on that, extra payments give you an instant return that's very attractive.
Finally, don't pay extra on those student loan debts (if they're federal student loans- ie, Stafford/Perkins) for two reasons- 1) they have a great interest rate; 2) Tons of benefits, including deductibility of interest, which reduces the after-tax cost of them even more. One note, though: if your loans rates are subject to reset to a higher amount, go for federal consolidation of the loans. Your rate will get locked in for good at that level.
Are you saying that if you invest money in 30 years you will only have 8% more money then when you first invested it (I assume after inflation) or are you saying that it increases on average 8% every year? I know over the long haul home prices stay flat with inflation.
Please explain I don't know very much about investing.
Quote:
Originally Posted by Mike From NIU
What the poster meant is that the stock market, over the long run, has averaged an ~8% annual return. This amount is not adjusted for inflation. Post inflation return, therefore, is ~5.5%.
As for your situation, I would make sure to build up an emergency fund of ~4-6 months basic living expenses before making large contributions to retirement funds, especially since you've recently lost some people to whom you could turn for short-term help. Definitely get that last $500 in credit card debt paid off. If you have extra, pay off the car sooner if you can. If you have a ~10% interest rate on that, extra payments give you an instant return that's very attractive.
Finally, don't pay extra on those student loan debts (if they're federal student loans- ie, Stafford/Perkins) for two reasons- 1) they have a great interest rate; 2) Tons of benefits, including deductibility of interest, which reduces the after-tax cost of them even more. One note, though: if your loans rates are subject to reset to a higher amount, go for federal consolidation of the loans. Your rate will get locked in for good at that level.
I don't know where you throw inflation into the mix,
ddmhughes, basically if you look at the overall time line you see some years the market is up 29% and some years it is down 21% (for example) if you average that out you get about 8% or some years it is up 9% and other years it is up 7%, again, for example. There are so many variables to this and your results may vary but you have to keep in mind that if you start with say $10,000 and you get an 8% return you now have $10,800, then your next period your 8% is on the $10,800 and so on. Again, these are all AVERAGES. Emerging markets are up about 70% on the year, but they also took the biggest hits last year which is why you look at averages, not statement to statement growth.
As far as saving for retirement, max out your employer match on your 401K now but don't add any more to that until you have taken care of the other things you need to do, pay off debt and build an emergency fund.
I would say that anyone in their 20-30's needs to realise that they are likely at the lowest icome to expense they will ever be in .40 thru retiremnt is your highest earnings level for most.Of course you want a emergency fund at that age because its the thing most likely to strike you and cause problems.Any plan can change but that is all you can do is plan and hope for the best.
Mark me down as another in the "less debt over more savings" camp.
I'm 32 and my husband is 34. This is the first year that either of us have worked a job that even HAS a 401k available, let alone does company matching. So, hubby is contributing to his. I still don't have that option.
We opted to pay off our debt rather than put money into investments up to this point. Now that all our debt, other than our mortgage, is paid off, we are fully funding two Roth IRAs and funding the 401k up to a company match. We're saving about 20% of our income. Additional money beyond that is paying down the mortgage, which isn't that big to start with. We usually do not get to write off mortgage interest, as we don't itemize.
So, our grand total of investments at this point is about $2000. By the end of the year, it will be around $12k. According to the experts, we are waaay behind.
However, I expect we will be just fine for retirement. We both are very frugal people, and we live in a relatively low cost of living area. Our house will be paid off by the time I am 40, and we will be debt free, and able to save almost everything we make for the next 2 decades. We aren't planning to have children, so we won't have any of those extra expenses or drops in income. Even without any form of Social Security, we should be just fine.
I say all this an an example of how there is more than one road to travel on in your path to save for retirement, and how you get there depends heavily on your income, lifestyle and goals.
Mark me down as another in the "less debt over more savings" camp.
Put me down as well.
I find it funny people strutting around(I know a few personally) that might have 100-200K in their 401K, which is great, but then when they have 500k in debt I have to say big whoop.
When you think about retirement you need to think about how much income you will need .... and be realistic about what you think you will spend. For any income over and above company pension (if anyone ever gets one) and Social Security you will need capital to fund it. A prudent approach is to assume 4% annual return for a relatively risk free investment strategy that protects the purchasing power of your capital. So, if you think you need an additional $40k/year then you will need $1 million in capital. That could come from a mix of 401K and other savings but that is the sort of money you need. If you are 30 now then you need to figure out how to generate and protect the capital over the next 30 years.
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?
Answer: As much as possible. Honestly, you shouldn't care about how much other people have in their 401ks. It's astonishing how low peoples' 401k balances are, even people who make good money. This is definitely one area of life where the standard for what's average is so low you definitely want to be way, way above the norm.
What you want to aim for really depends on what you want out of life. Some people want to be financially independent in their late 30s or early 40s. If that's you, you'll want to max out your 401K and start an IRA or Roth IRA as well. You'll probably need to save 33% to 50% of your salary in order to be financially independent at such a young age.
If you want to retire in your 50s, you'll probably need to save 20% to 25% from now until then to make that happen.
If you want to retire at 60 or later, you'll need to save 15%. In general, I wouldn't save less than 15% in the 401K unless something extraordinary happens (e.g. you lose your job).
Here are some interesting retire early web sites. Even if retiring at 40 isn't for you, there is still a lot to be learned from the underlying thinking from those who have done so:
I'm 28. I got $0 contributed towards my employer's version of a 401K. Did I mention they don't do matching? I do save around 30% of my net income into a regular savings account. That will probably die when the kids arrive. At any rate, liquid is king for Generation Y; I can afford saving that much for a rainy day, but I can't afford half of that to a penalty-withdrawal retirement fund. Sucks living on 45K as a 30-something with a wife and the expectations of having children. Oh well. If my income doesn't outright double by the time I'm 32 I'm hosed. Add me to the roll of save me feed me. And I went to college (twice), go figure LOL. Seriously though, my plan is getting some sort of pension, maintaining myself as cash rich as possible (meaning my housing expecations will always be "cheap"), no out of state education for the kids, and a healthy savings rate. And the rest is up to timing and luck, as it always was.
Jest aside, I think you'll be alright. 2035 America (right when the first GEN Y reach retirement age, unadjusted for the boomers screwing the timeline to the right) will be a very different country than what we see today. It will be, in my estimation, highly "europazied". Taxes will be high but so will be safety nets, two generations of households will become the norm (like present-day Brazil, Argentina, Spain, Holland) and thence the pressures of retirement will not be as great as they are today in "401K underfunded by a million bucks? You're hosed" America. Devolutionary indeed but that's what happens when you cut people's pensions and offer them a paycut to fund their retirements, never mind at the mercy of the capital monopolists that play with your money for the false promise of "double your money while you sleep". Keep a fund for a rainy day, but don't overdo the retirement contribution, it'll drive you crazy and you'll never get to a number that'll take you through 20 years of retirement with a 401K.
I think your post is too defeatist. Although I have to admit, I wonder if the US won't default or inflate its way out of debt between now and 2035, given the way we're racking it up. At best, I think we're going to end up with European tax levels without the services to go with them. The US government is too corrupt and inept to do a good job providing all those social services. But even if the worst case scenario plays out, I still think it's worth investing in stocks. If doomsday plays out, it won't matter. If it doesn't I think stocks will be the best place to be. I actually like balanced funds (60% stock 40% bond). The best balanced funds come close to and sometimes beat the stock market with less volatility.
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