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Retirement Savings Advice (For the Young)

October 22nd, 2014 at 01:58 pm

Excellent Article:

Comparing Three Major Levers You Can Pull On Your Retirement Portfolio

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The gist:

--Investor begins working at 25, but saving at 35
--12% savings rate
--50%stock/50% bonds asset allocation
--Salary starts $30k and rises with age

Initial plan, portfolio at 65: $474,000
Change to 80/20 allocation: $577,000
15% savings rate: $593,000

**Begins saving at 25: $718,000**



I share because I think this is very important in regards to efficiency and balance. Not helpful if you are no longer 25, but I do share for any young person who comes across my blog.

Our personal average retirement savings rate since age 24 is 12%. I get a lot of comments that we must not be saving enough or will have to work for 50 years. Considering we are well on track to retire at age 50, I am not worried about it.

Of course, we contribute more when we can, and that is important too. I just happened to notice the other day that our "average retirement savings since having kids" was 14%. I think this is counter-intuitive for many. It is most often assumed that our retirement is being sacrificed (with my spouse not working). The opposite is more the case. It's easier to save a bigger percentage of a smaller income. We simply don't have to save as much? (Some years we have put away 20% to retirement; those were our smallest income years, when 20% was just not that much money). That's all there really is to it. But it isn't setting us backwards because the smaller income is more than enough for us to live on and is a fine base for savings percentage.

We personally plan to save more over time. We are savers, and we like to prepare for the worst. That said... I would say that we are pleasantly surprised how well our retirement savings is doing. We've already done the heavy lifting, no doubt about it. Which is kind of ironic because it doesn't necessarily feel like it. IT feels like retirement has been more on the back burner than we care for, due to kids and economy and medical woes. It's nice to look back and see our steady/consistent contributions working for us over the long haul.

Our personal rule of thumb has been to never put less than 10% of post college income to retirement. We started with that, and then got a lot more serious about retirement savings in our 30s. (Maxing out retirement vehicles, around age 30).

P.S. I notice one very important lever left out of this discussion. Fees and costs. MyMoneyBlog has also touched on this point in the past.
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11 Responses to “Retirement Savings Advice (For the Young)”

  1. creditcardfree Says:

    I completely agree...start saving early!! It is amazing what compounding can do! We have increased the amount we saved as income has increased, but it still tends to be a similar percentage. I think we are over the 15% mark now.

  2. Violet Says:

    This is a great post. I agree, start saving early!

  3. scfr Says:

    I agree wholeheartedly and have 2 additional comments for the young 'uns out there.

    1. "Life happens": Since you never know what curveballs life will throw you or when, get a jump start on retirement savings. Try to get ahead of where you "should" be early on. That way you won't fall behind when you suffer a setback and have to put retirement savings on the back burner for a few months or years.

    2. The Upward Income Trajectory May Come to an End: 50 may seem a long ways away but it's not, and many in the 50+ crowd see a reduction in their incomes. So once again, get a jump start early on.

  4. guppy Says:

    What retirement calculators do you guys use? We have 80%+ of 1 years salary already in retirement accounts at ages 30 and 32 but whenever I run a calculator it shows that we're still far behind where we should be.

  5. MonkeyMama Says:

    @snafu - I don't know if today's young'uns are experiencing much "upward income trajectory". But I will say that "starting young" does help overcome that. Our own peak income year was age 25? Is maybe why I am not a huge fan of starting with some piddly percentage and increasing it over time. Better to start strong.

    @guppy - I don't follow any calculators. Most say we need some ridiculous sum to retire. Our personal plan is to save up seven figures, which coincides with having our house paid off and kids grown/done with college. At which point our expenses should decrease significantly. We also plan to downsize our home (cash out the excess equity). Age 50 - 60 I would prefer to work and earn enough money to live on and not draw down assets. This means conservatively we will double our money in that decade (if we stop saving for retirement). I guess simply our goal is to save up enough so that a 4% withdrawal rate covers our expenses.

    I do use a simple compounding calculator with a conservative return rate (5% or 6%) to make sure our savings is on track for the seven figure mark. My plan is based on my parents who WAY over-saved for retirement, retiring at 57. (They should have retired younger). Money Mustache preaches the same thing.

    Anyway, the calculators say we need $3M+ BEFORE we retire, which I think is ridiculous. I think my knowledge of income taxes also plays a lot into this. Sure, I could save up $3M and pay seven figures more in taxes in my lifetime. Or we can just go for the lower number and have our gross income = our net income (no taxes). It's the same in our working years and will be the same for retirement.

    I'd say we have about "10 years of expenses" saved up. We are much more focused on replacing expenses versus replacing income.

  6. MonkeyMama Says:

    P.S. We have 5 years expenses saved up in retirement funds and 5 years expenses saved up in home equity. Just to be clear that saving 12% on average did not get us quite that far. But there is more to retirement than just how much you have in your retirement accounts. We certainly save outside of retirement accounts and have done other things to move retirement along.

  7. MonkeyMama Says:

    @Guppy - sorry, I had to run. Most calculators recommend you save up 25 x income. Which is fine if you think you need to replace your entire income in retirement. If you are a super saver who can live comfortably on much less, then you don't need to save up that much. (I doubt that most people ever actually save up 25 x their income. I think most people in our generation will be lucky if they save up 5 x their income).

  8. guppy Says:

    So glad to hear that from you! I have also found that calculators end up telling me we need anywhere from 3 - 5 million in the bank to retire and that seems outrageous. Right now our mortgage is small with no plans to increase it unless we have supplemental rental income to allow for a larger home/mortgage. Our big expense is daycare/private school (terrible public school in our area) but manageable based on our mortgage and other expenses. We also purposefully staggered children's ages by more than a couple years to be able to rebound a little from the first's expenses so overall I feel were in decent shape but the calculators I've used have gotten me a little worked up. Thanks again for your help in this matter. It's good to talk about it with others!

  9. MonkeyMama Says:

    @scfr - no idea why I called you snafu. Ha! I did realize it was you but I am getting senile I guess.

    @guppy - glad you found helpful. Our parents have been very open with us about their retirement experience and numbers, which is a point of view that I appreciate very much. Mr. Money mustache really touches on my parents' retirement experience. I'd maybe think he was crazy otherwise but it makes sense to me. (They have more than they will ever need, and I think we have a few advantages over them).

  10. FrugalTexan75 Says:

    I started retirement savings at 21, but then had several years of less than steady employment, plus my income took a huge hit going from teaching to non-teaching jobs. So if weren't for my stock ...

  11. SavingBucks Says:

    Life handed me a bunch of lemons for lemonade (divorce) in my early 30's but I was able to bounce back because I am a saver. I remarried and DH is also a saver. Both sets of parents grew up very poor and saved everything for reuse. Between the two of us we are saving about 30%. This was a long and slow road to that percentage, and could only be done after our mortgage was paid off. College for DD should be set -- about 2 years off. Slow and steady wins the race....

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