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Message
Goal for retirement savings as a ratio of salary
Posted on 4/1/24 at 1:40 pm
Posted on 4/1/24 at 1:40 pm
I see these types of posts all the time, so why not one more? My total retirement savings goal has gone up quite a bit over the last few years due to inflation, primarily the increase cost to build a home where I plan to retire. My current view is that a good target is to have 20 times your income at retirement age. Meaning, if you retire at the age of 60 making $150K a year that you have at least $3M in a retirement fund. Lots of factors can influence that for each individual, but most people like to have a simple rule of thumb.
I'm curious how reasonable that sounds to everyone else.
Edit - It is quite funny to read the comments below. Either I didn't word my post very well or the vast majority of people replying don't understand what I am suggesting. It could be either since things sometimes sound better in my head than what I end up writing. I agree with what everyone is saying about doing actual planning versus a rule of thumb. I created a spreadsheet that I have been updating about once a week since the 1990's, so I definitely have been planning my budget, future income projections, expected return of investment, etc. It really is amazing that a 25 year old Excel file will still upload. The whole point to my post is if someone is looking for a ballpark amount they should have in savings to get an idea of when they can retire, I would recommend shooting for 20X what you expect to be earning when you retire. Yes, that requires you to be able to guess what your income will be 10, 15 or 20 years down the road if you are that far from retirement. It shouldn't be too difficult to make assumptions to calculate that. It's just a ballpark suggestion and not meant to replace actual retirement planning.
I'm curious how reasonable that sounds to everyone else.
Edit - It is quite funny to read the comments below. Either I didn't word my post very well or the vast majority of people replying don't understand what I am suggesting. It could be either since things sometimes sound better in my head than what I end up writing. I agree with what everyone is saying about doing actual planning versus a rule of thumb. I created a spreadsheet that I have been updating about once a week since the 1990's, so I definitely have been planning my budget, future income projections, expected return of investment, etc. It really is amazing that a 25 year old Excel file will still upload. The whole point to my post is if someone is looking for a ballpark amount they should have in savings to get an idea of when they can retire, I would recommend shooting for 20X what you expect to be earning when you retire. Yes, that requires you to be able to guess what your income will be 10, 15 or 20 years down the road if you are that far from retirement. It shouldn't be too difficult to make assumptions to calculate that. It's just a ballpark suggestion and not meant to replace actual retirement planning.
This post was edited on 4/2/24 at 6:45 pm
11
Posted on 4/1/24 at 2:01 pm to Ramblin Wreck
I like this
I worry about this all the time and after I am gone
will there be enough?
I worry about this all the time and after I am gone
will there be enough?
Posted on 4/1/24 at 2:08 pm to Tmcgin
I want 10k a month in retirement. Will have zero debt and only bills are the utilities
Posted on 4/1/24 at 2:09 pm to tigerbacon
The key thing is have your house paid for
That is a nest egg drainer
That is a nest egg drainer
Posted on 4/1/24 at 2:25 pm to Ramblin Wreck
Wouldn’t this be more of a function of what you bring home? After taxes, benefits, retirement, HSA, etc. I see about 50% of what I make….and that’s with a rental property and two teenage deductions.
Posted on 4/1/24 at 2:28 pm to Ramblin Wreck
The only metric that matters is how much you will spend in retirement. While it may be difficult to k ow that with certainty, knowing your exact spend before retirement is a good way to estimate post-retirement spend. These days, that’s pretty easy to do. I recommend a budgeting app to everyone for this reason.
TLDR, why waste your time with the rules of thumb? How much does it cost to live pre-retirement? Use that with an appropriate factor up or down.
TLDR, why waste your time with the rules of thumb? How much does it cost to live pre-retirement? Use that with an appropriate factor up or down.
This post was edited on 4/1/24 at 2:37 pm
Posted on 4/1/24 at 2:41 pm to Ramblin Wreck
Multiples of.income arent very useful. You could be spending 95% of income or 50% those would require entirely different retirement savings to replace.
A better rule of thumb is a multiple of projected retirement expenses minus retirement income sources (SS, pension etc). For a 4% safe withdrawal rate you'd use 25 x (expenses - retirement income)
Thus you'd need $1m for every $40k remaining expenses. More if the withdrawals are taxed.
A better rule of thumb is a multiple of projected retirement expenses minus retirement income sources (SS, pension etc). For a 4% safe withdrawal rate you'd use 25 x (expenses - retirement income)
Thus you'd need $1m for every $40k remaining expenses. More if the withdrawals are taxed.
Posted on 4/1/24 at 2:43 pm to SquatchDawg
I based 20X off real simple principles. One is the assumption that you will be spending in retirement about the same amount per year you do the same year you retire. That is probably pretty conservative. Using the same example, if you are making $150K the year you retire, a 5% rate of return-on-investment on your $3M would equal $150K. In reality your expenses should be less since you won't be driving to work every day, won't be paying social security taxes and you won't be paying into a retirement savings account. At the age of 62 (if you choose the soonest), you can also add social security to your income. Reduce the withdraw from your savings account by the amount of social security you make and it will allow your account to continue to grow to help offset inflationary effects in the future. An S&P 500 index fund should easily average 5% every year. Any dividends or real estate income is bonus savings or income.
This post was edited on 4/1/24 at 2:46 pm
Posted on 4/1/24 at 2:44 pm to SquatchDawg
quote:
Wouldn’t this be more of a function of what you bring home? After taxes, benefits, retirement, HSA, etc. I see about 50% of what I make….and that’s with a rental property and two teenage deductions.
I am retired now at age 58, earlier and with less money than I had planned.
Yes. You have been practicing living on half of what you make your whole life. I would suggest 25x of your annual bring home pay and stick to the 4% withdrawal rule as a goal. When 4% of your assets is equal to your bring home minus things like monthly savings, you are ready to quit working. The worst projected Social Security scenario is 70% of promised benefits. If you do the above and still get something from Social Security, you should be able to live about the same or better after retirement.
If you want to become a jet setter and collect European girlfriends after retirement, you'll need a lot more.
This post was edited on 4/1/24 at 2:51 pm
Posted on 4/1/24 at 2:54 pm to SquatchDawg
quote:
that’s with a rental property
The great added benefit to a rental property is that if you get in a bad situation, you can always sell it or borrow against it. I don't consider the worth of my RE properties in the value of my retirement account. I view the real estate as more of a source of emergency funds and income supplement when I retire.
Posted on 4/1/24 at 2:55 pm to Ramblin Wreck
quote:
5% rate of return-on-investment on your $3M would equal $150K
You're not accounting for sequence of returns risk. If market drops first few years of retirement and you draw 5% annually it will rapidly deplete your nest egg.
Posted on 4/1/24 at 3:02 pm to Ramblin Wreck
quote:
primarily the increase cost to build a home where I plan to retire.
I'm not sure I'd include this in a normal retirement savings. Retirement savings is usually for income.
You should hopefully have a good chunk of a home to sell also. But you also generally don't need as big or nice of a house in retirement as you do prior to when you retire. You may buy a bigger home, idk.
I also really don't understand why people completely plan on just having $0 in income. Lets go off of that $150k/ year. You and a spouse could both work part time jobs and make $30-50k a year very easily, no stress, and take all the vacation you could ever want. That for 2-3 years while you are young and active and capable and it gives you a lot of flexibility.
This post was edited on 4/1/24 at 3:05 pm
Posted on 4/1/24 at 3:06 pm to TorchtheFlyingTiger
quote:
You're not accounting for sequence of returns risk. If market drops first few years of retirement and you draw 5% annually it will rapidly deplete your nest egg.
If you are being risky, sure. Right now with bonds and CD's like they are if you are having a major market issue affect your retirement you are being incredibly risky. You could be 100% bonds or CDs and be getting basically that 5%.
But I always say, why would you not have at least 15 months in a CD, money market, etc for your future spending? That way your next 12-15 months has 0% risk? Your risk in the market is 15+ months away and a lot can happen in that time period.
Posted on 4/1/24 at 5:10 pm to baldona
I like the bucket approach pushed by an investment website I won't name.
The basic approach is 2 years of projected spending in a cash bucket, 8 years of projected spending in a bond bucket, and everything else (15 + years) in stocks. I deviate from these amounts, but I like the approach.
The thing about this approach is that if you elect not to reinvest them, the annual distributions from stock mutual funds tend to fill up the cash bucket every year regardless of market conditions. It's not really scientific, but it is kind of painless in that you don't have to put a lot of thought into it or agonize about selling at the right time. It's going to happen anyway, and hopefully the fund manager chose to sell at a good time. This probably doesn't work as well with passively managed funds.
The basic approach is 2 years of projected spending in a cash bucket, 8 years of projected spending in a bond bucket, and everything else (15 + years) in stocks. I deviate from these amounts, but I like the approach.
The thing about this approach is that if you elect not to reinvest them, the annual distributions from stock mutual funds tend to fill up the cash bucket every year regardless of market conditions. It's not really scientific, but it is kind of painless in that you don't have to put a lot of thought into it or agonize about selling at the right time. It's going to happen anyway, and hopefully the fund manager chose to sell at a good time. This probably doesn't work as well with passively managed funds.
Posted on 4/1/24 at 5:29 pm to Tmcgin
Having no debt/mortgage, not having to contribute for retirement will reduce your needed spend in retirement.
I go by 25 times income as my gauge of retirement readiness
I go by 25 times income as my gauge of retirement readiness
Posted on 4/1/24 at 5:37 pm to Ramblin Wreck
quote:
My current view is that a good target is to have 20 times your income at retirement age. Meaning, if you retire at the age of 60 making $150K a year that you have at least $3M in a retirement fund.
It should be based on how much you spend, not how much you made before retirement.
Posted on 4/1/24 at 8:45 pm to kaaj24
quote:
Having no debt/mortgage, not having to contribute for retirement will reduce your needed spend in retirement
Agree, at my current salary I plan on a 40% reduction in overall expenses
1. MORTGAGE
2. 401k
3. FICA taxes
My monthly expense will go from 14k to around 8k,
That is living the same lifestyle, inflation is a factor that is harder to predict.
Posted on 4/2/24 at 8:28 am to BHTiger
Posted on 4/2/24 at 8:44 am to Ramblin Wreck
quote:
My current view is that a good target is to have 20 times your income at retirement age
This makes no sense as it provides no target. My income has changed greatly over the last 15 years. Which year would I pick as the salary?
If it is supposed to be the salary you have right before retirement, how would you ever know what that salary will be in the future?
No matter how you slice it you will be living on a fixed income in retirement. Might as well start to figure out now what your planned expenses will be. Then figure out how much discretionary spending you want to have access to. At that point, determine what % of fluff you want and then go.
This post was edited on 4/2/24 at 8:45 am
Posted on 4/2/24 at 10:37 am to CharlesUFarley
quote:
The basic approach is 2 years of projected spending in a cash bucket, 8 years of projected spending in a bond bucket, and everything else (15 + years) in stocks. I deviate from these amounts, but I like the approach.
There's no reason to go "cash" right now though. We are just used to having very poor interest rates from 2010-2022 or so, but historically that's not normal or average.
Compared to the last 15 years, if you are close to retirment you should feel more comfortable than ever with your ROI IMO. Again, go 60-80% bonds or CDs if you want. Then live off of that.
I don't understand why this is downvoted, but in the entirety of the 80s, 90s, and early 2000s many were 60/40 or great in bonds earning 4-6% (maybe more). Their equities was really just for additional returns and to fight long term inflation.
Historically the stock market has recovered EVERY SINGLE TIME in 2-3 years at most. So if you have 2-3 years in fixed income, you'll recover.
People don't like the truth, but that's been proven over and over historically.
ETA: IMO if you are saving 20% You are doing well. 15% you are doing fine. Under 15% is not good and over 20% is great.
You gotta live your life and enjoy it also. Unless you are a super high net earner, saving more than 25% or so means you are really cutting into your current life to save for later.
This post was edited on 4/2/24 at 10:42 am
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