Don’t Freak Out on How Much You are Supposed to Save for Retirement

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    • #177909

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      Interesting article about “rules of thumb” on how much you are supposed to save and when you can retire. Life gets in the way too much where it complicates you being able to save for retirement as a main goal. Kids, mortgages, cars, etc. just a fact of life. However, being able to save something for retirement is important. Some people I know feel it is just too much effort to deal with retirement planning, that they just don’t do it. Out of mind, out of sight. They would rather take the extra $100 they have every month and go out drinking/eating out. If you can save $100/month for retirement, do it. It is something that can slowly build up. Then maybe in two years, you can bump it up to $200/ month and so on. You don’t need a lot of money initially to build up wealth. It can start with a trickle that can lead to river. It is never too late to start. The most important thing, don’t freak out and do nothing about it.


      I often see rules of thumb suggesting how much people should save each year or how much money they should have in retirement accounts by certain ages to be on track to a secure retirement. But I don’t see how it’s possible for people to meet these benchmarks when big chunks of income go to things like mortgages and children. Are these savings targets actually achievable? –C.H.

      I don’t blame you for questioning many of the rules of thumb and other benchmarks that are bandied about for retirement planning these days. Some of the figures you see about how large a nest egg you must accumulate or how much you ought to save each year are so daunting that you can’t help but wonder whether anyone could possibly reach them.

      For example, a recent Nerdwallet study said that if investment returns drop from their historical averages as many experts predict, Millennials may need to save 22% of pay a year to build a nest egg large enough to support them in retirement. That’s right, 22%!

      But when I looked into how that figure was calculated, I found that it assumed young workers would receive absolutely nothing from Social Security. Throw in even a modest Social Security benefit that assumes payments will drop considerably from today’s levels, and I estimate the savings target drops to about 15% a year (which, granted, many people may still consider a challenge).

      But the bigger issue here is that it’s a mistake to get hung up on any single number or benchmark. The fact is that estimating how much one needs to save for retirement or how much money people should have socked away in 401(k)s, IRAs or other accounts at different stages of their career isn’t an exact science. There are just too many variables and uncertainties that come into play, including how much you earn during your career; how faithfully you stick to a savings regimen; the rate of return on your retirement assets both before and after you retire; how long you live; your retirement lifestyle; and, how well you manage withdrawals from your nest egg after you retire. No savings target can reflect the interplay of all these factors, as well as others I haven’t mentioned.

      Besides, even if some guru or algorithm could come up with a benchmark that accurately takes all these factors into account, it’s not as if failing to meet that standard would automatically doom you to a miserable retirement. You still have the ability to make adjustments to improve your prospects, at least to the extent possible given your circumstances.

      Let’s look at an example. Fidelity Investments has an online Get Your Retirement Savings Factor tool that estimates how many times your annual salary you should have saved in retirement accounts at various ages. So, for example, if you’re 40, you expect to retire at age 65 and you hope to maintain your pre-retirement lifestyle after retiring, the tool estimates that you should have four times your salary saved by age 40 and 12 times at retirement.

      But the tool also shows that if you work two more years and don’t retire until age 67, the savings-to-salary target drops to three times salary at 40 and 10 times at retirement. And if you assume your spending will drop by 15% after you retire, the savings-to-salary ratio drops even more to roughly two times salary at age 40 and eight times at retirement.

      Of course, all of these figures are still estimates based on lots of assumptions, not all of which will precisely pan out. But the wide range of these benchmarks shows that when it comes to planning for and living in retirement, you’ve got some wiggle room. Consistently falling short of one target might very well prevent you from achieving your preferred vision of retirement.

      But by being resourceful and creative — working a few more years, being more judicious about your retirement spending, downsizing to a smaller home, taking out a reverse mortgage, etc. — you still have a chance to fashion a post-career life that, if not ideal, you can still find satisfying and fulfilling.

      At the end of the day, you can only do so much to prepare for retirement. You have a life to live before you retire — a family to raise, financial obligations to meet, etc. So you can’t direct all of your resources to the future. And just because some rule of thumb or calculator says you ought to save 10%, 15%, 20% or whatever to have a secure retirement doesn’t mean you can pull it off.

      That said, it’s also true that if you don’t make a bona fide effort to save, you may not be very happy with your post-career life, unless you’re okay with living only or mostly on what Social Security will provide. So it is important to be as disciplined and systematic as possible about how you save.

      My advice is to monitor whether you’re making adequate progress toward retirement by checking out Fidelity’s savings factor tool or, for a more detailed analysis, T. Rowe Price’s retirement income calculator. But as you do so, keep in mind that you’re getting guidelines, not guarantees or predictions.

      Most important, if you find you’re falling dramatically behind, don’t freak out or get so discouraged that you conclude preparing for retirement is an exercise in futility. Instead, see how you can improve your retirement outlook by saving more or making other adjustments. And remember, the more you can set aside for retirement now even if your savings effort doesn’t meet a given target, the less likely you’ll have to resort to radical adjustments later in life.

    • #295357

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      I never did save a huge chunk for retirement as my whole career was built around building buildings for cash flow for before and during retirement. If I were in my 30s or 40s and took a more traditional path, I’d also look at investing in mortgages. I’ve always done that anyway, either buying them or creating them. Creating mortgages can be very good IF IF IF you have a very high confidence of the value of the real estate and the equity after your mortgage. I’ve loaned a bunch and have never taken a loss.

      It’s usually best to do that through a real estate broker, as they can charge much higher interest than an unlicensed person can. I am not sure in this low rate environment if it still matters, probably so. They will collect points from the borrower, probably 5-10, and that’s their commission. You can almost always negotiate for one or two of those points at least to boost your yield. This is a good vehicle for family partnerships as there’s no management and fewer disagreements unless you need to foreclose.

      What you need to watch carefully are second home loan companies pitching you deals, as their appraisals are notoriously high. Just do your own. I don’t know if Spartan Home Loans is still around, but I’ve bought a couple from them over the years when I started out, then just went to origination mostly as I got the points. This is a very tricky business and documents must be perfect, not pretty close to perfect. If you miss one calculation you can be in trouble. Look around for recommendations, and just because someone says they like a broker doesn’t mean they understand the appraisals.

      My threshold was tougher than most, no more than 50% LTV with my loan, but I was often doing some deals with some calculated risk, like land, non-conforming residential, or in one case a felon on his way to prison where I knew I’d be foreclosing and so did he. For an individual investor I’d recommend less risky deals, and absolutely no greater than 70% LTV for good credit, 60% with some credit problems, and that’s YOUR appraisal, not the loan brokers’.

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