Friday, February 26, 2010

Retirement - how much

How soon you are able to retire depends on how much you have invested in your retirement fund. Whether you want to retire depends on whether and when you want to retire.

Cut to the chase - how much do you need?
  • Take whatever you believe you need to live on and divide it by 5%. The thinking there is that if you have $2,000,000 saved up, you can tap 5% of that per year to get $100,000 to live on (presuming that is the figure you want/need). Figure out what the figure you need to live on, then divide by 5%.
  • Remember that the figure you need to retire is going to be different than what you need in 2010 dollars - both to the good and to the bad.
    • When you retire your taxes will be lower (if you retire at or after age 65).
    • When you retire, you will hopefully have paid off your house and not have a mortgage to pay.
    • When you retire, remember that inflation will increase the amount of 2010 dollars you've calculated you'll need - project that out at the annual average inflation rate of 3% for the number of years left till you retire.
Okay, how much should you sock away each year? I've heard three different figures:
  • 10-15%
  • 14-18%
  • 15% of your own money plus whatever your employer puts in. This is what Dave Ramsey says. Dave also says that you shouldn't count on Social Security and I agree with him. And what is the downside, if Social Security really does happen for you, guess what, you got some extra money!
  • Bottom line, put in 15% of your gross annual wages each year plus whatever your employer chips in.
If you can afford to put in more, do it. Put in as much as you can. After all, when you get your statement from your retirement fund, at some point I hope you'll be able to go to your boss and tell him that you're retiring and he can find someone else for your job - you're new job is watching the waves come in on the beach!

If you can't get to the 15% this year, then start and work your way up every year. When you get your pay raise, go straight to the Human Resources office or officer and increase your personal contribution to your retirement fund by 1%. After several years of doing that you'll be at 15%. Yes, it will affect how much you can have now to spend but you will also not pay taxes on those monies you're investing.
What funds to invest in? I'm not going to tell you. I'm pretty aggressive in my personal investing and so far it's worked out well. I did bail on stocks at the early stages of the 2008 recession and got back in to equities in early 2009 so I dodged some (but not all) of that bullet. Rule of thumb, invest your age in fixed income and the rest in equities. I do about half my age but as I said, I'm fairly aggressive and I monitor it regularly.

Who to use? Any one of the big boys. I personally like Vanguard but that is a personal decision because years ago I was at a meeting in Philadelphia. During the lunch at a local church, I was served tea by the wife of the founder of Vanguard. I was so impressed that a woman worth hundreds of millions would willing serve tea and water to guests of her church - I just knew that said a lot about the company her husband founded. So, I use Vanguard but other companies such as Fidelity, T Rowe Price, and Tiaa-Cref are also very good.

As Dave Ramsay says, "Live now like no else so that later you can live like no one else" - meaning, you'll be able to retire while they are still working!

Lead On!

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