Author Topic: Rules of thumb for tax deffered retirement amounts  (Read 4461 times)

RFAAOATB

  • Pencil Stache
  • ****
  • Posts: 645
Rules of thumb for tax deffered retirement amounts
« on: October 23, 2014, 03:22:39 PM »
With the new yearly $18,000 limit to 401k, 403b, 457 accounts, now would be a good time to ask about contribution amounts and what would be too small to be meaningful, the bare minimum, average, and maxing out.

For background I  didn't sign up for my 457 plan until recently.  I've been working 3.5 years without it.  Earlier this year I got a pay raise from about $1897 gross/$1432 net to $2451 gross/$1818 net bimonthly.  Recently I signed up for the plan at $25 a pay period and plan to slowly increase that until my net is back in the 1400s.  If I max out my contribution I estimate my pay will only be 2400-2600 a month net.

Maxing out this account would be saving about 30%.  taking away $229 from the net for my Roth IRA cuts my net down by about 17%.  For a low to mid salary such as mine, it would be a significant burden.  I'm not surprised that many others contribute nothing and its taken me so long to start as I've been close to the edge/underwater for a long time and could not contribute an amount that would be meaningful.

So... what minimum level would be meaningful, how much (number and percentage) would be a goal for a traditional retirement age, and what income level would maxing out $23.5k be not so much of a stretch?

beltim

  • Magnum Stache
  • ******
  • Posts: 2964
Re: Rules of thumb for tax deffered retirement amounts
« Reply #1 on: October 23, 2014, 04:09:24 PM »
Saving 10% for retirement at a traditional retirement age is a good rule of thumb for a reason.  It works well with a range of incomes, isn't too sensitive to investment returns or inflation, and, combined with Social Security, replaces most of your working-age income at retirement.

For example, I ran a calculation where I took a 30 year old making $58k with no current retirement savings, who gets 1% real annual raises each year.  If that person saves 10% of their salary for retirement, every year until retirement, the combination of their savings and Social Security replaces 85% of income if they retire at age 67.  The range from 62-70 is about 63-103%, and remember, if they're saving 10%, they're only living on 90% of their income.

Jessa

  • Walrus Stache
  • *******
  • Posts: 6594
  • Age: 40
  • Location: MA, USA
Re: Rules of thumb for tax deffered retirement amounts
« Reply #2 on: October 25, 2014, 09:37:13 AM »
Putting in ANYTHING is better than nothing. Even small percentages might not be "meaningful" but they'd be something. My $.02 agrees with beltim that 10% is probably the minimum. "Average" you can't really calculate...average for America? Way too low. Average for the MMM forums? I'd guess it's really high, there are a lot of people maxing theirs out. With the new rates for next year, it would be $692.31 per bi-weekly paycheck to max it out.

Were you okay paying your bills on the $1,400 net? Did any bills change since you got the raise? If the answers are yes and no, can't you go ahead and put the difference into your 457 right now? You did get a pretty significant raise there, so if you can put the whole amount of that into your retirement plan, you'll be doing awesome. Even if you need a little more, say $1600net/paycheck, you can still put over $200/paycheck in. It really matters more what your expenses are like. I'm making $50k/year, so closer to your old salary, and I'm set to max mine out next year...but I know that I can cover all my bills on the smaller take-home pay. Depending on your bills, that might not work for you.

ender

  • Walrus Stache
  • *******
  • Posts: 5568
Re: Rules of thumb for tax deffered retirement amounts
« Reply #3 on: October 25, 2014, 10:19:04 AM »
So... what minimum level would be meaningful


$1 or 1% is hugely meaningful for anyone not putting anything into savings.

Why? Because in nearly all cases it is easier to increase $1 to $100 or 1% to 10% than it is to make the change from $0/0%. Both mentally and in many cases form a UI standpoint.


secondcor521

  • Magnum Stache
  • ******
  • Posts: 3117
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Rules of thumb for tax deffered retirement amounts
« Reply #4 on: October 25, 2014, 11:09:39 AM »
Maxing out this account would be saving about 30%.

So... what minimum level would be meaningful, how much (number and percentage) would be a goal for a traditional retirement age, and what income level would maxing out $23.5k be not so much of a stretch?

See this article:

http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

Saving 30% will, roughly speaking, enable you to retire 28 years from now (see the table in the above article).  If you're OK with that, then great!  If that's too many working years, you'll have to increase your savings rate.  If that's too few working years, then you can back off a little.

To answer the latter part of your question, it depends on the cost of living in your area.  In my area of flyover country, one could probably max out the $23.5K on a gross salary of about $60K.  That would still be aggressive for a Mustachian, and seemingly impossible for an average person.

However it all goes back to percentages.  If you're making $30K and saving $15K and spending $15K, you'll still be able to retire  in about 17 years (again, see the table in the above article) even though you're not maxing it out.

ender

  • Walrus Stache
  • *******
  • Posts: 5568
Re: Rules of thumb for tax deffered retirement amounts
« Reply #5 on: October 25, 2014, 12:39:16 PM »
To answer the latter part of your question, it depends on the cost of living in your area.  In my area of flyover country, one could probably max out the $23.5K on a gross salary of about $60K.  That would still be aggressive for a Mustachian, and seemingly impossible for an average person.

Another flyover country confirmation of this statement.

beltim

  • Magnum Stache
  • ******
  • Posts: 2964
Re: Rules of thumb for tax deffered retirement amounts
« Reply #6 on: October 25, 2014, 01:31:52 PM »
Saving 30% will, roughly speaking, enable you to retire 28 years from now (see the table in the above article).  If you're OK with that, then great!  If that's too many working years, you'll have to increase your savings rate.  If that's too few working years, then you can back off a little.

When responding to someone asking about retiring at a traditional retirement age, this is an irresponsible answer.  I gave an answer above showing that 10% is perfectly reasonable for someone retiring at age 67.  I've attached an Excel spreadsheet showing the math behind that. 

Using that same spreadsheet, you can see that if you save 30% of a $58k salary starting from age 30, with a 5% investment return to match the MMM article, you can retire even faster than you said -- at age 55 or 56.  Of course, you will have oversaved, because after the first 10 years of retirement, you'll receive Social Security equal to more than 50% of your expenses.

MikeBear

  • Bristles
  • ***
  • Posts: 390
  • Age: 61
  • Location: Michigan
Re: Rules of thumb for tax deffered retirement amounts
« Reply #7 on: October 25, 2014, 01:45:12 PM »
To answer the latter part of your question, it depends on the cost of living in your area.  In my area of flyover country, one could probably max out the $23.5K on a gross salary of about $60K.  That would still be aggressive for a Mustachian, and seemingly impossible for an average person.

Another flyover country confirmation of this statement.

Yep, me also, maxing 401k to $23k this year on $60k base, and also funded a Roth IRA for $6.5k. Next year I'll up them both for the extra they are allowing. It's a bit hard to put that amount of money out of reach of immediate spending, BUT, somebody has to do it, and I don't want to eat dog food during traditional retirement.

If I need some immediate cash for something that comes up and I don't have enough left out of my paycheck, I'll continue to sell things on Craiglist and Ebay for fast cash to cover that need.

There's ALWAYS money for the things a person WANTS, and right now my WANT is to fund my retirement instead of buying toys.
« Last Edit: October 25, 2014, 01:48:54 PM by MikeBear »

secondcor521

  • Magnum Stache
  • ******
  • Posts: 3117
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Rules of thumb for tax deffered retirement amounts
« Reply #8 on: October 25, 2014, 03:41:48 PM »
Saving 30% will, roughly speaking, enable you to retire 28 years from now (see the table in the above article).  If you're OK with that, then great!  If that's too many working years, you'll have to increase your savings rate.  If that's too few working years, then you can back off a little.

When responding to someone asking about retiring at a traditional retirement age, this is an irresponsible answer.  I gave an answer above showing that 10% is perfectly reasonable for someone retiring at age 67.  I've attached an Excel spreadsheet showing the math behind that. 

Using that same spreadsheet, you can see that if you save 30% of a $58k salary starting from age 30, with a 5% investment return to match the MMM article, you can retire even faster than you said -- at age 55 or 56.  Of course, you will have oversaved, because after the first 10 years of retirement, you'll receive Social Security equal to more than 50% of your expenses.

Meh.  I can't read your spreadsheet because I only have Excel 2002.  Anyway, you and Mr. MM and I and the OP are all probably making different assumptions if we're coming up with different answers.  I don't think Mr. MM's article assumes any SS; people have different opinions on what to assume there.  I didn't assume any particular starting age, and I didn't check to see how old the OP was, or whether their net worth was zero or above or below.

Personally, I think anyone interested in retirement should run their own math with their own spreadsheets and their own assumptions.  Sounds like you're doing that for yourself, so good for you.  I'd suggest the OP do the same, and not trust you or me or Mr. MM.

If you want to disagree more with the content of the article, take it up with Mr. MM.  It's his article, not mine.  If you think I've misquoted or misrepresented the article, then sure, have at it.

beltim

  • Magnum Stache
  • ******
  • Posts: 2964
Re: Rules of thumb for tax deffered retirement amounts
« Reply #9 on: October 25, 2014, 04:17:49 PM »
Saving 30% will, roughly speaking, enable you to retire 28 years from now (see the table in the above article).  If you're OK with that, then great!  If that's too many working years, you'll have to increase your savings rate.  If that's too few working years, then you can back off a little.

When responding to someone asking about retiring at a traditional retirement age, this is an irresponsible answer.  I gave an answer above showing that 10% is perfectly reasonable for someone retiring at age 67.  I've attached an Excel spreadsheet showing the math behind that. 

Using that same spreadsheet, you can see that if you save 30% of a $58k salary starting from age 30, with a 5% investment return to match the MMM article, you can retire even faster than you said -- at age 55 or 56.  Of course, you will have oversaved, because after the first 10 years of retirement, you'll receive Social Security equal to more than 50% of your expenses.

Meh.  I can't read your spreadsheet because I only have Excel 2002.  Anyway, you and Mr. MM and I and the OP are all probably making different assumptions if we're coming up with different answers.  I don't think Mr. MM's article assumes any SS; people have different opinions on what to assume there.  I didn't assume any particular starting age, and I didn't check to see how old the OP was, or whether their net worth was zero or above or below.

Personally, I think anyone interested in retirement should run their own math with their own spreadsheets and their own assumptions.  Sounds like you're doing that for yourself, so good for you.  I'd suggest the OP do the same, and not trust you or me or Mr. MM.

If you want to disagree more with the content of the article, take it up with Mr. MM.  It's his article, not mine.  If you think I've misquoted or misrepresented the article, then sure, have at it.

My issue is that you're misapplying the article.  Taking an article that describes how much you need to save to retire extremely early isn't really useful to someone talking about a traditional retirement.  And it results in some bad math, and bad decisions.  There's a huge difference between saving 10% and 30% - for someone planning to work 40 years, saving 30% would give them retirement income of about three times their pre-retirement expenses.

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1310
  • Age: 37
  • Location: Missouri
Re: Rules of thumb for tax deffered retirement amounts
« Reply #10 on: October 25, 2014, 05:30:04 PM »
What secondcor521 said isn't irresponsible. The OP following secondcor521's advice without doing his own research would be irresponsible.

secondcor521

  • Magnum Stache
  • ******
  • Posts: 3117
  • Age: 51
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Rules of thumb for tax deffered retirement amounts
« Reply #11 on: October 25, 2014, 07:12:15 PM »
@wtjbatman, thanks, and I agree with you :-).

@beltim, I see your point.  I mainly referenced the MMM article so the OP could look at the table in the middle, which applies whether one is discussing early retirement or normal retirement.  Comparing your description of your spreadsheet to MMM's table, it seems that you and he are different in what you calculate as the necessary savings rate.  For example, a 10% savings rate in MMM's table results in 51 years to retirement, which starting at the age 30 you mention in one of your posts results in a retirement age of 81, which is not really a typical retirement age by any stretch.

I don't have a dog in this fight, really.  You have your spreadsheet, MMM has his, they don't seem to line up.  Since you're both probably proficient in Excel, the differences are probably in the assumptions.  It doesn't matter to me because I don't plan on using either of them.

I did notice after reviewing MMM's article again that he has his spreadsheet there, for what that's worth.

Again, I would suggest to the OP that s/he look at a bunch of spreadsheets and ideally make his/her own.  When one retires, whether early or not, should be one's own responsibility, and taking some random Internet people's advice as gospel without checking the math is probably not a good idea.  (That's actually why I built my own spreadsheet.)