So I was reading this great article in Money Under 30 and felt a little sick to my stomach after I was done. According to blogger David Weliver (and others in the PF world), you should have anywhere from 1-2 years salary in your 401K or other retirement account by the time you reach 30. Uh, what? I mean, I thought I was doing okay in my retirement savings, but 1-2 years salary?
After my husband was laid off in 2009, we were completely focused on building up our emergency fund to last 6 months. When we found out we were pregnant, we started building a healthy savings account for medical and baby expenses. So instead of upping my retirement contributions (like I intended to do a year ago), my money was saved in other places. Did I make the right choice?
I'd love to hear from you all out there - does anyone have (or did you have if you're over 30) a year or two's worth of your salary in your retirement accounts? How did you do it?
Let's work backwards. If you want to retire at current spending levels, you need about 20x current spending levels(both salary and savings are pre-tax), assuming you can sustainably earn a 5% return above inflation (a modestly aggressive assumption). If you're savings earn about 7% interest, they'll double every 10 years, so in 40 years time, when you're 70, your savings will be 16x what they are today. So to have 20x current salary at age 70 retirement, you probably need about 1.2x current salary saved at age 30.
ReplyDeleteHowever, current spending levels are different from current salary, especially if you save a lot right now. So if you save 30% of your income, you probably only need about 0.9x current salary saved. Also, you may get Social Security (haha right). On the other hand, taxes will probably be higher (especially on people prudent enough to save for retirement). And you probably want a margin of error. So 1-2x current salary seems like it's in the right ballpark, but most people can be towards the small end and it'll be okay.
There is also a second issue with the 1-2x salary: this assumes that you will not save much more. This is actually a better way to go about it: it's much easier to save a little now than a lot later - for every dollar you save today, you can skip about $10 in savings at age 60. But most people don't do it that way because you have the highest ratio of income to expenses at the end of your career, when you're at your highest income and your kids have left home. Certainly if you keep saving a small percentage of your income, it adds up big time.
FWIW, I do have about 1x salary in savings, but I'm fortunate to have a really good job that lets me save a lot without missing out on much.
Are you pregnant already!?!?! JK, but I'm sure people are already asking you "when's the next one?" because people are annoying. :)
ReplyDeleteI have about 2/3 of a year's salary in my 401K but I'm only 27 -- so I should make it to ver 1 year by the time I am 30.
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