Category Archives: Retirement

How much money do I really need in retirement?

Mint has been the go-to software for budgeting over the past year, and it’s helped me keep my monthly spending in check, or at least to not freak out when the unexpected wrecks havoc on my budget. They have a feature called “Goals” that I’ve tried out before, but I found it clunky and, as each goal needed to be attached to its own bank account, it didn’t make sense for me to have separate accounts for cars, houses, etc. I just put everything into my investments, minus my $8k CD emergency fund, and allow the success of those investments to guide my goals.

Then I realized I should at least make one massive lump-sum goal for my monthly investment savings. In the Goals product, Mint has a feature that determines how much money you should be saving monthly to reach that goal. I selected their “Retirement” calculator, and put all of my investment accounts into this massive goal, even though in reality they’re also the same funds that I’ll be using one day as the down payment for a house, and to buy a car, etc. In any case, I figured it’s best to at least be saving the amount I need for retirement, and I can build on that as my income goes up in the coming years, knock on wood.

The calculation results are terrifying. And I thought I was being conservative in my requirements for retirement. If I want to retire at age 65 with $60k a year in “income” and I plan to die at 90 and I expect to earn 5% interest on my investments, I need to amass a retirement portfolio of $3.62M. What if I live to 100? I’ll need $4.65M in investments to retire at 65.

The monthly required installments to meet this goal are $2,149 a month. That is, if I can manage to eek out 5% a year interest on average. There is no guaranteed way to do this. I am not sure exactly what my stock market returns have been year over year since I started investing in 2005, but I’ll be lucky if after calculations they’re positive at all. This makes me very nervous about my future. What if there are months I can’t save $2149 a month? What if I need to buy a new car? What if my rent goes up, but my salary doesn’t follow?

This all reminds me how important it is to negotiate the highest possible cash salary, or, at the least, work an extra freelance job or two to bring in an extra $1000 a month.

 

 

Retirement Impossible

Looking at my various investment accounts, as they fast erase their gains of the last two years and start to go red, I wonder if retirement will ever be possible. I thought a few years ago when we were in a “recession,” my investments at the bottom would eventually equate to some reasonable returns.

It’s so difficult to understand if I have bad investments, if the market is just killing everyone equally right now, and if there are any other places I should be putting my cash right now. Watching about $10k in investments disappear in two months is painful. I understand in a few months it could swing the other way, but right now I’m starting to lose faith in the economy overall. I can see the next 10 years being the lost years of America, and in that time the market will either remain flat or even decline.

I’m one of the fortunate people in America with a good job, who isn’t in debt, who can actually invest my money in the market and hope to see it grow. But, like the few of us left, there is no growth. The only growth is on Wall Street — for the criminals that received huge bonuses from taxpayer bailout money. I’m not political, I’m not walking the streets protesting, but it does seem a bit unfair that Bank CEO pay jumped 26 percent in 2010 after two years of decline (source: good.is) — I’m a capitalist. I don’t believe in loan-free bailouts. Continue reading

See the Future, Wrinkled You and Save More?

Researchers at Stanford believe that the reason so many 20 and 30 somethings don’t save enough during their valuable investing years is that they actually think their future self is a whole other person than the self they are today.

The trick to making us save more, then, is showing us a digitally altered version of ourselves that’s just recognizable enough to shock us into saving more and spending less. Apparently research proves that this works, to an extent.

In one experiment, young people who saw their elderly avatars reported they would save twice as much as those who didn’t. In another, students averaging 21 years of age viewed avatars of themselves that smiled when they saved more and frowned when they saved less. Those whose avatars were morphed to retirement age said they would save 30% more than those whose avatars weren’t aged.

My question is, how fast will these 20-somethings forget how they looked all wrinkled and grey, and return to their spend, not save, philosophy and reality? Hopefully there is some long-term truth to this study, and it can be used to help people my age save more versus waiting until it’s too late to build up a reasonable nest egg for retirement outside of a cushy mid-six figure corporate job. Continue reading

Dilemma: Grad School vs. Work

Some say a graduate degree (in the right subject) can improve your future potential earnings. But I wonder if taking 2-3 years out of my career right now would actually equal more money in the long term.

Assuming I’d be missing out on an earning potential of $100k per year (let’s call that $60k after tax) and I go to school for 2 years. That’s -$120k plus -$50k per year on school and other costs So In the course of two years I’d be out $220k, give or take.

Let’s say I manage to save half of the money I earn, or $30k a year, $60k total. In 30 years at 5% annual compound interest rate, by the time I’m 60 I’d have $259,316 just from that $60k. Ok, that’s not too impressive — in theory I could make a lot more with a grad degree such as an MBA, which is one potential route.) But I’d also be $100k in debt. Ok, so how does that really add up…

Sans Grad School,
Investing $30k per year for next 30 years:
$2,222,481 by age 57

With Grad School,
assuming -$30k savings lost per year in school
plus $100k in student loans
Income increase to $150k / year, $90k after tax
Savings start 2 years later @ 29
Can save $50k / year after loan repayments
3,066,135.60, by age 57 – 259,316 in lost investment earnings

BUT — it’s really hard to say if that’s actually true. That’s assuming a lot of other variables that are unknown. Namely, it’s quite possible for my income to go up WITHOUT a graduate degree, and for my income to go down WITH one. Over the long run I believe a graduate degree would make my yearly income a bit more predictable (but not by much) and give me opportunities to pursue better paying jobs, but that doesn’t mean I will want to take them. But the two years I am in school may be two years I could have spent at a startup that ends up having a successful exit, and thus the grad school would never be able to equal the fiscal value of those lost years (not to mention the experience may be professionally just as valuable, at least in getting a job, as the degree.)

So the truth is the choice of grad school shouldn’t be about money. Clearly if I get a graduate degree and use it to find a better paying job over the long term it could mean a larger retirement nestegg. But it’s not a certain to say the least, and right now the experience and opportunities outside of graduate study are.

Why Women Need to Understand Finance

My mother, never the best with money, was willing to put out spending a few extra thousand dollars per month when my dad told her that they’d be ok financially when the 401k was available for tapping. While my mother (or my family for that matter) never bought designer clothes or super fancy electronics, my parents still manage to spend, on average, $7k a month between the two of them. I’ve seen some months where they’ve spent $14k!?! Granted, currently that includes my sister’s tuition, the home equity payments, and my father’s medical treatments for his cancer, but most of that $7k is spent on other things that fall into the category of “none of the above.”

When my dad was working he always managed to cover the poor spending habits with his rather large upper middle class salary. Giant credit card bills were paid on time. No one in my family spent wisely, but at least there was a sense of financial responsibility, spending within our means, albeit as an afterthought. And my dad still managed to save up a decent retirement nestegg in his 401k… which before the crash would have been worth around $2M, and now is at $1M.

It’s difficult to explain to your mother that $1M, when you’re spending $7k a month, just doesn’t last that long. My dad tells her now that the 401k is available she can spend $3k per month total — which doesn’t include my father’s bills or the basic home ownership expenses. That should be more than enough. Somehow, it isn’t.

Meanwhile, she’s peeved that my father made it sound like once the 401k came in they’d be ok to spend much more money. She’s finally realizing that she DOES have to pay attention to where the money is going. I find it absolutely ridiculous that she spends $800+ on a weekly maid service for a suburban home with two people living in it… but she wouldn’t want to have to do cleaning, or even go to a bi-weekly setup, so she pays for this service.

I’m admittedly concerned that one day I will have to support my mother because she doesn’t understand that $1M goes fast if you’re spending $100k plus per year. My father, knock on wood, has survived longer than the doctor’s thought he would with his late-stage cancer, and I’m glad about that. However, he doesn’t really care about the well-being of my mother later in life, so always falls back on the “spend the money, I’ll be gone when  you run out.” That’s really helpful, thanks dad.

IRA or 401k? Is it too late?

When I realized I would be earning too much this year to qualify for a Roth IRA, I cried a little bit. Ok, that’s overly dramatic, but I have been so proud of myself for saving my pennies each year of my $20k to $50k / year income to max out my Roth IRA that I felt a little empty knowing my savings this year could not be invested in tax-free growth.

So I thought I’d do the second-best thing… open a traditional IRA and deduct the money now, pay taxes on it later. Not the best option in the world, but at least I’d get to deduct the money from my rather high single tax rate.
This morning I found out that I was completely wrong about that. I admit it’s my fault for not doing my research appropriately, but now I’m totally bummed. Apparently the income you’re allowed to have to get the benefits of a traditional IRA is LOWER than that of a Roth IRA. This makes absolutely no sense to me right now because why would anyone want to invest in a traditional IRA if you are in a low-ish tax bracket?
I guess if you do not have a retirement plan at work you are allowed to deduct up to $5k for your traditional IRA in each tax year. Funny how this is the first year of my life I will have access to a retirement plan… a 401k (no match or anything, of course, god forbid I work for a company that would match my contributions.) I signed up for it, and I am supposed to start making contributions in mid July. I wanted to max out my 401k and my IRA for the maximum deduction to reduce my AGI. But it looks like that’s not happening.
The only reason I can see a traditional IRA having some benefit is that I think I can still put up to $5k in there each year and $16.5k into the 401k and later, when I’m not making a lot of money over the year, I can convert both of those accounts to a Roth IRA and pay taxes in a lower tax bracket. Given that I obviously don’t understand tax law very well, I may be off on this logic as well. At least then I can see why a traditional IRA has some value. But as this conversion thing is fairly new – why would anyone want to open a traditional IRA? Is there ever a good reason for this?

4 in 10 Americans Don’t Know When They’ll Retire

With a mix of a morbid stock market and American’s not understanding just how much money is needed for retirement, the country is filled with people who may never get to enjoy a retirement.

A study that came out today from ING Direct reports that 40% of Americans expect to retire much later on or not at all. Americans will be chained to their jobs longer than ever before just to keep up with their bills and ensure food is on the kitchen table. The survey results also noted that over 60 percent of Americans are significantly more concerned about saving enough money for retirement and having the right type of retirement plan than they were six months ago.

Some other interesting stats from the survey:

· Nearly half of all Americans (47 percent) have “no clue” how much money they need to retire;

· Despite nearly two years of economic turmoil, 65 percent of Americans have not adjusted their retirement investments;

· One in five Americans (19 percent) are still banking on Social Security to be their main source of retirement income; and

· One-fifth (21 percent) of Americans are contributing less to retirement than they were last year

This is pretty scary stuff. The only thing that I go on is that retirement is maybe not a necessity. Well, at some point when I can no longer move or think I’ll want to retire, but I hope I’m well into my 80s at that point. I enjoy working, and can’t imagine enjoying retirement. I’d be bored silly. Maybe my mind will change by then, but still — my biggest fear is not having enough money to take longer vacations and travel in between being professionally productive. I’m definitely not banking on social security to be my main source of retirement income.

The national online survey of 1,223 adults was conducted by Harris Interactive on behalf of ING DIRECT between February 18-19, 2009.

Investment Advice From Y’all…

I received quite a few comments on my last post regarding my freaking out about losing $100+ on my Roth IRA and mutual fund investments. Thanks to goldnsilver, enoughwealth@yahoo.com, glenn, savingdiva, wanda, and hazygrey (and “anonymous”) for your words of wisdom. Here are some highlights from the comments, and my responses…

hazygrey said…

“This is your IRA – you shouldn’t be pulling out money for 40 years. Don’t worry about it and leave it for now. I know it’s easier said than done. Also remember that there have been double digit gains in the stock market for several years now, and a correction or crash could happen soon. When that happens, don’t panic and don’t touch the money!”

response: I’m less concerned about my Roth IRA and more concerned about my mutual fund investment. I’m terribly confused about what I should be investing in with my “extra” savings right now. I have $12,000+ tied up in average-rate CDs, which I consider my stable, low-risk investment. Then I decided to be somewhat(?) risky and put $4,500 into the Vanguard Mid Cap Growth Index Fund. While the thought of losing that $4,500 isn’t exactly one of a happy sentiment, I could deal with losing the money. I don’t want to lose the money. That $4,500 might be a long term investment. I’m only 23 now, so I’m hoping I’ll make enough money in the coming years to keep at least $5000 away in a long-term, non-IRA investment account. But I also would like to save for a house and/or grad school. I’m not sure if that’s a year out or ten years out. My life is rather in flux right now. Therefore it’s hard to plan financially. My Roth IRA is fine. It’s in the 2050 retirement account for a reason. I don’t plan on touching it until then.

Wanda said…

Don’t look at your investments every day or even every couple of weeks. Unless you are a day trader, there’s no reason to. …If a 2050 fund & a mid-cap makes you sick at night, then it’s not the investment for you. Like goldnsilver said, pick something that pass the stomach test. Pick something with 20% bonds. You’ll have less risk (of losing your money), but you’ll be giving up the rewards (or potentially larger returns).

So what’s the difference between “bonds,” “money market funds,” and “CDs.” I get the index fund versus stock thing, but beyond that I’m lost. Is a CD a bond?

Anonymous said…

How much do need the money in the other [non roth] account? Were you depending on a quick gain to pay the rent this month? If not, give it atleast a year. These are supposed to be long term investments, not quick capital gains.

I’ll gladly leave my money in the mutual fund account for a year or more. I just don’t want to be losing $100 a week on this account. I guess that’s unlikely, but looking at the performance thus far I’m just a tad bit nervous.

SavingDiva said…

I understand your frustruation with your loss. I don’t like to lose any money. I’ve had to stop checking my retirement accounts every day because of market fluctuations causing fluctuations in my blood pressure! 🙂

Thanks for understanding. I probably should stop checking my accounts every day as well. I’m sure I’ll be fine once my account starts to grow past my initial investment. It’s just now I’m down $100. And that’s not a good feeling.

Glenn said…

Take a step back and look at the big picture. If you are young and you will not need the funds for over 10 years don’t panic. You will be adding to your investments over time. If they funds are still lower when you make your next investment, you will be buying the same companies at a lower price. When you go shopping would you rather buy the same product at a lower price or a higher price? The same goes for mutual funds and stocks.

Good points indeed. As I noted above, my Roth IRA fund is for 2050. But the mutual fund account could be needed sooner. In 10 years I’ll be 33 years old. I have absolutely no idea what my life will look like at 33. Maybe I’ll already have kids. Maybe I’ll have decided kids aren’t for me. It’s just so hard to plan when I can’t figure out when I’m going to need this money. I’d like to invest so I can obtain enough cash for grad school in a few years. Or at least so I don’t have to take out tons of loans, I really like the idea of paying up front for as much as possible. But it’s also likely that I’ll never go to grad school. How can I plan my finances based on a life I’ve yet to figure out?

enoughwealth@yahoo.com said…

If a drop of more than 10% would make you feel like liquidating your investment, then your current asset allocation doesn’t match your risk tolerance. — Enough Wealth

I’m not going to liquidate my investment, I’m just not all that comfortable with the idea of losing my money. But I doubt anyone is really comfortable with losing cash when it comes to investing. I mean, sure some people are more risk averse than others, but the way I see it is I’m young now and I have time for my cash to recover if the market gets wonky. If anyone should be making risky investments, it’s people like me who are young with no debt. Right? I know I can survive without that $4,500. But it sure would be a shame to lose it.

GoldnSilver said…

Market fluctuation is normal. It has only been 2 weeks. Generally if you are investing for the long term, the advice is not to check your balance everyday. However, people have different habits, no one can make you do or not do something. Compare your funds to its peers or industry benchmark, that’s how you can judge your funds performance. That being said, if you are risk adverse, (seeing a drop with turn your stomach upside down). CD or bond funds are not bad options. So many people focus on time horizion…if you are young you should invest more agressively. There’s truth to it. However, just as important, one should know one’s risk tolerance. There are many investment/savings vehicles out in the market place that can help achieve your goals. Pick one that you can stomach.

You know, I’ve never been a gambler. Maybe that’s because I’m female. Maybe that’s because I was raised by a risk adverse family. But I don’t want to be dumb about it. If lots of people invest in somewhat risky mutual funds, they can’t all be “wrong.” Not that there’s really a “wrong” in index fund investing, but, I mean, it’s not like I’m rushing to trade individual stocks.

Vanguard Woes

Ok, I know mutual funds are rather safe when it comes to an investment, but I’m really bothered that my $8500 invested in a Roth IRA and index fund has turned into about $8338 over the course of two weeks. I know I have to deal with fluctuations in the market, but it’s no fun to lose over $100 in two weeks. The only thing that keeps me from pulling my money out is knowing that if it lost $100 in two weeks, then it certainly could gain $100 in a similar time span. But that’s not really the point of investing. I’m supposed to be making money, not watch it all sink down the drain. Maybe my investments are bad. Or maybe the market just isn’t doing good for the time being. At what point should I be worried about my investments? When my $8500 is $6000?

Vanguard Mid-Cap Growth Index Fund Investor
Shares 180.505
$24.56 –$0.14 *$4,433.20
Subtotal $4,433.20 (Bought for $4,500)

Vanguard Target Retirement 2050 Fund
$24.06 –$0.07 $3,955.61
Subtotal $3,955.61 (bought for $4,000)

Too Good to be True?

I understand that mutual funds are fickle, but I’m still rather excited by the fact that my $3000 has made $31.28 in just two days. It’ll probably drop down again sometime soon, so I’m not sure how much weight to put on that $31.28 cent gain. Still, that’s pretty cool… to think, it’s possible to make an extra $15 a day. That’s enough for lunch!

Meanwhile, my Roth IRA has gone up $18.40. So I’m up $49.68 in two days. That’s not bad, is it? I wonder how long until my accounts are at less than what I started with.

I’m still confused about the CD I tried to open online. It was that $5000 one at 5.01%. BoA called me but I still haven’t gotten back to them. And, as I noted before, I tried to take of the matter with a real person at an actual banking center, but because I bought the CD online I can only ask my questions to online banking reps via the phone. I’m kind of hoping something went wrong with it and it didn’t go through. That way I can take that $5000 and put it into another mutual fund, perhaps a large cap one. Or maybe I’ll be risky (stupid?) and put more in my VMGIX fund.

One thing I don’t get is if mutual funds work like the stock market. For instance, is it best to “buy” when the price is low for each fund share? Or does it matter less because you’re buying pieces of a bunch of stocks as opposed to just one stock?

I wish my bank would process transfers faster. It gets confusing when it looks like my checking account has $14k in it but really I know $6k of that was moved to the IRA & mutual fund and $5k of that is supposedly tied up in a CD that may or may not exist.

Off on a tangent, it’s quite exciting that I’ve gotten so many comments on my blog in the past day. One person who reads my other blogs actually figured out who I am! I don’t really care much if people who know me read this, but I guess I’m partially ashamed of being such a spoiled brat with my cushion of savings in the bank, and I feel awful that I don’t have student loans to pay while plenty of my friends do.

Then again, I also have friends whose parents will gladly put them through grad school and I know that, while my dad would help out here and there, I’m on my own when it comes to any higher education. Or am I? Well, my father says he can access his 401k funds in about 3 and a half years. It seems like he’s hinting at the fact that at that point he’ll be able to help out with money a bit more.

A part of me wants nothing to do with his money right now. I’ve already received more than I desire, and I feel guilty about that. But there’s also reality, and how I’m likely going to be making a “normal” salary for the foreseeable future. My $24k in savings doesn’t seem like much when I figure plenty of my peers are making $50k or $60k per year. Give them two years or less and already we’re on an equal playing field. So how guilty can I let myself feel, really?