This week at work we had someone in to discuss our retirement plan. He covered the basics of tax-deferred savings and company matching and all the other stuff you’d expect from a guy pitching a 401k. Good for him. But as I looked around the room and chatted with a few co-workers, I realized there are so many of us out there who want to retire eventually but have no plan. Because that gave me the shudders, I thought today I would share my take on some of the basic questions you need to answer to prepare for retirement and make sure I address a couple of the common excuses people give instead of taking action. Let’s dive in.
How much money do I need to be able to retire?
There are lots of formulas out there, but the simplest and best one I’ve heard (and the one I use) involves three simple steps:
- Pick the dollar amount you think you’ll need to be able to meet your financial needs each year at retirement.
- Unless you’re really close to retirement age, bump up that number 30% or so to give you a rough cover for inflation (multiply the number in #1 by 1.3).
- Take the number you came up with in #2 and divide it by 8% (or .08).That gives you a lump sum amount you should have in a good retirement fund to be ready to live off the interest.
Example: Let’s say you think you’ll need about $40,000 per year in retirement. Adding 30% ($40,000 x 1.3), we get to $52,000. $52,000 ÷ .08 = $650,000. What does that mean? That means if you have $650,000 in the bank and can earn roughly 8% interest per year in your investments (very possible), you should be able to draw off $52,000 per year without ever touching the principal amount. Rinse and repeat annually.
How Much Should I Save?
Dave Ramsey recommends saving 15% of your take-home pay from each paycheck and putting it toward retirement. That’s a good rule of thumb. Keep in mind if you’re really close to retirement age this may not be enough. If you’re really young, this is PLENTY and you may want to save a little less while you’re focusing on paying cash for your car(s), paying off your house, etc.
For those nearing retirement age, it’s crucial to assess whether this percentage adequately accounts for their retirement goals and lifestyle needs. Conversely, younger individuals have the advantage of time on their side, allowing them to leverage the power of compounding and potentially adjust their savings rate accordingly. While prioritizing retirement savings is paramount, it’s also essential to strike a balance and address other financial milestones, such as homeownership.
Where Should I Put My Retirement Savings?
Man, oh man – if I could answer that question I’d be a billionaire already. Let me lay out the simple points. Don’t put it in a savings account. It won’t grow. It is safe, but it won’t grow. Don’t put it in single stocks. That’s too risky and you’re betting a lot when you buy single stocks. Mutual funds are huge accounts that have lots of different stocks in them, giving you a happy mix of risk and return. Bonds are debt sold by a company to raise money. They pay back the debt with interest and you get paid. Of course there are all kinds of details here that a broker should walk you through, but this should get you started on your quest and these two investment types are the simplest and safest way to get started while making a decent return.
I’m Too Old/Young to Save for Retirement. Why Bother to Start Now?
Not true. You may have some catching up to do or you may be lucky enough to have a head start. Either way, as Jon Acuff wrote in a great little book called Quitter, “…not doing anything is its own decision, and the odds of failure are horrible.” Get started!
I Want to Save For Retirement, but I Can’t Afford to.
Boy, I’m gonna get some hateful comments when I say this, but here goes…In 98% of the cases, that’s a lie. You CHOOSE not to save for retirement. You want your stuff now and are being lazy about saving. You’ll be working for the rest of your life or depend on me to support you when you can’t work any longer. There are a few who can’t afford to save for now, but most of you out there are just being lazy. If you are claiming that excuse, look hard at your budget (you are doing a budget, right?!) and prove it. Then set a goal to start saving and work the plan to get there.
I could write a book about this, and many people have, but I’d better stop here. Since I’ve only scratched the surface, I’m happy to try and address any questions you have so feel free to add them in the comments.
I’d love to hear from you – what’s your plan for retirement?
I’m going to chime in here on the conterversial part… I have had a job since I was 15 years old with the exception of approximately 18 months. For that 18 months, I was on assistance. What caused me to be on assistance was that I had two very small children (3 years and 6 months) and to put it nicely their father wasn’t being responsible; I couldn’t get daycare (specifically weekends and nights)for the jobs available. I was on assistance approximately 3 months when “I” inquired the assistance office about on-the-job training or something. That is when they offered to send me to school up to 12 months. I jumped at the chance. I graduated with a certified diploma in Computerized Secretial with honors from a business school. I then acquired a decent job and started working a month after graduation. Now, I told you all this because I have been on both sides. First I want to say that it’s the “system” that’s broken. The welfare/assistance program is set up completely wrong. It is set up in a way that it “keeps” people on assistance. It doesn’t help people who ARE working and trying to make ends meet. It doesn’t help get people off assistance or while they’re transitioning off assistance. For example, when I started working I was bringing home $425 every two weeks…without affording insurance and forget about a 401K. The assistance program then said that I made too much money and took everything away, i.e. housing assistance and food stamps. My rent was $435 a month (and this was on the cheap side for rent)and my utilities were about $150-160. That left me with $265 to feed and clothe us, pay for gas and car insurance, and pay for daycare. Needless to say, I ended up being behind immediately and robbing peter to pay paul for about a year until my “big” raise came in. I distinctly remember thinking to myself… “No wonder people stay on assistance!” Now, don’t get me wrong…. I’ve seen many people take advantage of the system, but it’s not like you might think…. where there are a bunch of people who just want to be lazy and not work (there are some of those too). I know Barry is a good man and didn’t mean it to be unkind with the “leeches” comment; but I’ve told many people my story when I hear them talk with disgust about people who are on welfare…. and I wanted to make you aware as well. If you want to fix the problem, you need to fix the way the system works. Period. Oh, and by the way, all the programs that helped me get off assistance? (education, welfare to work, daycare subsidies) GONE!! So, I say to people, if you want people to get off assistance/welfare, then the system needs fixed. For example, why not make it a requirement that someone receiving assistance HAS to work at least 30 hrs. a week? (with certain special exceptions of course) God helps those who help themselves… and so should we and the “system” too.
Shawna, Barry and I have no problems with government assistance. 🙂 We’re very happy that it’s there and we have no problems helping people when they really need it. In all honesty, two of my very good friends are on assistance right this very minute – and we’re very glad they have that help because they need it. Our beef is with people who “use” the system – which is easy to do because it’s so broken.
Our goal is to teach people to manage their money well, so that not only will they have enough for themselves, but they’ll also have enough to help others. 🙂
And great job, by the way. You really kicked it girl…I hope you’re proud of yourself – I am. 🙂
Stacy, I know that you and Barry weren’t talking bad about people on assistance. When I mentioned about people talking with “disgust”, I wasn’t trying to imply you or Barry. I was just mentioning other people I have encountered. I just wanted people to be aware of the problems with the assistance program, especially when trying to return to the workforce. It really needs revamped. And let me say, I have learned so much from you guys! I wish I would have had half the information back then that I have now. I could have saved myself a lot of money and stress. I think you and what you are doing is great!
Barry does a lot of work with the State of Tennessee – he teaches classes for those in the lower income bracket who need housing assistance…so he really does know how badly the system is broken. 🙁
I know you knew what we meant – I just wanted to make sure others knew that we weren’t talking out of our heads….we’re speaking from experience. 🙂
PS – I think you’re great too!
Even though Stacy’s already commented, I want to do so as well. You’re spot on with your comment that the system is designed to keep people in it instead of helping them out of it. As Stacy said, I have zero problem with helping someone who NEEDS assistance. I believe it is my responsibility as a tax-paying citizen. So many I counsel have the mindset that the government owes them something simply because they don’t WANT to work and it is those people I offend because my tax dollars shouldn’t be spent to support their laziness! I’m proud to hear you were able to beat the system by using it to your advantage and climbing out to become self-sufficient. I happily and regularly partner with multiple government agencies who work to help people out of the mess. When I teach workshops, provide counsel, etc. to those folks I can always tell a difference than when I meet with someone who expects the government to solve all their problems. Government assistance programs should always work to help people become self-sufficient, not dependent.
Good for you, Shawna! I think we would all agree that your use of the “system” was exactly for the purposes for which it was intended (i.e., a hand up, not a hand out). Too bad the programs that helped you are not there now to help someone else who might similarly benefit. Single parenthood is no easy job and you made the best of the difficult situation in which you found yourself. Best wishes to you and your children.
In defense of Kimberly, Barry used the word “leeches” in his response. I don’t think he was trying up be unkind, but using that word is inflammatory. She was not being hateful. She was just stating a different viewpoint from Barry’s and probably many of your readers. I think the best welfare program is a good job and being being frugal with your money. That being said, I think that this belief that only conservatives believe in hard work is not true. I have always worked, my husband has always worked, my mother has always worked and my father has always worked (including the time he bravely and volunyarily served our country).
We always welcome different points of view. 🙂 Looking at all the sides helps people be more informed – and then they make better decisions. Thanks for the great comment, Jennie!
Jennie, thank you so much for defending me and my comments! I appreciate it, and otherwise agree with everything you said. I do regret the snarky tone of my previous posts and I’ve tried to explain myself better and more thoughtfully in a separate response. My reason (not excuse) was that I was annoyed to read something I found so objectionable on a blog that I otherwise really enjoy. Also, I was rushing as I wrote them because I was, wait for it…. about to leave for WORK!
I so agree with this. Good job and a great reminder. We shouldn’t expect anyone to take care of us but us. As shown in some comments, some people want the government to be both our mommy and daddy, and make excuses for the many people who could take care of themselves if they were willing to work at it. I’m unsure what they think- that the country would not be “stagnant” if we allowed even more people to live off of the government? As usual, people like that spout off lines that have no real meaning, and can’t back it up.
Thanks for this comment. I shake my head when I get dissenters to my view of self-sufficiency because I truly don’t get it. I really try to understand that position but I just can’t. ???
Hi Barry–I just read “It’s Not About Money” and was very impressed. I am a 24-year-old social worker and my husband (he’s 27) owns a video production company in North Dakota. I have been looking for guidance regarding our fianaces and this was perfect! Like many in your book, we have tried budgeting but made it too difficult by tracking too many small expenditures. I love the envelope idea! The simpliest ways are often best.
In regards to the above comment by Kimberly, I appreciate how tactfully you dealt with the situation and could not agree with you more regarding the hand-outs. Many of my clients would benefit from recieving less hand-outs because working increases self-esteem. Of course, there are many people who *cannot* work and this does not apply to them. It is interesting to me that the states who are doing the best are republican, although I like to think of myself as a moderate. My husband is one of the “entrepreneurial minds” you wrote about and it is very difficult for him to hire employees due to the high rate of taxes on small businesses. Hello, the less we are taxed the more we can hire!
Please excuse my rant 🙂 One last thing…we are looking forward to having a family (God willing) in the near future. I would like to quit my job at this time to focus on family. My husband will be able to support us, but money will be tight. Do you have any advice for preparing for this transition financially, especially since his income fluxuates? Thanks again!
PS–Love your wife’s tips! God bless!
Thanks for your kind words, Kelsey. To answer your question about moving to one income, I actually just wrote about this on the little site I have to write articles as a reference. The article is http://www.debtortobetter.com/how-to-budget-if-you-dont-get-a-steady-paycheck/. In addition to that article, let me offer the most basic pieces of advice for making a tight budget work. Schedule a date night with the following agenda:
1) AT HOME: 30-45 minute review of all expenses for your household, asking a single, two-fold question – “should we be doing this?” and “if so, how it can we do it while spending less money?” Discuss every single one, even if you think it is a necessity. Don’t break out into defensive positions when you disagree. Just make a note of any items you aren’t sure about or can’t easily agree on.
2) OUT: Nice date night for the two of you at a quiet restaurant then somewhere else you can talk and interact (in other words, not a movie), discussing anything and everything EXCEPT the items from #1. Relax, enjoy each other and let go of any tension that developed during #1.
3) AT HOME: Discussion of only those items that you couldn’t resolve the first time around in #1. Remember that you’re on the same team and trying to accomplish a goal together. If you still can’t agree on some of them, don’t change anything about those.
What I’ve found from that simple “date night” activity is that a couple does two really awesome things. First, the couple COMMUNICATES. Good or bad, they discuss their finances fully and openly. Since almost every challenge in a marriage has a financial component to it, this means it is a healthy self-imposed “marriage counseling” session. Second, the couple almost always makes some changes to the budget that generate savings for the family. Since both husband and wife had an equal say in an open discussion, the changes can’t be blamed (good or bad) on anyone and since the focus was strictly on expenses (not income), the question of “should we be doing this” gets asked instead of the “can we afford it” one. I believe that puts the discussion in a better place.
Hope that helps!
Thanks, Barry! We are going to try the “date night” activity asap!
Hi Barry,
I know you probably don’t want people to “get into it” here, but I can’t stop myself. Actually, to be honest, I don’t want to stop myself, and didn’t even try. So…here goes:
Kimberly, I’m afraid I can’t understand the logic of your comment. How is a mindset of self-sufficiency, personal accountability, modest living, and charitable giving causing our country to stagnate. If everyone who was capable (I said CAPABLE, not willing) would put his best foot forward and suppress the desire for instant gratification, the natural human instinct to make excuses, and the propensity to take help they don’t “need,” how could that be a problem for our economy? How could it do anything but stop the slow bleed in that area of our economic crisis? Yes, there are other issues in our economy, but that one is huge.
We all respect your desire to unsubscribe, but please don’t be crass and hateful. Disagreements can be handled maturely, as Barry did here. The Myers do wonderful things for their readers and community, mostly for free, and should be thanked, not dragged across the coals for the rare time when their opinion differs from yours. Considering how well they are doing on the “cents” side of Humorous Homemaking, perhaps we should all be listening a bit better.
That said, well done, Barry. Well done. Delete if you wish, since this is a controversial comment, but please know that I stand behind you guys!
Couldn’t have said it better myself!
Christy, I agree with *almost* everything you said in your comment. The way you suggest is precisely the way I have lived my life and the mindset which which I have raised my children. I have never taken a handout as an adult, put myself through college (no PELL grants), and have been a consistently employed taxpayer for over 20 years.
I was, however, raised by a single mother and at various times we were on welfare and foodstamps, lived in subsidized housing, etc. My father was ordered to pay $300/mo in child support, but went to court to get that reduced to $230 — on which my Mom was supposed to raise 2 small children! My mother struggled to get off welfare every time but, as noted by Shawna, the system makes it quite difficult to do so. For example, I recall that the only way we could have a working car (bought used for about $400) was to have it in my aunt’s name because my mother wasn’t permitted to have an asset worth that much. Since those difficult days, my mother remarried, she has worked at the same job for 20+ years, and she and my stepdad live in a completely paid-for home with a fully funded retirement. My sister and I both turned out to be productive taxpayers as well.
As you advocate, Christy, I too am strongly in favor of “self-sufficiency, personal accountability, modest living, and charitable giving.” Again, I am doing all of these things on a daily basis. I also could not agree more with your comment that “if everyone who was capable (I said CAPABLE, not willing) would put his best foot forward and suppress the desire for instant gratification” that the country would be in better shape.” What I have a problem with, and why I commented in the first place, is because of the comment that “leeches” are our country’s “biggest” problem.
We have many big problems in our country, and I get quite discouraged when I consider just how divided our country is about how to fix them. I SO agree with Jennie, that work is vitally important not only to individual self-worth and security but also to the overall health of our communities and our nation. To be sure, there are many out there who are not paying or doing their fair share, either because they can’t, won’t or don’t know how — as a foster parent working with birth parents, I often made the observation that the importance of children observing the adults in their lives being productive (i.e., work, school, running the household effectively) cannot be underestimated. However, I cannot agree that people on welfare or otherwise receiving “handouts” are the “biggest problem” we face. That is my point. There are world economic forces at work. There has been many years of an expensive war. There have been laws enacted that benefit only a small proportion of our society, allowing many corporations and individuals to avoid paying their fair share of taxes. We’ve lost many manufacturing jobs overseas and our workforce is not well educated for the jobs that are out there and being created in the new world economy. We have a truly screwed up healthcare system. While it’s easy to kick poor folks, to try to take away the measly few dollars they receive at the individual level, again, my point was that there are much bigger fish to fry and we should collectively point our attentions and efforts in THAT direction.
The stagnation to which I was referring was by elected officials (and I’m liberal so I’m mostly blaming conservatives here, but I’m sure that’s not entirely the case) who are sitting in Washington and doing absolutely nothing, based solely on some “principle” or because they are afraid of Grover Norquist and the Tea Partiers. There is a mess. It needs fixing. And I’m just a nurse and I don’t profess to even remotely have the answers. But I do know that people sitting on their own sides, refusing to meet, talk plainly and make hard compromises, and instead blaming impoverished, disenfranchised people as a diversion, will never get anything done. That hurts all of us no matter what side you’re on.
I’ll miss your posts, Stacy! I especially loved the ones where you tried to give up sugar — I could never do that myself either! My best wishes to you.
Thank you, Barry. I am a Canadian so naturally my situation is quite different than any of yours Stateside but like everyone else, I also face retirement challenges. (I am terribly sorry that one of your readers misunderstood your meaning regarding the sense of entitlement re: gov’t assistance as I am pretty sure that is all you really meant.) In Canada, most of us, unless you are union, have no pensions within companies. I am one of them. But my company does indeed match my RRSP (401K in your country) up to 5% which is grand as it is vested immediately. This will help but it will not be enough. My challenge is that I entered the housing market very late in life and am now about 15 or 18 years away from retirement. I am budgeting like a mad thing! And once I got into the groove of that, it is actually a lot of fun to try to meet the challenge of the monthly numbers. (If its not fun, why do it?) I have only one income but I live alone and have no dependents. I’ve begun adding more to my albatross (ie mortgage) and will again next year when I reassess the numbers. I’ve learnt buckets from you and Stacey so thank you. And this entry today has also been very helpful. I’ve always wondered what the actual number might look like…time to pull up my stockings… 🙂
Teresa, thanks so much for chiming in! I love knowing how y’all do things up there. 🙂
The truth hurts, but not as bad as the reality if we don’t do SOMETHING! Thanks for being brutally honest and for lighting another fire in us to better manage our finances. Best wishes!
Thanks, Rebekah!
Is the 15% recommendation based on putting the money in a pre-tax or after tax account? I put my retirement into a Roth 401(k), so I pay the taxes now so I don’t have to pay on any of the growth over the next 40 years (which I certainly hope is a lot!) I recently got a raise at work, so I just upped my contribution so I’d have the same take-home as I did before since we were making ends meet fine on that – we won’t miss the money now, but we’ll appreciate it later. We’re at 10% of our income now.
This is only a rule of thumb so I wouldn’t be so concerned with Roth or traditional when considering this rule. Instead, I would add that you should ALWAYS use Roth when possible (unless there’s a company match) because you can deal with the known tax rates and other issues of today and know the money would grow tax free. I’m a huge proponent of Roths.
That’s how I feel about them too. And my company does match my Roth 401k, so I guess I’m actually pretty close to 15 percent. I definitely prefer the Roth, if for no other reason than it makes the math simpler – I know all the money in it is mine and my husband’s. Plus we’re getting educational and other tax breaks right now we won’t be able to get when we’re retired, so I’d definitely prefer to pay taxes now when our rate is quite low. I’d love to be in a higher tax bracket at retirement because that would mean all our saving in the present worked to provide us a richer future!
I worked for the state for 11 years and was saving for retirement in their 401K and 457 plans of investments. I was injured in a car accident which required surgical repair. I did physical therapy and went back to work. Things weren’t the same. I am required to drive/ride in a car for several hours a day then stand on my feet making observations 8-10 more hours a day. I started having debilitating pain and couldn’t stand this anymore. Now I’m applying for disability but am having trouble getting that approved. But in the mean time, I’m afraid I’ll lose my retirement and it won’t be much anyway cause I only worked 11 years there. I’m sunk if I go on disability. Any advice?
With these very limited details, I would wonder what other opportunities you would have to make an income. As encouragingly as I can put it, just because you cannot do the job you did before doesn’t necessarily mean you can’t do ANY job (this is a question only you can answer, and must for yourself). I have no idea if you should or should not be on disability. If you truly need it, fight for it. If you are able to do another type of work that would provide an income, don’t fight for disability – fight for a better job.
I have to assume you’re at risk of losing the retirement because you will feel the need to withdraw it to live off of, right? While this is sad, it is a real possibility. The only time I encourage someone to pull from retirement funds is to avoid bankruptcy because the penalties and taxes are so steep against removing monies from retirement funds (as high as 40% will vanish in penalties and taxes). Cut expenses to the bone and do anything legal and reasonable to earn an income while you fight for disability or a job you are able to perform.
I hope this helps!
This all sounds wonderful but at age 58 and saving as much as possible I don’t expect this country to really be able to recover from what is happening with our president and our economic future. We are set to retire in 4 years but with the stock market falling and 1 in 5 on handouts the system will not make it I am afraid. I hate to be doomsayer but at my age I have never seen anything like this and my mother who lived through the Great Depression says the same except then people did not expect the government to take care of them. I pray this is not the case but mostly I pray for conversion and repentance from our once great nation.
I agree our nation is in a terrible state of affairs, but that is not (and cannot be) an excuse for us to decide the country cannot recover. I have very little faith in our government’s ability to do anything to bring our economy to where it should be, but I have great faith in the entrepreneurial minds running businesses every day to make us prosper. It is up to those of us who refuse to believe the doom and gloom as the end but as an opportunity to overcome a challenge that will make the difference. The biggest problem I believe our economy faces is the expectation by so many that they “deserve” a handout (as you mentioned). There are so many who need help and I am glad my tax dollars support them. But there are so many more who are, to be blunt, leeches on our system. It is a mindset change that will provide an economic change.
I subscribed to this blog to get recipes and because your wife’s writing can be very entertaining. How disappointing to today read white male BS like this, blaming “the biggest problem” in our economy on “leeches.” In MY opinion, it is narrow minded, bigoted attitudes like this that are causing our country to stagnate. Please unsubscribe me immediately. Thank you.
I actually said I believe the biggest problem is a large percentage of our society who believe they deserve a handout. I’m sorry if you disagree. I will unsubscribe you at your request.
Oh, and by the way. I’ve been a working taxpayer my entire adult life so please do not dismiss me as one of of the “leeches” to whom you are referring. I just think your mindset is shameful, and the fact that so many think as you do is getting us nowhere as a nation.
I wholeheartedly agree with you on this one. While I support the libertarian frame of mind when approaching nearly every issue (including fiscal conservatism) I cannot ignore that our country is in a rotten state. The outward symptoms that people notice more readily are the financial aspects such as unemployment and the declining dollar and inflation. When it comes to entitlements, it’s a tricky subject because I feel we are obligated to reach out and help up our fellow man. I just don’t think that money should be taken from us without our approval (although filing your taxes implies approval–ask me about our nation’s VOLUNTARY income tax!) and used for things we do not approve of. In the past, my family had to apply for food stamps before my husband re-entered the workforce, and many of my former friends were all too ready with advice on how to handle the applications and lie to get more money. I believe this is the sort of person you meant when you said “leeches”, not the working families who are the victims of this butt-backward system. It’s sad to see someone get so heated when they don’t seem to have understood what you really said. God bless you and thank you for your counsel!
You’re 100% correct – we are obligated to reach out and help our fellow man…it’s our Biblical mandate. 🙂