I will able to pay my bills and still possibly contribute roughly /week into 401k after taxes, which will go into a Roth IRA. I’m currently 23 yrs old, but I figured from 24-65 if I put in 75 a week at a historically modest 8% return, I would have ,243,557.56. Continuing to earn that 8% after 65, assuming I pull money out for 30 years, I could get ,124.78 per month tax free. Assuming at that point that my home and everything will be paid for, that is a bit excessive as far as I can foresee. My plan was to contribute 15 or 20% now and then maybe more as my income grows, but it kinda looks like that may not be necessary.
I watched a video in my college personal financial planning class that said that people really need to contribute 18% of their income to their 401k. I was thinking of possibly going with 20%, but since even 15% seems to be excessive, I’ll probably just stick with the 15%. Is that a bad move? I could live a little better with the extra few bucks now.
I used a financial calculator to crunch the numbers. I’m looking for answers from people w/ a financial background as well.
Number of periods = 2132 (41years * 52 weeks per year)
Interest Rate: 8%
Present Value=0
Pmt per week=
Future Value=,243,557.56 (in 41 years)
Considering I’ll probably pull it out for 30 years and the money will still be earning interest right before I pull it out. .2 million earns nearly 0,000 in interest the final year before I start pulling out.
N=360 (30 years * 12 months per year)
Interest Yield=8%
Present Value=,243,557.56
Future Value=0
Payment=,124.78/month
I’m not trying to argue, I’m just trying to show my position and how I came to my conclusions. I know I need to save, but I just don’t want to save more than I’ll ever need when I can spend it now and be happier while I’m young.
I have not been able to quickly identify a calculator to measure the result of inflation and that is one critical factor I overlooked. Thank you!
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That is absolutely not too much, and as a matter of fact, if you can do a bit more, I would recommend it.
I think that all of your assumptions are taking good information into account, but they are assumptions. You are a young person, and inevitably your life may change with marriage and children. (Which mean a bigger house, more cars, more expenses, college tuitions, etc.) With that it may be harder to set aside 15 or 20% for retirement.
Other things to keep in mind are possible job loss, illness, emergencies, inflation, having a home that may not be paid for, and having a spouse that you will also be supporting who may not have any retirement.
Set aside as much as you can, make sure your beneficiaries are documented in writing and don’t look back!
75 isn’t all that much. Remember if you keep more of it, it will be taxed, but if you put it into your 401k, it is pre-tax, so you will have a lower tax bracket at the end of the year along with a nice cusion started for retirement.
How could you get $9k a month? You should only plan to take out 3 top 4% of your nest egg each year in retirement.
Also, $9K per month 40 years from now till be very little. Did you do any calculations factoring in inflation?
No, $75 a week is not TOO MUCH. I put in $130 a week and get matched about $40. I am 38 and have been contributing near this level my entire career. I also put $100 a month into a ROTH IRA and $100 a month into my son’s 529.
Having a little over a million dollars in your retirement account 40 years from here IS NOT nearly enough to reire COMFORTABLY.
** Also, you assume a 30 year retirement and claim that you will take out the same amount evenly over that time. That $9K will not go very far in the 29th year of your retirement. You will need to take a 3 or 4% raise each year to keep up with inflation.
Step it up, dude!
I recently stopped putting money in my 401K until I get out of debt, except for my house.
You should put in 15% in a retirement account, but you should be debt free first…. if you cant afford it right now, then lower the amount. You have 40 years til retirement, so if you need to spend 2-3 years getting your life in order, then I dont think it will hurt you.
Also, 8% is probably on the low side of what you could actually make on a return.
$75 a week for retirement savings is not excessive. Your calculations also ignore the impact of inflation. Your 8% historical return is not an unreasonable number. However, in 43 years your $9125 will only be worth about $3200 in todays dollars if you assume 2.5% inflation – a fairly decent historical number. I would not call $3200 a month excessive – especially if you have some medical needs then.
Go to 20% if you can afford it. That $1.2 Million number looks great now. But after 40 years of inflation, it won’t.
For example, what $1,000 bought in 1966 cost $6,176 in 2006, 40 years later. So if the same holds true for the next 40 years, $1,243,557.56 in 2047 will only be worth the same as $201,331.95 is today. Do you think you could retire for 25-30 years, on that.
First it is great you are starting at age 23. Congrats.
Second – you mentioned both a 401k and a Roth IRA. If you have a choice, normally you would want to invest in the 401k first to at least get your employer match. Then some will suggest investing the "next" increment of savings into a Roth and as you top out the Roth – go back to the IRA. Personally for ease of investing – at this point – I would suggest that you invest it in a 401k.
Third – if you invest 15% of your income per year in a 401k and your income doubles in real terms (taking inflation out of the equation) and you invest in a mix of primarily stocks with some bonds and you can keep it up for the next 40 years then you should be able to withdraw 4% of your investment nest egg each year during your retirement years. Remember that a 401k defers taxes but you still have to pay them when you withdraw money from a 401k. If you build a spreadsheet with these assumptions – you might think you are saving too much but alot depends on variables that you currently cann’t control. For example, will the stock market tumble just as you plan to retire, will you be without a job/income at some point in the next 40 years, will your expenses go up due to house payments and kids college expenses and therefore reduce your ability to save. I listed a web site below that will help you calculate how much you should save. But I suggest you contibute as much as you can now (15-20%) and you will be happy with your decision in 10 – 20 years when your ability to save may be reduced. I recently was in a serious accident and was concerned I may not be able to return to work. I am 50 years old and when I looked at my investments, I realized that if I needed to retire – I had enough saved that we could retire – at a little lower standard of living but we would be fine. I did recover and am back to work but that was one less thing to worry about when I was trying to physically recover.