How do you Determine Your "Number" at a Young Age?

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robocop
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How do you Determine Your "Number" at a Young Age?

Post by robocop »

Question for everyone- I tried out the Vanguard retirement calculator that someone posted a few days ago.

I had the same problem I always do when I am looking at these calculators- I have no idea how much income I will need in retirement. Mostly because it is so far away- I don't have a house, a spouse, kids, my SO is changing careers, I don't know if I'll stay with my current company (or even career) forever, and thus don't know if I will stay in my high-cost area, have the same nice salary, etc.

How did you guys calculate your number when you were younger? For now, I am saving the max in my 401K, and doing backdoor Roth, and just started maxing out HSA this year, but every time I use a calculator, it tells me I am way behind in contributing enough to get to the normal (~75% of current income) income needed for retirement.

Should I start furiously saving extra once I meet my student loan debt goals? Or should I stick to my current plan and ignore these 'average' percentage of income numbers until I actually have some idea of what my retirement might look like? What did you guys do?
staythecourse
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Re: How do you Determine Your "Number" at a Young Age?

Post by staythecourse »

What you mention is the crux of the problem. All the young folks are trying to save and invest for future without anyway of knowing how much is needed to get to the finish line.

I have gotten old enough to realize there is no point of trying to figure it out, becuase life has a way of throwing out a curveball when your sitting dead red on a fastball!!

The one aspect one has no control of in investing is returns (so don't worry about them). Control the 90% of investing that you can. Get a good education, get a good paying job you like, LBYM, save, focus on asset allocation to control short term volatility, avoid active management, pay attention to fees/ taxes/ and inflation, and finally focus on staying the course.

As time rolls on tax laws and life events will change which will constantly make you re-analyze your "number".

Just keep in mind even the folks who are retired are assuming the have their number right. When they die is the only time ANYONE of us will know if our number is correct or just a poor guess.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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zaboomafoozarg
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Re: How do you Determine Your "Number" at a Young Age?

Post by zaboomafoozarg »

I don't know how much I will need, since it's impossible to know what is going to happen to the world or to myself. So I just save as much as I can. Right now it's 60-70%. If I need to save less in the future I will, but it's much better to save a lot early and let it compound over 30+ years than to play catch-up later.
SP-diceman
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Re: How do you Determine Your "Number" at a Young Age?

Post by SP-diceman »

When young, work as hard as you can and save as much as you can.
:)
Johm221122
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Re: How do you Determine Your "Number" at a Young Age?

Post by Johm221122 »

SP-diceman wrote:When young, work as hard as you can and save as much as you can.
:)
+1 This is all you can do,when you hit late 40's then you can start to think number's.
donall
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Re: How do you Determine Your "Number" at a Young Age?

Post by donall »

Johm221122 wrote:
SP-diceman wrote:When young, work as hard as you can and save as much as you can.
:)
+1 This is all you can do,when you hit late 40's then you can start to think number's.
+1
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Watty
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Re: How do you Determine Your "Number" at a Young Age?

Post by Watty »

I agree that it is pretty unknowable but a number of studies have shown for someone retiring at 65 they can have a "safe withdrawal rate"(Google this) of around 4% which means that they can spend 4% of their retirement nest egg each year and likely not run out of money if they live to be 95. There are of course lots of assumptions and opinions but a 4% withdrawal rate means that you would need a retirment nest egg that is 25 times your expected expenses when you retire.

For example if you have $50K in expenses each year now and want to keep your same standard of living then you would subtract any other expected retirement income, like social security, and multiply the remainer by 25. If you expected $20K in other income then $50K-$20K=$30K, and $30k*25= $750K in today's non- inflation adjusted numbers.

This is one of the reasons why living a moderate lifestyle can have such a huge impact on your retirment savings. For example if you reduced your expenses from $50K to $45K, then not only would you save an extra $5,000 a year but your required nest egg would also drop from $750K (30*25) to $625K. ( (30-5) *25 ).

In crunching the retirement number I usually do everything in current non-inflation adjusted dollars but I lower any expected future earnings. For example if you guessed that investments would increase 10% a year but there will be 4% inflation, then you would just crunch the retirement numbers using 6% (10-4).

It is also good to target retiring earlier than 65 so that if there is a savings shortfall then you can work a few extra years.
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kenyan
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Re: How do you Determine Your "Number" at a Young Age?

Post by kenyan »

As you point out, there are far too many variables and unknowns to compute a reasonable number with several decades ahead of you.

One thing I would suggest/reiterate is to forget the "75 (or whatever)% of current income + inflation" assumption. That method is pretty useless for most people. Instead of an income-based method, use an expense-based method. Expenses are something you have control over - income less so. Yes, you still need to make lots of assumptions, but your retirement living expenses are the most important factor in determining your "number."

If you're living large while working, don't assume that you can just cut down your expenses in retirement. Living standards are far easier to increase than they are to decrease - psychologically speaking.

If you plan to get married, buy a house, and have kids, take that into account. Those almost invariably come with extra costs, so it might behoove you to assume that you won't always be able to save at the same rate, even if you don't increase your standard of living. Depending upon your field/career, it's not always good to assume your income will increase, either. I've been working for over 7 years now, and despite promotions and experience, my salary is almost exactly the same - inflation-adjusted - as it was the day I got out of graduate school (yes, that is depressing).
Retirement investing is a marathon.
wilked
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Re: How do you Determine Your "Number" at a Young Age?

Post by wilked »

The good news is, when you get married hopefully your retirement savings doubles :-)

The bad news is, when you have kids your savings halves or worse.

As others have said, don't sweat it too much. Maximize tax deferred, consider trying to max I-Bonds as well right now, and you will be fine. The calculators tend to show you behind in your 20s / early 30s, then you can jump past them in mid 30s.
nomadgecko
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Re: How do you Determine Your "Number" at a Young Age?

Post by nomadgecko »

I agree that the first question, "How much income will you need?" is impossible to answer when you're younger. So is "what return do you expect on investments?" or another favorite of mine "what inflation rate do you assume?".

My two cents:
1) Assume you will have to fully fund your retirement, i.e. no social security. I'd say the end game is in the mid-seven figures.
2) Over the next few years I would focus on milestones to keep you on a good glidepath to the right ballpark. I think mulltiples of your current gross salary are a good metric. So saving one year's gross salary by (I'm making this up) age 28 is great, 2x gross by age 35.
3) Good advice from the other posts
kd2008
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Re: How do you Determine Your "Number" at a Young Age?

Post by kd2008 »

At this stage in your young life, getting into habit of tracking your expenses will get you much further ahead.

You want to see your savings as a multiple of your expenses. While exact expenses in retirement are difficult to determine now, the floor can be easily set. You need money for housing, food, auto, insurance, health care. Based on your lifestyle it may be 1x or 1.5x or 2x or any other multiple of this floor is what you may want to aim. You may want to consider if you plan on paying off your house early. That will reduce your floor.

Also, the as life events change your perspective of what you want to do in retirement, the multiple of expenses also will change. So be flexible.
Tigermoose
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Re: How do you Determine Your "Number" at a Young Age?

Post by Tigermoose »

Grandpa Tigermoose here. I'm of the ripe old age of 36, but I've learned a thing or too :)

1. Save enough money now so that your wife can stay at home with the kids if she so chooses. Don't assume your spouse will be contributing to retirement savings.

2. Make sure that you have enough to live on securely, but not so much that you lose discipline and the ability to have to make tough choices on how you spend your money (this is especially important once you have kids - you don't want the growing up feeling entitled - they have to learn to value money and hard work)
3. Make sure you are saving enough money for a down payment on a house. This would be in a non-retirement account.
4. Don't develop any luxury vices. Don't assume that you can just stop once you get married or have children. Habits develop over time from a young age.
5. Develop hobbies and habits that lead to happiness, satisfaction, and security.
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Confused
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Re: How do you Determine Your "Number" at a Young Age?

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Dandy
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Re: How do you Determine Your "Number" at a Young Age?

Post by Dandy »

You can't forsee your income needs and therefore your asset base decades into the future. Focusing on a high rate of savings, asset allocation (mostly in broad based index funds), low investment costs, periodic rebalancing, minimizing taxes, insuring against large risks, and living below your means is my advice.

I thought I would need at least a million with a full pension. That was when my job was very secure and 10 year Treasuries were maybe 6% or more. Lost two jobs, and interest rates and pension are a lot lower. But, as advised as a new employee by some sage, "every time you get a raise put some of it into automated savings". So, my focus was on building my asset base more than trying to hit a specic target. I lived pretty well but below my means - no regrets on that score. Frugality and luck
have left me with a nice nest egg. You can't control luck but can control the other factors.

good luck
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bcboy57
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Re: How do you Determine Your "Number" at a Young Age?

Post by bcboy57 »

I recently read a new idea, I think from the Wall Street Journal............... amount calculated needed per year X years in retirement planned.

Works out well in my instance, but I am almost 62, much older than you, with few future variables as you'll likely have......Doug
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TomatoTomahto
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Re: How do you Determine Your "Number" at a Young Age?

Post by TomatoTomahto »

Confused wrote:
Tigermoose wrote:Grandpa Tigermoose here. I'm of the ripe old age of 36, but I've learned a thing or too :)

1. Save enough money now so that your wife can stay at home with the kids if she so chooses. Don't assume your spouse will be contributing to retirement savings.
Or that your husband can stay at home with the kids if he so chooses. For the record.
+1. I would have thought that at age 36 you'd have figured out that gender-neutral planning works to the betterment of the family unit, in terms of finances, mutual respect, and a happy life. I hope you'll take that gentle tweak in the spirit in which I'm offering it, but in all seriousness, flexibility in determining roles can be valuable for a family.
I get the FI part but not the RE part of FIRE.
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Clearly_Irrational
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Re: How do you Determine Your "Number" at a Young Age?

Post by Clearly_Irrational »

Focus on establishing a minimum number. So using expected performance and the least amount of money you could live on how much would you need? Apply the engineering rule of thumb and double it. There, you need at least that much money or you're in trouble, are you on track for that? Here's an example (this is quick and dirty so there could be errors):

US Poverty level for a household of two: $15,130/yr
Expected return for a 50/50 stock/bond portfolio: 8.1% (used to avoid sliding allocation complexity, numbers taken from Rick Ferri's forecast)
Projected retirement age: 65
SWR based on 30 year retirement: 3.5% (100% success rate on firecalc)
Average US Citizen aged 35-44 has saved: $22,500
Minimum pile of cash needed: $432,286 in 2012 dollars
After inflation that's $884,663 in 2041 dollars
Apply engineering rule of thumb and your number should be about $1,769,264 in 2041 dollars (ignores SS and possible pension)

If your plan doesn't project you'll have at least $1.8 million by retirement age then you need to do some hard thinking.
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ruralavalon
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Re: How do you Determine Your "Number" at a Young Age?

Post by ruralavalon »

"[A]t a Young Age" don't even try to calculate a number. Over the next 40 - 50 years there are too many unknowable variables (inflation rate, tax rates, rates of return, medical issues, employment changes, etc.) to do a meaningful calculation.

Wiki article link: Bogleheads® investment philosophy . See the first two points: (1) live below your means; and (2) invest early and often.
Last edited by ruralavalon on Thu Sep 27, 2012 4:06 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
digit8
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Re: How do you Determine Your "Number" at a Young Age?

Post by digit8 »

Estimates of retirement are uncertain in best case scenarios. Being young, unmarried, childless, and potentially changing your job and career just makes an unknowable number slightly more unknowable.

Honestly, I'd say blow it off for awhile. It sounds like you're being diligent about the savings. For now, that's enough. Hit a milestone or two- like becoming more certain of your job choice- and then revisit the question.
(Not to jinx it, but questions about retirement planning are IMHO a great point to hit on amongst other discussions when one becomes engaged. Both parties checking their own financial values, and how they can combine, before the wedding is as important as questions residential or religious).
"You can't latte yourself to bankruptcy. The bladder won't allow it." | -Katherine Porter
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mrpotatoheadsays
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Re: How do you Determine Your "Number" at a Young Age?

Post by mrpotatoheadsays »

There really isn't "a number" at any age. There is too much variability in the future. Most retirement calculators you'll find on the web are worthless. The best source I have is Henry K. Hebeler's book "Getting Started in A Financially Secure Retirement: Pre- and Post-Retirement Planning in a Time of Great Uncertainty" and the associated calculator. You can get the calculator/planner at http://www.analyzenow.com/Free%20Progra ... ograms.htm. You don't have a lot of info to put in, but others at age 40 or so should have several numbers. The calculator shows your money burn based on numerous variables. So when you ask "Can I afford to retire?", the calculator will show your money burn. If your money burns out at age 120, then you're probably OK since you'll be dead, but if your money burns out at 70, the answer is probably "no".
stan1
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Re: How do you Determine Your "Number" at a Young Age?

Post by stan1 »

For now:
Focus on earning more and obtaining/maintaining skills that are in demand -- so you can save more while maintaining your current lifestyle.
That's what you have control over.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
Tigermoose
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Re: How do you Determine Your "Number" at a Young Age?

Post by Tigermoose »

Claude wrote:
Confused wrote:
Tigermoose wrote:Grandpa Tigermoose here. I'm of the ripe old age of 36, but I've learned a thing or too :)

1. Save enough money now so that your wife can stay at home with the kids if she so chooses. Don't assume your spouse will be contributing to retirement savings.
Or that your husband can stay at home with the kids if he so chooses. For the record.
+1. I would have thought that at age 36 you'd have figured out that gender-neutral planning works to the betterment of the family unit, in terms of finances, mutual respect, and a happy life. I hope you'll take that gentle tweak in the spirit in which I'm offering it, but in all seriousness, flexibility in determining roles can be valuable for a family.
I appreciate your condescension and thought police efforts. I fully understand "the spirit" in which you are offering this advice. I think we men are all too familiar with this "gentle" nudge and correction that we so "richly deserve" whenever we stray from the officially approved thought. I'm so pleased that you took the time to correct my unsophistication. :oops:

No doubt, this reply will find its way to the memory hole.
Institutions matter
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TomatoTomahto
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Re: How do you Determine Your "Number" at a Young Age?

Post by TomatoTomahto »

Tigermoose wrote:
I appreciate your condescension and thought police efforts. I fully understand "the spirit" in which you are offering this advice. I think we men are all too familiar with this "gentle" nudge and correction that we so "richly deserve" whenever we stray from the officially approved thought. I'm so pleased that you took the time to correct my unsophistication. :oops:

No doubt, this reply will find its way to the memory hole.
Tigermoose, I'm sincerely sorry that my comments made you angry. You had made a useful comment to OP about what can change in a family's finances when children come into the picture. I was simply pointing out that sometimes it works better for a family if optionality is increased. I say this as a card-carrying member of the House-Husband Union :D My family came out considerably ahead by my being the one staying at home. YMMV. Apologies if my attempt at humor fell flat.
I get the FI part but not the RE part of FIRE.
Tigermoose
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Re: How do you Determine Your "Number" at a Young Age?

Post by Tigermoose »

Claude wrote:
Tigermoose wrote:
I appreciate your condescension and thought police efforts. I fully understand "the spirit" in which you are offering this advice. I think we men are all too familiar with this "gentle" nudge and correction that we so "richly deserve" whenever we stray from the officially approved thought. I'm so pleased that you took the time to correct my unsophistication. :oops:

No doubt, this reply will find its way to the memory hole.
Tigermoose, I'm sincerely sorry that my comments made you angry. You had made a useful comment to OP about what can change in a family's finances when children come into the picture. I was simply pointing out that sometimes it works better for a family if optionality is increased. I say this as a card-carrying member of the House-Husband Union :D My family came out considerably ahead by my being the one staying at home. YMMV. Apologies if my attempt at humor fell flat.
I appreciate the apology. I have no problem with other people making up their own minds and own choices. I would also advise young women to save as early and as much as they could so that they could stay home with their children if that is their choice, or if they wanted to save enough for their husband. That wouldn't be my choice, but I recognize other people make different choices.

My "anger" -- annoyance would perhaps be a better description -- was directed more to your language that said that by age 36 I would have "figured" out the correct way of thinking. I grew up thinking that "gender-neutral planning works to the betterment of the family unit, in terms of finances, mutual respect, and a happy life", but my experience has taught me otherwise. Your experience and interpretation of that experience will no doubt differ. My advise to Robocop is that he - or she I suppose - needs to save to keep that option only for his or her spouse. I assumed, with a moniker of "Robocop", that the OP was a man. I don't know too many women who like that movie, but YMMV.
Institutions matter
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