Trying to fund retirement in late 20s.

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B4Xt3r
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Trying to fund retirement in late 20s.

Post by B4Xt3r » Mon Dec 05, 2016 10:48 am

Hi All,

I've got a question that has a side of personal preference to it. My wife and I are currently 28 and recently now debt free, and we are thinking through saving for retirement for the first time. What are your thoughts about trying to "fund" retirement now by saving ~150k in ~4-5 years, and then starting "real life" (i.e. house downpayment savings, saving for replacement vehicles, saving for having kids etc - this is of course the personal preference question). My thoughts were that if we had 150k and left it untouched for 37 years at 7%, we would have ~1.9 M at age 70, which would generate 75k per year at the 4% withdrawal rate. There is no other time in my life where I can fund retirement for 150k is my thought, and therefore other ways to use money have a huge opportunity cost because we are reasonably young. Any thoughts from the bogleheads?

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steadyeddy
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Re: Trying to fund retirement in late 20s.

Post by steadyeddy » Mon Dec 05, 2016 11:22 am

I think your plan to save as much as you can while you are young is a good one.

My only caution is that if inflation averages 3% over the next 37 years, your $75k income 37 years from now will only be worth about $25k in today's dollars. So you might need to save more than you think over the course of your lifetime.

b42
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Re: Trying to fund retirement in late 20s.

Post by b42 » Mon Dec 05, 2016 11:23 am

A few thoughts on this:

The first is the 7% return assumption. This may be right, or it could end up way off since returns don't usually follow a pattern like 7 7 7 7 every year (also, how would this money be invested?). If you only get a 5% return, you are only looking at 912k. Predicting returns up to 40 years in the future is almost impossible.

Also you are looking at the withdraw amount in today's dollars. With 2% inflation over the entire 37 years, 75k erodes to about $36k in today's dollars.

You are right that today's savings have the most time to grow, so saving as much as you can is ideal. However you'll likely need to save more than $150k in contributions. What most would recommend is do a little of everything over time. First you want to try and max out the tax-advantaged accounts that you have available (IRA, 401k, 403b, etc.). Starting up an emergency fund as well will help with unexpected expenses (car breakdown, kids earlier than planned).

dsmil
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Re: Trying to fund retirement in late 20s.

Post by dsmil » Mon Dec 05, 2016 11:23 am

There are a couple of options here. If you are fine delaying those other goals, than throwing everything at retirement is a great idea because the more you save when you are young, the less you have to save in total. Maybe this means saving 30% of your income for a few years and then saving 12% after that. Or maybe you're able to save for those other goals immediately, while saving 15% for retirement.

In "Your Money Ratios", which is a nice read, to retire at 65 with 80% income replacement, the value of your investments vs. your income should be at least 60% at age 30, and you should be saving 12% of gross income for retirement. At age 35, your investments to income ratios should be 140%.

Saving solely for retirement and "catching up" is a great strategy, but if you'd like to hit those other goals earlier and still find yourself with a nice retirement savings rate, than you should be fine.

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Re: Trying to fund retirement in late 20s.

Post by mhalley » Mon Dec 05, 2016 12:10 pm

Front loading savings now is a great idea, but I would never be comfortable stopping saving for retirement. There are so many risks involved, ranging from sequence of returns list as you enter retirement, prolonged underperformance, Health, rapant inflation, Job loss, etc. The catch up plan is fine and jump starting your retirement will be great, but I would continue to save 15% of your income after the initial front load. If things go poorly, then you will still be able to retire at a reasonable age. If things go great, then you might be able to retire much earlier than you expected.
On a personal note, even Dave Ramsey doesn't recommend putting off starting a family due to finances, so if you want a family I would start it on a personal, not financial basis. Fertility does decline as you age, (esp after 35) and that can be a huge expense if there are problems.

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bligh
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Re: Trying to fund retirement in late 20s.

Post by bligh » Mon Dec 05, 2016 12:12 pm

It is a good plan. But just like the other posters I would caution against considering yourself to be done after the 150K .I think the 150K will lay your retirement plans on a rock solid foundation, but you are still going to build on top of it. Perhaps not as aggressively, but make sure you do not plan to stop putting aside a little into retirement every year even once "real life" kicks in. Make sure you differentiate between lifestyle inflation and "real life".

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Re: Trying to fund retirement in late 20s.

Post by Grt2bOutdoors » Mon Dec 05, 2016 12:34 pm

I concur with the others, while $150K is a good base, it will most likely not be enough to fund a retirement unless you are planning on a very frugal one.
Too many events can alter your best guessestimate of future value - sequence risk, inflation risk, interest rate risk, policy risk - ie. the laws in place today may be very different when you plan on retiring, market risk, etc. Don't bank on 7% either, you could find yourself earning half of that.
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Watty
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Re: Trying to fund retirement in late 20s.

Post by Watty » Mon Dec 05, 2016 12:42 pm

There are severalthings you are missing in your plan.

1) Either or both of you will likely have jobs with a 401k match and you will want to contribute at least enough to the 401k to get the match. For example before I retired I had a 401k where the company would match half of a 6% contribution, which is 3%. That match is too good to pass up so combined I was always adding 9% of my income to my 401k each year.

2) You mentioned having $150K in five years and having it invested for 37 years. In five years you will be 32 so you will only have 33 years until you are 65, not 37.

3) It varies a lot but saving 15% of your income each year is often mentioned as being a good retirement savings goal. If you do this then you get used to living on 85% of your income. For example if you make $100K you would live on $85k. If you are not saving that 15% then you would get used to living with a higher standard of living of $100K. That will make the amount of money needed to maintain your standard of living in retirement a lot higher.

4) By spreading your savings out over several decades you will get the benefit of dollar cost averaging. If you save all that money over the next five years then you could get unlucky and have poor investing returns over the next five or ten years. Your match would look much different if the markets are flat for 7 years and only have around $150K at the age of 40.

5) There is no one right answer as to when, or if, to have kids but if you wait until you are in your mid 30's to start trying for financial reasons it might be much more difficult. Paying for fertility treatments or adoption could eat up a lot of your savings. You can search the boards for prior threads about adoption and IVF costs. Depending on when you have kids you may be facing retirement and college costs at the same time.


A better approach would be to focus on building up your net worth quickly to become financially secure regardless of you put it into retirement savings or something else.

Money is"fungible" which is a fancy way of saying that if you have $1,000 in stock, cash, or home equity that it is all basically the same. Not that I would recommend it but if you live in a low cost area then the identical couple that lives next door could decide to buy a $150K house and have it paid off in five years. By then you might have $150K in retirement savings but they would have a $150K in home equity in a paid off house. Your net worth would basically be the same.

There is no way of know which choice would be better but just like in other aspects of investing diversification has a lot of advantages. Having $75K in savings and $75k in home equity with a small mortgage might be a better choice because it would be more diversified.

One thing that I have do is to have a simple spreadsheet where I calculate my net worth each year on January 1st. I just list all my accounts, debts, and major assets like my house and cars. It takes less than a half hour to look all these up but then I can see how my net worth has changed over the years. I also have subtotals for things like retirement savings where I can see the trends for that.

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B4Xt3r
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Re: Trying to fund retirement in late 20s.

Post by B4Xt3r » Fri Dec 09, 2016 8:18 am

Hi All,

Apologies for not responding to the individual comments as of right now, I got busy with work. I did an alternative calculation, which was in response to this quote.
If you are fine delaying those other goals, than throwing everything at retirement is a great idea because the more you save when you are young, the less you have to save in total.
To get the same retirement principal as 150k invested now, and starting from 0 savings, I would have to contribute ~850 per month for the next 40 years. 850*40*12 is ~400k. That is the power of saving early, retirement is basically a half off sale if you get it early 8-)

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Ethelred
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Re: Trying to fund retirement in late 20s.

Post by Ethelred » Fri Dec 09, 2016 10:04 am

Starting to fund retirement in your 20s is a great idea, and far too few people do so. However, I would add a couple of further cautions to the other comments already made:

- Compound interest means that the earlier you save a dollar, the more valuable it is for retirement. However, most people's salaries increase with age and experience, so that the amount you can save should increase.
- This is perhaps a personal viewpoint, but don't wait to do the big things in life, be that owning a house, having children, travel or whatever else. Instead, work out how to do them for less money. That way, you can both have fun, and set yourself up for low expenses, which is just as important to a comfortable retirement as saving towards it.

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Re: Trying to fund retirement in late 20s.

Post by Engineer250 » Fri Dec 09, 2016 10:12 am

Everything's a tradeoff.

How old is your wife? Getting pregnant at 34 could be a lot harder than at 30. I wouldn't put frontloading retirement savings as a good reason to delay having kids.

If you delay buying a house for 10 years, you're renting meanwhile and who knows what will happen to the market. You might be able to rent cheaply and then there might be another crash right at the time you have your downpayment saved up and your timing could be perfect. Or what's affordable in 2-3 years from now might become out of your reach in 10. Or one of you might get laid off. Having a house fund is easier to tap into than your 401ks.

I agree with the person above however that I don't think I could ever "stop" saving for retirement entirely.
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MI_bogle
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Re: Trying to fund retirement in late 20s.

Post by MI_bogle » Fri Dec 09, 2016 10:29 am

kehyler wrote:Hi All,

I've got a question that has a side of personal preference to it. My wife and I are currently 28 and recently now debt free, and we are thinking through saving for retirement for the first time. What are your thoughts about trying to "fund" retirement now by saving ~150k in ~4-5 years, and then starting "real life" (i.e. house downpayment savings, saving for replacement vehicles, saving for having kids etc - this is of course the personal preference question). My thoughts were that if we had 150k and left it untouched for 37 years at 7%, we would have ~1.9 M at age 70, which would generate 75k per year at the 4% withdrawal rate. There is no other time in my life where I can fund retirement for 150k is my thought, and therefore other ways to use money have a huge opportunity cost because we are reasonably young. Any thoughts from the bogleheads?

A few thoughts:

Starting to save for retirement in your 20s is great

One of the benefits of saving a decent amount of your income (15-25%, say) is that you are continually investing, through market ups and downs. But probably more importantly, it is reducing your lifestyle inflation while at the same time adding to your future income.

If you "get retirement saving out of the way" it seems likely that it would be much easier to inflate your lifestyle if you were not contributing anything to retirement, thereby setting yourself up for needing more income when you retire

UndeadHead
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Re: Trying to fund retirement in late 20s.

Post by UndeadHead » Fri Dec 09, 2016 11:14 am

I think there are a lot of great comments here that you should evaluate. I think your plan is sound for the next 4-5 years, so if you both support it, I say go forward with it. I believe its good to review your plan and adjust it based on where you are at different set points in your life. Use the 4-5 years ~150K timeframe as reevaluation point. If you get to the 150K earlier or you hit the 5 year mark, evaluate how it is working for you. Maybe at that point you will decide to never invest another penny in your future, or maybe at 33 you feel differently. I would not sweat that too much at 28, given your current plan. Also, invest in reading a boglehead book and exploring the wiki and chat. Try to avoid investing with your buddy as so many us have, its just too costly and with a 50 years horizon they just can't beat diversified indexing. Good luck.

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Re: Trying to fund retirement in late 20s.

Post by surfstar » Fri Dec 09, 2016 11:19 am

Save like heck while you can.

You can always change your goals, as you go. You can tap into Roth contributions and $10k of earnings, if needed, for a 1st home. Some plans allow 401k loans, too.

It doesn't have to be either/or. It is a great idea to front-load as much as possible, but remember that you'll still have the flexibility if you need it. Maybe you want kids/home earlier than you thought. No biggie. You can be just fine with a 10% savings rate in your 30s, if you get the head-start you're planning on now.

There's definitely no reason to not save as much as possible, when you are able to.
:beer

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B4Xt3r
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Re: Trying to fund retirement in late 20s.

Post by B4Xt3r » Sat Dec 10, 2016 12:36 pm

steadyeddy wrote:I think your plan to save as much as you can while you are young is a good one.

My only caution is that if inflation averages 3% over the next 37 years, your $75k income 37 years from now will only be worth about $25k in today's dollars. So you might need to save more than you think over the course of your lifetime.
Yeah, that is a fair point.

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B4Xt3r
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Re: Trying to fund retirement in late 20s.

Post by B4Xt3r » Sat Dec 10, 2016 12:43 pm

mhalley wrote:Front loading savings now is a great idea, but I would never be comfortable stopping saving for retirement. There are so many risks involved, ranging from sequence of returns list as you enter retirement, prolonged underperformance, Health, rapant inflation, Job loss, etc. The catch up plan is fine and jump starting your retirement will be great, but I would continue to save 15% of your income after the initial front load. If things go poorly, then you will still be able to retire at a reasonable age. If things go great, then you might be able to retire much earlier than you expected.
On a personal note, even Dave Ramsey doesn't recommend putting off starting a family due to finances, so if you want a family I would start it on a personal, not financial basis. Fertility does decline as you age, (esp after 35) and that can be a huge expense if there are problems.

Yeah, these are points well taken. I guess probably shouldn't have used the term "funded" because I have given off the impression that it was 150k and stop that I was proposing. I suppose that I should have said is that I was proposing saving a "substantial" amount to give me a "significant" head-start, in order to allow me to have some more flexibility to spend on other expenses when they come up w/o feeling as though I'm falling behind on retirement savings.

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Re: Trying to fund retirement in late 20s.

Post by B4Xt3r » Sat Dec 10, 2016 12:43 pm

bligh wrote:It is a good plan. But just like the other posters I would caution against considering yourself to be done after the 150K .I think the 150K will lay your retirement plans on a rock solid foundation, but you are still going to build on top of it. Perhaps not as aggressively, but make sure you do not plan to stop putting aside a little into retirement every year even once "real life" kicks in. Make sure you differentiate between lifestyle inflation and "real life".
Yeah, point taken. This is more along the lines of what I was proposing, but the language I used was a bit strong.

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B4Xt3r
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Re: Trying to fund retirement in late 20s.

Post by B4Xt3r » Sat Dec 10, 2016 12:49 pm

Watty wrote:There are severalthings you are missing in your plan.

1) Either or both of you will likely have jobs with a 401k match and you will want to contribute at least enough to the 401k to get the match. For example before I retired I had a 401k where the company would match half of a 6% contribution, which is 3%. That match is too good to pass up so combined I was always adding 9% of my income to my 401k each year.
Yeah, we would still save enough to get match, free money is good by me :)
Watty wrote:There are severalthings you are missing in your plan.
4) By spreading your savings out over several decades you will get the benefit of dollar cost averaging. If you save all that money over the next five years then you could get unlucky and have poor investing returns over the next five or ten years. Your match would look much different if the markets are flat for 7 years and only have around $150K at the age of 40.
I'm not convinced DCA is a significant benefit, vanguard even posted something about how to invest a lump-sum a while back, and I think that they said on average it was better to just put it in all at once because markets go up in value on average.
Watty wrote: Money is"fungible" which is a fancy way of saying that if you have $1,000 in stock, cash, or home equity that it is all basically the same. Not that I would recommend it but if you live in a low cost area then the identical couple that lives next door could decide to buy a $150K house and have it paid off in five years. By then you might have $150K in retirement savings but they would have a $150K in home equity in a paid off house. Your net worth would basically be the same.

There is no way of know which choice would be better but just like in other aspects of investing diversification has a lot of advantages. Having $75K in savings and $75k in home equity with a small mortgage might be a better choice because it would be more diversified.
I'm not really on-board with this one yet either. 1,000k in cash is a depreciating asset, 1,000k in stock is an appreciating asset. I don't consider appreciating assets the same as depreciating.

I appreciate your responses, don't take my comments as attempting to be argumentative.

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B4Xt3r
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Re: Trying to fund retirement in late 20s.

Post by B4Xt3r » Sat Dec 10, 2016 12:52 pm

surfstar wrote:Save like heck while you can.

You can always change your goals, as you go. You can tap into Roth contributions and $10k of earnings, if needed, for a 1st home. Some plans allow 401k loans, too.

It doesn't have to be either/or. It is a great idea to front-load as much as possible, but remember that you'll still have the flexibility if you need it. Maybe you want kids/home earlier than you thought. No biggie. You can be just fine with a 10% savings rate in your 30s, if you get the head-start you're planning on now.

There's definitely no reason to not save as much as possible, when you are able to.
:beer
Yeah, this is actually part of the plan. Roth contributions for the house downpayment. We'll also roll her Roth 401(k) into her Roth IRA at some point in the near future too.

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Re: Trying to fund retirement in late 20s.

Post by Geist » Tue Dec 13, 2016 12:11 am

kehyler wrote:
Watty wrote:There are severalthings you are missing in your plan.
4) By spreading your savings out over several decades you will get the benefit of dollar cost averaging. If you save all that money over the next five years then you could get unlucky and have poor investing returns over the next five or ten years. Your match would look much different if the markets are flat for 7 years and only have around $150K at the age of 40.
I'm not convinced DCA is a significant benefit, vanguard even posted something about how to invest a lump-sum a while back, and I think that they said on average it was better to just put it in all at once because markets go up in value on average.
You missed an important aspect of that advice from Vanguard -- a lump sum is preferable to DCA if you have the money right now. That way, you aren't sitting on $100k in a bank account earning peanuts waiting to DCA it into the market over the next 3 years. But if you don't have a large chunk of money available upfront, DCA is your best option. Bottom line is that you want to invest your money when you have it available to invest.

To your OP, I would say that going full-bore with retirement accounts right now is a great option, but I'd suggest continuing to save toward retirement, even if just maxing out Roth IRAs & earning your company match, so that you can build in some flexibility to your plan. You might be able to make it work without continuing to add money to your retirement accounts every year, but retirement planning will be a lot easier with some wiggle room. The more you can save over time, the more contingencies that you'll be able to deal with when the time comes.

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Re: Trying to fund retirement in late 20s.

Post by sdsailing » Tue Dec 13, 2016 12:34 am

Money is fungible. Save as much as you can. The retirement "bucket" is somewhat artificial. If you are that flexible, it would be wise to plan to buy a house during a housing "dip", i.e. when there are many foreclosures. If you are in an expensive RE market, that can accelerate you progress significantly.

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Re: Trying to fund retirement in late 20s.

Post by Portfolio7 » Tue Dec 13, 2016 3:32 am

We started saving when I was 28 and dw was 26. In 5 years of saving (and returns) we accumulated $115K. At 2.0% inflation over the 16 intervening years, that is not too different from your $150K, +/- depending on whether you are including returns in your $150K.

We continued saving 15% in 401ks for another ten years, roughly, and then let it drop to about 10% due to real estate and business investments. I'm almost 50 now & I've run 30 or 40 views of our retirement income from simple to complex, and net is, if we can make it to about age 60 employed we should be in very good shape for a well funded retirement with enough extra spending money to pursue any reasonable interests we choose.

Note that our idea of a desirable annual income has increased significantly in 20 odd years. When we started, we were making well under $100K family income annually, and were still living high on the hog. Now we earn twice what we used to, and our finances feel much tighter than back then.

The twist at the end. Both of our jobs are in jeopardy. Mine constantly, working for a F500 firm that consistently reduces US resources each year. My wife's from her physical ailments which may impede her ability to continue work she loves. My pension has been slashed by 90% over the years, and it was all legal. We'll manage, but the odds are not as much in our favor as we anticipated. In hindsight, I'd have saved more aggressively. Note that based on age, income, and net worth, we're in the most aggressive few percent of US savers.
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Badger007
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Re: Trying to fund retirement in late 20s.

Post by Badger007 » Tue Dec 13, 2016 5:59 am

Kick starting your retirement savings will be very helpful. However, I would absolutely continue to utilize (maximize if you are able) tax advantaged space until your retirement - aligned with most of the comments I read.
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Re: Trying to fund retirement in late 20s.

Post by ScroogeMcDuck » Tue Dec 13, 2016 11:07 am

Saving a lot early on is always a good plan.

We're 32 and planning something similar. We have 25x annual expenses saved and are going to drop down to one income in the coming months and likely stop adding to our savings.

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