Ah.. balance. That holy grail most personal finance bloggers (including this one) searches for. Saving for retirement is one of my biggest financial priorities, but I know that I have to balance saving for the far off future with saving for the near-term future. Prepare for tomorrow but enjoy life today, right? I recently wrote about my dilemma: should drastically decrease my cash for near-term expenses by contributing the full $16,500 to my 401K, or should I opt for more cash on hand?
After considering the should I max out my 401K? question (thank you for all your helpful insights), I’ve decided to compromise, and contribute $15,000. I’ll leave the maxing out for 2011.
I admit, I was a little worried about the impact the $2,500 monthly contributions ($2,500 x 6 months = $15,000) would have on my net cash flow. So in comes the Paycheck City calculator. After I crunched the numbers, I saw that if I am careful with budgeting, I should be able to contribute the $15,000 for the rest of this year. It also helps that I will have rent that’s $200 cheaper starting in a month. 
I can theoretically afford to contribute $16,500, but that would be cutting things very tight.
Of course I want to save as much as I can in the 401K, but I wasn’t quite comfortable with putting away the entire $16,500 this year. A few things tilted me towards that decision:
- My car seems okay, but it’s nearing 230,000 miles. Though I hope it lasts me another 2 years, I have to be prepared to get a new / new-to-me car at a moment’s notice. Having to purchase a new vehicle will knock about $10,000 of my cash savings.
- I want to save $30,000 for graduate school. My mother had previously indicated to me that she will put $30,000 of her inheritance from my grandmother towards my graduate school costs. That makes $60,000, or roughly 1 year of tuition + living expenses at a full-time MBA program. My goal is to only take out loans for the second year. If I were to need a new car, I will need to rebuild that cash cushion.
- Enjoying life today is also important to me. I want to eat! and travel! And eat while traveling… and all that takes cash. I don’t want to end up so cash-poor for the rest of the year that I will be taking money out of my savings.
Near-term goals have to be balanced against retirement goals, so this is the compromise. Including $5,000 in Roth IRA, I’ll be able to put away $20,000 for 2010. Considering how I spent a quarter of the year making barely $2,000 a month because I was freelancing / collecting unemployment, I think I am doing OK. Next year I will plan on putting away the maximums allowed under 401K and Roth IRA.
How do you balance retirement goals with big-ticket short-term goals such as travel, graduate school, down payment, car purchases, weddings, etc?
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I think its totally possible to live a good life while saving for retirement. You hear those stories on the news where some nice 85 year old lady recently died, the story is she usually lived very frugally, saved and invested and died with $4 million in the bank. I don't want to judge because perhaps they had simple desires and that's fine. But I do want to go on yearly vacations, shop without the need to hit the sales rack, and go out on nice dinners with my bf on the weekends.
Saving shouldn't have to mean deprivation. Some lady wrote her story about her frugal grandmother who was very frugal but wouldn't allow herself to have luxuries now and then, she said that had her grandmother given herself the permission to enjoy herself once in awhile she would have been better off. Here's the story.
http://www.stretcher.com/stories/03/03nov17c.cfm
I definitely want to have a great nest egg for when I'm a senior, but I don't t need to die with $10 million in my bank account. The NY Times had an article a couple of years ago that said some people were saving too much for retirement. Sometimes I think some people want to die with the biggest nest egg that they can. I don't know, I don't want to be too judgmental, but yea I guess my point is its okay to enjoy yourself as you save for the future.
Anyway I think you're making good choices, its nice to see someone else in their 20s, take retirement seriously. So many people say "oh my kids will take care of that" but you know adult children get into debt and can't help mom and dad, some kids turn out horribly its really sad and won't help their parents, there are all sorts of reasons why children can't always help their folks.
I once got accused of saying my portfolio was more important than a child, its ridiculous the things people say. I don't want kids but I have heard stories in financial magazines and blogs of people who had children and retired with very nice nest eggs and I admired that.
Anyway, Good luck to you =)
Thank you for that kind comment. I remember that NY Times article you mentioned – yes it's so hard (er, impossible) to know exactly how much you will need in retirement. I guess all we can do is the best we can.
For us, retirement savings come first. Everything else is second. But we got married later in life. We already had the houses, graduate degrees, etc. If we want more money to travel (or other fun stuff), then we have to figure out what to cut back on.
To be honest, I really HATE saving for retirement. I just feel like no matter how much I save (which isn't much and it's only about to get worse…I'm favoring paying down debt right now, so retirement is taking a back seat) it will never be enough. And, I also feel like the actual amount of money I will actually have when it comes time to retire is, to some degree, out of my hands. So much depends on the markets and the economy at large.
So, for right now, retirement savings is a low priority for me as I'm paying off my debts and building a healthier cash savings fund. When I have both of those goals accomplished, I'll amp up my retirement savings.
I 100% agree that so much depends on the market – the first few years before, during, and after retirement are especially crucial to a portfolio. If a retiree retires during a recession (i.e. everyone who retired in 2008 and 2009), they may never recover from the withdrawals from a declining portfolio. On the other hand, I figured that's not something I have control over, and if I'm unlucky enough that my portfolio is going to take a 20% hit at retirement, I'd rather it be 20% of $5 million than 20% of $500,000.
It sounds like your just guessing on how much you have to put into your 401k (called super annuation in australia). I went through the same thing. The most important thing to do is to sit down and work out what you actually want to "earn" in retirement. Is it what your on now? Do you want to be on more? (remember you probably won't have accomodation costs because you'll have paid your house off soo you can factor that in) Then adjust for inflation (average over the last 50 years), then divide it by the government bond rate (average over the last 50 years). This will give you conservative balance that you need to retire. From there you can use investment calculators to identify how much you need to put away to retire.
Look I put together a spread sheet to help you work it out. Is essentially agree with nyx, you need to know how much you need so you can have as much possible along the way. you can get it here http://www.debtmediators.com.au/wp-content/upload...
That's awesome your car has over 200K miles on it! Sounds like you are doing the right thing and have your head on straight.
15K/yr is pretty darn good if you ask me.
Best,
Sam