Crossing a milestone

You know what’s really great about getting married? Getting to calculate your combined retirement savings! When we added together our 401K and IRA balances, we saw that we have crossed the $100,000 mark with a few thousand dollars to spare. As a couple in our twenties (I am 26 and CB is 25), I think we are at a good place in terms of retirement

Saving consistently more than beating the market

I can’t say that I’ve always made the best decisions when it comes to money, either on earning or spending, but one of the things I’ve done right is to start saving for retirement with the very first real paycheck I got. CB also started saving in earnest once he got a full-time job with benefits. (I’ll take some credit in encouraging him to start a Roth IRA). He is on track to max out his Roth IRA for the 3rd year straight this year.

Our real returns are nothing to boast about. We invest in mostly index funds, with a few lower-cost mutual funds, so you can imagine that we tied our fortunes with the broader market itself. Even though I started investing at the HEIGHT of the market – late 2006, can I pick ‘em or what? – our account balances have been growing.

How? We have been consistent. As our annual household gross income increased (from $30,000 when I first graduated to ~$130,000 this year), we kept saving. When we went through bouts of part-time work and underemployment in 2008 and 2009, we kept saving. As I made money from this blog and when CB got overtime, we kept saving. We started with $4,000 in 2006, and then saved every single year after that. In 2010, including employer contributions, we had $30,000 put away. This year, we’ll be on track to save the same amount.

Most of our $100,000 is from our savings and employer contributions. Hopefully as our portfolio balances grow and time goes on compounding interest will start shouldering some of its load!

Looking forward

By the time we reach our 30s, I would like to have $150,000 or even – if we are really disciplined and lucky – $200,000 in retirement. Given that we will be in graduate school for a couple of years, I expect retirement savings will dip a little (no more 401Ks!). But I am determined to continue to at least max out our Roth IRAs even through our graduate school years.

I am grateful that we were in a position to save what we saved, and hope we can keep the momentum going.

image credit: wikipedia.org

What does a retirement investment portfolio and mystery meat have in common?

I’m not sure what animal products mystery meat is made of (and not sure I want to know…), and I wasn’t clear on what investments make up my retirement portfolio. When I first started investing in 2006, I had one retirement vehicle – a Roth IRA – and one fund in that vehicle – a 2050 Target Retirement Fund.

Since then, I’ve added different funds. With a 401K (stock and bond funds via American Funds), a Roth IRA (international stock index, U.S. stock index, U.S. bond fund), a Rollover IRA (international stock index and U.S. stock index), and a SEP IRA (Vanguard STAR Fund), it’s a little confusing to me what my portfolio actually composes of. Do I have enough stocks? Bonds? What is the split between my international and domestic equities? What sectors am I invested in? Who knows!

Figuring out what’s in my portfolio

Fortunately, Morningstar has an easy and free tool made for folks like me. It’s called the Instant X-Ray, which, as the name implies, “x-rays” your portfolio to show you what’s really in there. All I had to do was to input the ticker symbols of my funds and my current balance, and voila! The website spits out a set of handy graphs and charts with details on different characteristic of my funds (stock vs bond, geography, growth vs. value, etc.)

This tool would be even more helpful for folks who have portfolios of greater complexity. Say you have individual stock funds, or Treasuries, or are part of a couple with several funds between the two partners. The Instant X-Ray would help you see what you actually have in your portfolio.

Armed with this information, I can re-balance to my desired asset allocation. I thought I was at 80% stock / 20% bond mix, but as you can see, I am actually at 70% stock / 30% bond. Now, when I make new Roth IRA contributions, I only contribute to my stock funds. That way I can slowly bring up my equities portion until I read the 80/20 split. If I didn’t have the Instant X-Ray, I probably would have gone on dividing my contributions between stock and bonds.

On the whole, I am comfortable with my investments. Nothing too exotic, nothing wildly out of sync with the broader market (which would make sense as I invest mostly in index funds). I plan on checking my investments every 12 months or so so I can make sure they are appropriately balanced. As my portfolio grows, I plan to add in a REIT fund and a small cap fund.

Do you know what’s in your retirement portfolio? Did your findings surprise you?

Retirement planning is as much an art as a science.  One of the most common questions is: How am I doing?  No one can tell you for sure, but one nifty little website tries to give you a sense of your progress compared to a predefined index. This website, the Pudding Index, tries to answer the question: when you retire, what percentage of your income will your retirement accounts provide?

The Pudding Index does so by comparing you to a Benchmark Account (represented by the score 100). The Benchmark Account for women means that you are on track to save 55% of current income by age 65.  For men, it means that you are on track to save 65% of current income.  If you score above a 100, it means that you are ahead of the 55% (or 65%, if you are a man) of current income. If you score below a 100, you are lagging behind the index. The Benchmark Account for women is lower because women tend to live longer – another reason we ladies need to save early and save often.  The Benchmark assumes that your investments will grow at 7% a year and that you will contribute 9% of pay to retirement every year.  It also adjusts for inflation in terms of pay.

The Pudding Index calculator requires four simple inputs: (1) birth date, (2) gender, (3) current income, (4) defined contribution assets (401Ks and IRAs for most people). Then the Pudding Calculator spits out a single number to show how you compare against the index.

This Index doesn’t take into account cash savings, possible Social Security benefits, government / private pensions, or other assets (such as real estate, inheritances, business interests) that can become retirement assets.  It’s not a perfect measure (and one doesn’t exist), but it is a good way to check your progress against an Index based on just what you have saved in defined contributions accounts.

Most retirement experts I’ve read recommend 70% to 90% of your current income.  When I input my factors, I received a score above 100. The website says that if my account’s performance were to match the Benchmark Account’s (i.e. every year I save 9% of pay and my investments grow at 7%), my retirement assets can replace about 65% of my income at 65.  Given that retirement is always a moving target, I prefer to err on the side of saving too much rather than too little. I am glad to know that I’m on the right track, though.

Feel free to share your scores in the comments. Did this calculator teach you something new? Or did it confirm what you’ve already known?

image source: puddingindex.com

Perhaps the title is a little misleading – saving for retirement is by no means my only financial priority, nor am I dismissive of the fact that I might never reach retirement (only the guy upstairs knows for sure, right?). But given the choice between saving for retirement in 4o1Ks and IRAs, and saving money in taxable investment accounts or cash accounts, I will almost always choose to save more for retirement.

Even though money is fungible (i.e. you can use money you’ve saved for X and spend it on Y – there’s no difference. The value of that money is still the same), the psychological impact of retirement savings and everything else is very different.

Because retirement is so far away for me, a twenty something – it’s easy and sometimes tempting to put it off. A 25-year-old may tell himself, “I can start saving when I’m 30, right now I am paying student loans.” A 35-year-old might say, “I’ll start after I’m 40, right now I have to save for a down payment.”

Every time you save for retirement, you’re making a choice to give up something now (a nicer car, a fancier apartment, a vacation to Paris) for an uncertain payoff decades down the road. That’s exactly why I stretch myself to put more in retirement. Because if I save for retirement first, the hard part would be done.

As an example, let’s say in a year I can comfortably save $10,000. I want to start saving for $40,000 down payment in 4 years. I could put the $10,000 towards the down payment, then try to scrape together some savings for the Roth IRA. Or I can put $5,000 in retirement, $5,000 in the down payment, then try really hard to save another $5,000 for the down payment.

If I really want a house, it would be much easier to forgo meals out and cute clothes if I see that the payoff is an extra $5,000 in a down payment. I might be able to push myself and save $15,000 instead. That payoff is more immediate than a retirement 40 years away. On the other hand, if I save for the down payment first, I might  not be motivated enough to put another $5,000 in retirement funds. Saving for retirement is my biggest financial priority, because it’s always difficult to make immediate sacrifices for a far-off reward. But it must be done.

image source: i.village.com