Retirement. The 800-pound gorilla in the personal finance room. You can’t talk about personal finance without talking about retirement. And you can’t talk about retirement without talking about how much you are saving for it.
Save 10% for BASICS, 15% for COMFORT, 20% to ESCAPE. This rule of thumb works pretty well if you start to save for retirement by your early 30s. Saving at least 10% of your income ensures you won’t be eating pet food. Fifteen percent should get you a more comfortable living, while 20% gives you a shot at an early retirement (and yes, you get to count employer contributions as part of your percentage). Wait just a decade to start, though, and you’ll need 15% for basics and 20% for comfort; an early retirement may not be in the cards.
Wow! Those are some pretty big figures… We Americans aren’t exactly known as big savers, and I’d bet that most of us are not anywhere saving near the level necessary to escape into comfort. Recently, some experts are telling folks that they are saving too much money for retirement – after all, we might downsize our homes, we don’t need to buy business wear, maybe we can become a one-car or even no-car household. But I might argue that even 20% is not enough. Even though all these arguments make sense, I never feel that I am saving too much for retirement.
Thanks to my mother’s medical background and her penchant for sharing stories of folks in long-term care or suffering from catastrophic illnesses, I can imagine any NUMBER of ways to go. And it’s never pretty. Or cheap. (Well, if you die instantly it’s not too expensive. But most of us don’t get to choose). With the disappearance of pensions, diminishing Social Security payments, and increasing cost of health care, I wonder if fairly soon the new rule will be “15% for basics, 20% for comfort, and 30% to escape.”
In related news, I just maxed out my 2011 Roth IRA. Which makes this the first (and last, at least for a few years) year I have contributed the maximum to my 401K and IRA. Looking back at my past retirement saving history…
In 2006, I saved…. 39%
In 2007, I saved…. 42%
In 2008, I saved…. 8%
In 2009, I saved…. 17%
In 2010, I saved…. 39%
In 2011, I saved…. 24%
I maxed out a Roth IRA in 2006 with my first “real” paycheck. Since then, my savings rate has bounced up and down – in 2008, I wasn’t able to contribute to a 401K, and in 2009, I was laid off, but retirement saving has always been a top priority of mine. Last year I saved the most money I have to date, and this year I will be able to save around $2,500 more. If you count employer contributions, CB and I are both saving around 24% of our gross salary this year. Here’s hoping that we will have the option to escape to San Diego with mai tai’s when we are retired! For 2012, I have already submitted my paperwork for open-enrollment period at work. I’ll be saving 25% of my gross salary and CB will be putting down 10%, with an additional 10% employer contribution. Then we will max out our Roth IRAs.
On a side note, I like to evaluate my savings progress based on our total, unadjusted gross income. 401Ks are pre-tax, Roth IRAs and Roth 401Ks are post-tax, SEP IRAs are pre-tax but it’s based on 1099 income, etc., so I find it much easier to just calculate everything on the gross income. Otherwise it gets a little messy when you have to adjust for tax deductions. Every country has its own retirement system, for example Australians have the chance to setup a self managed super fund (SMSF), which gives people the freedom to own & control their retirement (superannuation) investments. There are multiple financial institutions, such as AMP who will not only set you up but give advice when you please.