Do you know how much you need in retirement saving every year to get to the comfortable level? If you do a calculation, you may come to a surprise that you are probably over saving. Let me explain my calculation. Let’s assume that my salary is $100,000 per year. I contribute $10,000 per year to employer 401(k) plan. Let’s also assume that I get employer match of up to 5% of my gross income, which means the absolute amount of $5,000 per year. In addition, I have an IRA account where I max out with $5,000 per year.
My annual retirement contribution comes to be $20,000, combining contribution to 401(k), IRA and company match. In addition to that, I get an annual profit-sharing contribution deposited to my 401(k) accounts. this amount depends on economy and company performance. For calculation shake, let’s consider the average of last 3 years, which is slightly more than $2,000 per year.
So with imaginary salary, I am saving $22,000 per year towards retirement.
Is my retirement saving excessive?
When I retire 30 years from now (I am not looking at early retirement), at 7% annual rate (this is grossly accepted long-term stock market return rate) the amount in my retirement saving accounts should be over $2.8M. I took in to consideration my current saving as principal at hand and 3% year-on-year salary growth.
Is this amount plenty to have? If it’s a problem of plenty, this seems to be a happy problem to have. I should be happy about it, isn’t it?
But, at the minimum possible age that I can withdraw from retirement savings without paying any penalty, I have to pay more taxes than I planned before I ever would.
Similarly for you, if you have a mountain of cash in your retirement saving, you’ll be paying more taxes upon withdrawal than you ever would have paid had you planned more carefully.
Now, another aspect of it. If you are planning to retire early. Or, if you are planning to quit your boring day job, you have your huge saving locked up in retirement account. Unless you pay penalty, you don’t have access to this fund.
For me, it all depends on how the work situation evolve. How I cope with office politics and how I keep motivated toward growth and career advancement. If things don’t turn out well in next 5 -6 years, I may start thinking about alternatives.
I am not planning to live an ordinary life of 9 -5 office goer either. So, there is a possibility that I may look in to an early retirement in future. Am I being prudent in socking up $22,000 a year in my retirement fund which I can only lay a hand in my mid 60′s?
I can use my Roth IRA contributions for a few years, provided I convert traditional IRA to Roth prior to that. Since I can withdraw contributions without penalty. Still, it won’t be much. Bulk of my contribution goes to 401(k). Converting that to Roth is going to cost me tax money. I can’t convert now while I am working.
My other saving goals
As I think it through further, I question myself, is my retirement saving rate taking the money away from my other saving goals. I talked about prioritizing saving goals before and as per my goal priority list, I completed 1st, the emergency fund. On-target for 2nd, retirement saving. We don’t have any debt either, except a 0% car loan, which I don’t consider a debt as we are not paying any interest on the outstanding balance.
That leaves us with saving for home, raising a kid and provide for his/her college education. I don’t think we are doing bad in terms of saving. We save almost 50% of my salary.
SMB has now started looking for a job. Although we are not hoping to get a high paying job for her as she doesn’t have any earlier work experience, and has a 7 year gap between college and now. Still, a decent paying job would be enough. She has two masters degree on her belt, not looking for minimum wage either. If we can live off of her salary alone, then we can save my pay check entirely towards our goals.
We thought to our self, If I could drop that 401(k) contribution little bit, keeping just enough to get maximum benefit of company match, we would free up some more money towards other goals in our life without risking the quality of our retirement. We could rather think of down paying for home earlier, a dream Europe vacation, or, a month-long cruise to Australia or south Asia.
Again, If I decide to start a small business, I’ll need some upfront capital. I need a saving towards that goal too. It’s a constant dilemma.
Now, how do we know what’s the target number we should aim for retirement.
To answer that, we made a list of free retirement calculator available online. We calculated with Kiplinger, CNN Money, Bloomberg, MSN, FINRA etc. The calculators came out with all different numbers. We took the maximum of the numbers and then added an extra cushion of 15% to it. Now, that’s my target retirement saving amount.
This is the easiest way to find out how much you need for retirement. That 15% safety cushion should land you in solid foot.
For the next part, we calculated how much I needed to put away every month to reach that target number in 30 years. We adjusted our retirement saving amount in 401(k) accordingly, keeping IRA contribution untouched. Good thing is that we continue to feel secure about our retirement till we keep our job.
This year, we are going to take some big decisions about our lives and that’s going to cost us good deal of money. We now have fund freed up towards that as well. Plus, whatever SMB brings in from her job, would be good for us. The saving goals would be achieved sooner.
What about you? if you are saving in excess for your retirement, adjust your contribution and start socking that money away for other goals; An emergency fund, a home purchase, a side hassle you dream of, a vacation, or whatever it is that really makes your life worth living. May be a charity for that matter, whatever makes you satisfied.
Balance between your post retirement and pre-retirement life.
The above is my opinion, based on the goals and aspiration I and SMB have in our lives. If extra retirement saving makes you feel more secure and you do not have other important goals to save for, you don’t need any adjustment. Continue to contribute towards retirement at the same rate.
Immediately after reading this article, check your numbers through CNN Money Retirement Planner, T. Rowe Price’s Retirement Income Calculator, Fidelity’s Retirement Quick Check and Vanguard’s Retirement Income Calculator. I will advice you to use all these tools. Put in information like your age, current saving, salary, how much amount you think you’ll need per month and expected salary increase rate.
These calculators allow you to try out a different savings rates, investment planning and retirement years while projecting your target. By putting these different values you can play around with various retirement strategies before fixing on one.
Ultimately, what matters most is your happiness and fulfillment from life. Do what works best for you.
Let us know what do you think about your retirement saving. Do you need any adjustment? Check out if you can, another retirement post I did a couple of months ago, when is the right time to retire.