5 Mistakes That Will Crush Retirement Dreams

[Tekward]

An interesting article that applies most to us hopeful ERers.

Points 1 & 4 are no-brainers. Strong agreement by anyone serious about ER. The 40% target seems high. I am saving ~20% after taxes but I've also paid off the house and cars and saved some for kids college and weddings.

Points 2 & 3 are determined by personal risk tolerance. I'm very conservative based on my background, so I have low assumptions for future returns.

Point 5 is something I don't see discussed much but has been a key for me compared to some peers. I'm all about "tough love" parenting. I told my waivering 17 YO daughter that at 18 she was either in school or on her own, paying for her cell phone and car insurance. Now I have three girls successfully launched and ER looks much more likely.

5 Mistakes That Will Crush Your Retirement Dream

 

[timeasterday]

Points 1 & 4 are no-brainers. Strong agreement by anyone serious about ER. The 40% target seems high. I am saving ~20% after taxes but I've also paid off the house and cars and saved some for kids college and weddings.

I agree - the 40% is too high for most people. He doesn't seem to even factor in taxes and other pay deductions when he says "You have to determine what is needed to keep your committed expenses at or below 60% of your monthly household gross income. "

My net pay is 67% of gross after the 13% 401K is taken out as well as taxes, etc. So right there is 20% off the top that isn't going to retirement or my expenses (well, OK some of that is Social Security). I max out a Roth IRA and put money aside into a car fund and a vacation fund. After that there's nothing left. And I make a pretty good salary too.

 

[Midpack]

Points 1 & 4 are no-brainers. Strong agreement by anyone serious about ER. The 40% target seems high. I am saving ~20% after taxes but I've also paid off the house and cars and saved some for kids college and weddings.

After conducting annual 401k and other financial planning meetings with (salary/hourly-blue/white collar) employees for over 20 years, and hundreds of individual employee discussions - I can tell you 40% would be considered ridiculous even insulting to at least 99% of an audience.

• We used to suggest a measly minimum of 10% (relative to the article above), or at least the 6% threshold for matching funds - IMPOSSIBLE!!!
• We also used to recommend things like increase 1% a year from where you are until you reach 10% - IMPOSSIBLE!!!
• We used to recommend putting all or part of their annual increases into their 401k contributions before they got used to having the additional income (seems relatively painless) - IMPOSSIBLE!
• If we had ever recommended 40%, the whole room would have been screaming at us for days/weeks - and we'd have no credibility from then on.

Unfortunately they're all still working, we (my Dept Mgrs esp HR, Corp & I) really wanted to help them build their nest eggs and tried everything we could think of. Management (us) just sucks!!!

Boy I miss those days

But I'd love to watch Lance present his recommendation to a live, mainstream audience.

 

[pb4uski]

+1 40% is ridiculous. I was highly compensated and I don't think that i could have saved 40%.

I think the key is to start young, start out saving the amount needed to maximize the employer match (or at least work up to that) and increase your contributions for 1/2 of all pay increases. If someone did that, LBYM and had access to some reasonable cost investment options I think they would have a comfortable retirement between their nestegg and SS.

 

[boatfishandnature]

I liked point no. 5, too, but too late now, having already funded college and an MBA for my kid... wished I had seen it before I promised to do so, years ago... oh well.

 

[rodi]

After conducting annual 401k and other financial planning meetings with (salary/hourly-blue/white collar) employees for over 20 years, and hundreds of individual employee discussions - I can tell you 40% would be considered ridiculous even insulting to at least 99% of an audience.

• We used to suggest a measly minimum of 10% (relative to the article above), or at least the 6% threshold for matching funds - IMPOSSIBLE!!!
• We also used to recommend things like increase 1% a year from where you are until you reach 10% - IMPOSSIBLE!!!
• We used to recommend putting all or part of their annual increases into their 401k contributions before they got used to having the additional income (seems relatively painless) - IMPOSSIBLE!
• If we had ever recommended 40%, the whole room would have been screaming at us for days/weeks - and we'd have no credibility from then on.

Unfortunately they're all still working, we (my Dept Mgrs esp HR, Corp & I) really wanted to help them build their nest eggs and tried everything we could think of. Management (us) just sucks!!!

Boy I miss those days

But I'd love to watch Lance present his recommendation to a live, mainstream audience.

I hear you on this.

When they rolled back SS payroll contributions last year - I told everyone around me to increase their 401k by that 2%... That way it wouldn't "hurt" when the temporary cut went away. A win-win... averaging out your net pay by diverting it to retirement savings. If SS goes belly up - you've got a few more dollars in the 401k to make up for the shortfall.

I was talking to a coworker (who's likely going to ER the next time he has a bad day at work - he's hit the FI point.) He's been maxing his 401k since the inception in the 80's. He's very conservative... so it's not as big as some of the portfolio's mentioned here... but it's over 600k... He's under 60.

40% of gross is probably extreme - but 25-30% is doable on a midrange salary. Especially if you're using 401k/ira/roth, 529's, etc to divert the money before it hits your checking account.

As far as kids... I own up to being a mean mom. I've told the kids if they want a car, we'll match them dollar for dollar... and they have to pay for their own insurance and gas. We'll be happy to keep their bicycle in good repair if they can't afford it. College will be the same deal I got. Public school, degree related to a marketable career (no art history on my dime), I'll pay tuition, books. and base rent... spending money, laundry money, commute money - that's what a part time job is for. If they don't like it - they can move out and support themselves.

 

[travelover]

+1 40% is ridiculous. I was highly compensated and I don't think that i could have saved 40%.........

I saved 45% in the last 5 years that I worked. Having no kids helps here, plus for #5.

 

[obgyn65]

Not sure why this is ridiculous. I save 80-90% + of my salary. I live (very well) on my own, no debt, no kids.

+1 40% is ridiculous. I was highly compensated and I don't think that i could have saved 40%.

 

[REWahoo]

Not sure why this is ridiculous. I save 90% of my salary. I live (very well) on my own, no debt, no kids.

Surely you understand you are an outlier.

 

[eridanus]

Here's where we can see a clear divide between this board and others (ERE, MMM). Saving 40% is fairly average for those boards.

 

[obgyn65]

Agreed. This is why I rarely share absolute numbers. But I don't want my FIRE strategy - and maybe that of others here who are the silent minority - to be described as 'ridiculous'. Some of us earn more, some of us save more, some earn or save leas, but we all share the same FIRE objective.

Here's where we can see a clear divide between this board and others (ERE, MMM). Saving 40% is fairly average for those boards.

 

[REWahoo]

But I don't want my FIRE strategy - and maybe that of others here who are the silent minority - to be described as 'ridiculous'.

Some man's "ridiculous" is another man's "perfectly normal"...

 

[scrabbler1]

I saved 45% in the last 5 years that I worked. Having no kids helps here, plus for #5.

I exceeded 40% for 8 straight years (1999-2006) in my peak full-time earning years and, amazingly, some part-time working years (due to growing investment earnings compensating for the reduction of wages).

But exceeding 40% is a pretty steep level. In those 8 years I was debt-free and (always) childfree. Before that, I was saving between 30% and 40% most of the time, still having a mortgage before I paid it off way early.

Good point in #1 about leaning on the conservative side in the 401(k) because the company match assures you of extra-good return even if the underlying investment is on the low side. A 75% match, for example, gets you a 75% return even if you stuffed it in a mattress.

 

[rbmrtn]

Not sure why this is ridiculous. I save 80-90% + of my salary. I live (very well) on my own, no debt, no kids.

Do you not pay taxes ? 40% of my salary was gone before I ever got it...

 

[traineeinvestor]

We've managed to exceed 40% savings on gross income for a number of years ... of course, it helps that our effective tax rate is below 15% and we live in a city where a car is completely unnecessary.

On #3, I only partly agree with this. Taking too much risk with investments is (IMHO) not a good thing but neither is taking too little risk. Inflation has the potential to decimate the real value of cash/bonds/fixed annuities and over a 40+ year retirement I worry more about inflation than I do about market volatility.

 

[traineeinvestor]

Some man's "ridiculous" is another man's "perfectly normal"...

Shouldn't this be in the "recent photo" thread?

 

[W2R]

Although I do think that extreme saving is hard to do, I don't think it is ridiculous at all. The fraction to be saved depends on the income as well as the timeframe in which someone is planning to retire. It's all in the math.

 

[REWahoo]

Shouldn't this be in the "recent photo" thread?

No. I've lost weight since that was taken.

 

[W2R]

We've managed to exceed 40% savings on gross income for a number of years ....

Yes, me too, and there are quite a few others. Others have not and if they can meet their goals, then more power to them. Saving a lot is one way to meet one's ER goals faster when nothing else is working. To quote a professor I once had years ago, speaking about another matter... "If it was easy, everybody would do it." It's a lot easier to save less over a longer period of time, IMO. There are many paths to retirement but no matter which we take, we end up at the same destination.

 

[growing_older]

Not sure why this is ridiculous. I save 80-90% + of my salary. I live (very well) on my own, no debt, no kids.

Unless your salary is tiny and you somehow have almost no expenses, I do not see how this is possible. Taxes alone can easily take 20%. Do you live on nothing?

 

[obgyn65]

I gave a guess from the top of my head while having a large glass of wine ;-) I will have a closer look at my BoA and Edward Jones accounts for the year, will calculate the spend/pay ratio more precisely, and will make any correction to my post if needed.

Unless your salary is tiny and you somehow have almost no expenses, I do not see how this is possible. Taxes alone can easily take 20%. Do you live on nothing?

 

[ziggy29]

We're saving a little more than 30% now. I could save a little more, but at some point you have to balance securing your future with enjoying the here and now, so I have no interest in an "austerity budget" just to get the savings rate higher. I find forcing myself to save too much is a form of stress I don't need, at least when I think I'm already doing fine in that regard.

 

[Midpack]

It appeared to be an article for a general, mainstream audience. I critiqued it from that POV, not my own experience.

A lot of people HERE have managed to save 40% or more, but would you feel comfortable trying to convince a mainstream audience to do the same?

I dare you...

 

[RISP]

Remember, if you are only in cash, the match you receive from the company will generate a 3-6% annual return all by itself and that will COMPOUND on a year over year basis.

Uhm...that's not true, is it? I'm not familiar with the US approach, but let's say I get a "100% match on the first 3% to 6%" as quoted in the article. That would be REALLY generous, I guess. Let's further assume that I make 100,000$ a year and contribute the maximum 17,500$. On the first 6,000$, I get a 100% match, meaning total payment into the 401(k) is my 17,500$ plus 6,000$ from my employer, which equals 23,500$. The match adds 34% (6,000$/17,500$) to what I contributed myself. Great!
Now what if I have contributed the maximum for 15 years? Even assuming 0% investment returns (because it is oh so smart to be "only in cash" ), my balance is 15 x 23,500$ = 352,500$. Now, the 6,000$ match means only a 1.7% (6,000$/352,500$) "annual return". Not too shabby still, but clearly not "3-6% annual return" (and most probably below the inflation rate). Any positive return on my balance increases the effect. And of course it does NOT compound because the match is only paid on new contributions, isn't it? Did I get that right?

 

[timeasterday]

Did I get that right?

Yeah, I think so. The match only applies to that year's contributions, thus it is not compounding the previous investment.