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Can you ER saving 15% for retirement?
Old 04-24-2014, 10:00 PM   #1
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Can you ER saving 15% for retirement?

Can you retire saving only 15% of salary for retirement? Would this hypothetical budget work?

If we made $100k
2 kids, MFJ
Gross $100,000.00
401k -$17,500.00
Fed Taxes -$5,237.50
SS -$6,250.00
Medicare -$1,500.00
Income $69,512.50
Roth IRA -$11,000.00
529 -$4,000.00
Living $54,512.50
Monthly Budget $4,542.71

Realizing that I'm not sure what medical premiums would be, and assuming a savings rate of 28.5%, instead of 15%, could this work? I did no state income taxes because I want to live in WA.

Now I realize that at this income level I'm not sure the Roth IRA is better than 401k since it drops income into 15% tax bracket. But assuming a 15% to retirement we would have more monthly as well. Could we at age 35ish afford to scale back to 15% retirement savings and still retire by 55?
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Old 04-25-2014, 01:09 AM   #2
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There are so many variable that is pretty much impossible to give a definitive answer. My rule of thumb has been that you need to save roughly 25-30% (including employer contribution 401K match or profit sharing) in order to be able to retire at 55 without too much of reduction in life style.

Your 28.5% is definitely in the right ballpark. In order to do it with 15%, I'd say you need a combination of great returns and modest decrease in living expense, or be willing to retire at 60 or 62.
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Old 04-25-2014, 03:47 AM   #3
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Here's a good article (from Nords' blog) on saving rates versus years to FI, with an excerpt below. Pardon the awkward table cut & paste.

How many years does it take to become financially independent?

Years to Financial Independence at a 5% rate of return for various savings rates:

Savings rate (%):// Years to FI:
15 // 43
30 // 28
40 // 22
50 // 17
60 // 12
70 // 9
80 // 6
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Old 04-25-2014, 07:16 AM   #4
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This book says you can if you start at 25 and retire at 65 If You Can: How Millennials Can Get Rich Slowly.
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Old 04-25-2014, 09:02 AM   #5
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Here's another yard stick from an old MF article....

Your Work-to-Retirement Ratio
Back in 1889 when Otto von Bismarck created the first government pension program, the retirement age was 70. Back then, if you reached age 50, your life expectancy was 72. If a typical worker began a full-time career at age 16, he worked for 54 years to fund two years of retirement. Fast forward to today, and a college graduate begins work at age 22, retires at 62, and lives to 82. That’s 20 years of retirement, supported by only 40 years of work. This “work-to-retirement ratio” is how Alex Pollock, a resident fellow at the American Enterprise Institute, summarizes the challenges faced by today’s retirement landscape. But the work-to-retirement ratio isn’t useful just for explaining corporate and govern- ment problems. It also helps explain how much one has to save each year throughout a career to fund retirement (“required savings” includes employer contributions to retirement plans):
W-R Required Ratio Savings
2:1 14%
3:1 9.5%
4:1 7%
5:1 6%

You can see that this ends about where the Nords blog tables begin (as the tables are more early retirement oriented), and the info above aligns with the 6% return table.
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Old 04-25-2014, 09:09 AM   #6
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A lot of it depends on how your investments perform.
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Old 04-25-2014, 10:49 AM   #7
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Quote:
Originally Posted by clifp View Post
There are so many variable that is pretty much impossible to give a definitive answer. My rule of thumb has been that you need to save roughly 25-30% (including employer contribution 401K match or profit sharing) in order to be able to retire at 55 without too much of reduction in life style.

Your 28.5% is definitely in the right ballpark. In order to do it with 15%, I'd say you need a combination of great returns and modest decrease in living expense, or be willing to retire at 60 or 62.

I think that is the play book my pension system operates under. Work 30 years with 29% contribution rate pretty much puts you at 55. Two percent cola. Take home pay is roughly the same in retirement as working. Of course pensions do have the natural advantage of riding out financial storms over an individual, provided it is adequately funded.


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Old 04-25-2014, 11:37 AM   #8
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Quote:
Originally Posted by livingalmostlarge View Post
Can you retire saving only 15% of salary for retirement? Would this hypothetical budget work?

If we made $100k
2 kids, MFJ
Gross $100,000.00
401k -$17,500.00
Fed Taxes -$5,237.50
SS -$6,250.00
Medicare -$1,500.00
Income $69,512.50
Roth IRA -$11,000.00
529 -$4,000.00
Living $54,512.50
Monthly Budget $4,542.71

Realizing that I'm not sure what medical premiums would be, and assuming a savings rate of 28.5%, instead of 15%, could this work? I did no state income taxes because I want to live in WA.

Now I realize that at this income level I'm not sure the Roth IRA is better than 401k since it drops income into 15% tax bracket. But assuming a 15% to retirement we would have more monthly as well. Could we at age 35ish afford to scale back to 15% retirement savings and still retire by 55?
Keep in mind that increasing spending by dropping from 28.5% savings rate to 15% savings rate means that that spending should probably carry over into retirement and require a larger supporting portfolio. There's a double whammy here.

I like 15% as a starting point, If you've been doing 28.5% since starting work and are dropping to 15% now you are likely in good shape for retiring at 55. It all depends on what kind of investment returns you end up with.
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Can you ER saving 15% for retirement?
Old 04-25-2014, 11:37 AM   #9
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Can you ER saving 15% for retirement?

If you save 15% for 30 years:

10% ROI will replace over 100% of your income.

7% ROI will replace less than 50% of your income.

Actual result will be a function of earned income, savings rate, and ROI.

We hope to retire in 3 years after 28 years of working and we saved about 25% of our income.
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Old 04-25-2014, 12:04 PM   #10
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It depends on what you spend the other 85% on. For example, if you put your kids in private schools, you won't have that expense during retirement.
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Old 04-26-2014, 01:16 PM   #11
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Quote:
Originally Posted by livingalmostlarge View Post
Can you retire saving only 15% of salary for retirement? Would this hypothetical budget work?
Could we at age 35ish afford to scale back to 15% retirement savings and still retire by 55?
You're asking a complicated question involving variable savings rates, and it's nearly impossible to give a definite answer. The more you can save during the early years, the more time it has to compound. If your investments have a good decade during those early years then maybe your plan will work.

But how will you feel about your work-life balance? Let's say that you get to your mid-30s and decide to dial your savings rate back to 15%. How are you going to feel if the stock market drops 20% and your retirement portfolio isn't growing as fast as you projected? How will you feel about the money that you've already spent after you cut your savings rate? Would you be willing to work into your 60s if you enjoyed spending in your 30s and the retirement portfolio didn't grow as fast as you projected?

Why change the savings rate at all in your 30s? Are you implying that you'll have rising expenses in your mid-30s, or are you considering living like a Tibetan monk in your 20s & 30s so that you can cut loose after that?

Instead of trying to dial in a specific savings rate for a specific period by using history to project the future, maybe a better approach is to try to maximize your savings rate at a lifestyle you're willing to work for. On the spending side, cut out the waste. Then cut back the spending you don't care about. On the earning side, figure out how to boost your income through improving your skills or negotiating a raise or starting a side business. Decide what brings value to your spending-- how long are you willing to work to afford to buy it, and how much will the expense delay your retirement?

The key is to live a frugal life that you find challenging & fulfilling without crossing the line into deprivation. If that leads to a savings rate of only 15%... well... you'd have to be willing to work a long time. If it leads to a savings rate of 50% then you'll feel great about your impending ER.

But if you're clenching your jaw and gutting through your 20s to keep that savings rate up there until your 35th birthday, then life might seem a little bleak. And if you cut loose in your 30s just before a two-year recession, then you might be feeling even worse about the money you've spent.

Quote:
Originally Posted by Huston55 View Post
Here's a good article (from Nords' blog) on saving rates versus years to FI, with an excerpt below. Pardon the awkward table cut & paste.
Thanks!

For those who prefer to tweak more variables, here's the calculator version:
How many years does it take to reach financial independence?
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Old 04-29-2014, 10:41 PM   #12
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We are relocating in 2 years in some ways our "semi-er" to a cheaper COLA from where we currently live. We are moving without jobs and with two kids. So who knows what we'll make or need to live on. I am hoping $100k income which would set up the budget up on top.

Yes we've been saving substantially more than 30% for awhile now and living actually on $60-65k/year for a long time while drastically raising income. But now after being so used to saving so much for so long we're both nervous about cutting income and only possibly being able to save 15% to retirement.

I will say that I'm not sure what income we'll be hitting so the risk is very high. And we are preparing for it in the next two years. And our $60k budget is with mortgage payments of $30k/year so in all honesty we aren't a lavish family with 2 kids.

Rather in 2 years I am hoping to cash our all our home equity which is substantial (thank you HCOLA) and buy another home cash right now at over $350k. That means we might need less to live on if we get really low paying jobs. Which again I'm hoping not. My DH is very negative nelly and think we'll be working for less than $50k, but I think not.
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Old 05-12-2014, 01:47 PM   #13
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Agree with "depends on how your investments work"

A few good years, being fairly aggressive in the markets, and protecting your gains, minimizing your losses. You're there.
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Old 05-12-2014, 04:05 PM   #14
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So many factors; are we talking about 15% savings net or gross? what are the expected returns? what is your ER target sum? what have you already saved?

For example; if I want $1M in ER (in 10yrs) and I'm at $500k currently, that means I need to accumulate $50k/yr consistently...that sounds quite a bit but if the market returns 5% on avg. on the $500k I already have that means I'll only need to come up with about $25k per year for the next 10yrs.

Here's an simple calculator I often use for ball park calculations: Investing Calculator - daveramsey.com
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