How am I doing?

[amithereyet]

Hey folks. New member here. I've been casually investing for about the past 3 years through 401k and a Roth IRA. I've had a decent amount of cash laying around so recently decided to put it to work in a couple mutual funds. Since that investment I've been obsessed with finances and investing which brings me here. I'm curious how I'm doing so far regarding early retirement. Here are the specifics:

I'm 28 and live in the midwest making 60k/year. I'm single and rent. My rent is slightly over 1/4 of my take home pay. I hope to retire at 55. My company has a "rule of 85" (age at retirement + years of service = 85) in order to draw a pension and I should meet that rule at age 55. I hope to live off the pension and mutual funds until I can start drawing from my Roth IRA and 401k. My current finances are:

Cash - $16,000 (my emergency fund plus a couple extra thousand)
401k - $25,000 (contributing 6% and 100% of that is being matched)
Roth - $8,000 (contributing 5k starting this year)
Mutual Funds - $5,000 (will be contributing annually starting next year. Contribution amount will be all the cash I have after Roth and 401k besides my emergency fund of 12k, probably around 5% of gross income)
Cars - $40,000 (a classic worth 30k and a daily driver worth 10k)

Total percentage of investments from gross salary is 19% (25% if you include my employers 401k match)

I am debt free and own 2 cars outright. One is for necessity and the other is for fun and possible appreciation (a 1966 mustang fastback).

So, how do you guys think I'm doing? Net worth right now is around 95k including the vehicles. I'd like to continue to rent until I can use my mutual funds to buy a house outright but I understand that will be a while, and to be honest, probably wont happen. Let's face it, I'll have to get a mortgage

 

[donheff]

You are seriously saving at 28 -- you are doing great! But don't count on that defined benefit plan. Are you sure that you will stay with them and that they will stay in business? Are you confident they won't drop the DB plan?

Oh, and welcome to the board.

 

[David1961]

Welcome to the board. Can you tell us about your asset allocation? I assume your mutual funds are stock funds. What about your 401k?
You are definitely on the right track. Few people your age are this interested in investing and you are living below your means.

 

[devans0]

I have to second the DB doubts. I had a defined benefit that promised a nice benefit, but was back loaded. Sure enough, when the pot was large enough that people were looking to retirement, there was a recession, and the benefits were changed.
I still count myself among the fortunates. When a company gets sold, one of the first things that gets raided to fund the acquisition is that pile of money that is just sitting there. Too many co-workers of mine started over at fiftyish over just such shenanigans. Do not rely too much on government, company or planners/agents promises. Promises are cheap, and usually well intentioned, but difficult to keep. Rely on yourself and diversify. Other than that caveat, you are doing well. Keep up the good job.

 

[MasterBlaster]

This little chart shows that you'll need 12X your salary (or so) plus SS (or the money to pre-fund the cash flow before SS kicks in) to generate the ubiquitous 80% of pre-retirement income.

It's not a bad little "how am I doing" yardstick in spite of the obvious limitations.

 

[Aiming_4_55]

How should the chart be adjusted to reflect OP's desired retirement at 55?

Based on the chart, OP is doing great.

This little chart shows that you'll need 12X your salary (or so) plus SS (or the money to pre-fund the cash flow before SS kicks in) to generate the ubiquitous 80% of pre-retirement income.

It's not a bad little "how am I doing" yardstick in spite of the obvious limitations.

 

[MasterBlaster]

How should the chart be adjusted to reflect OP's desired retirement at 55?

Based on the chart, OP is doing great.

Oh you ask those hard questions...

If you want to retire at 55 you'll need 12X earning plus the extra stash to fund your expected SS payments until you are eligible to collect.

so if you make $60k and you'll receive SS payments of $18K/year at 67 then you'll need

($60k *12) + ((67-55)*$18k) = $936k.

also you need some way to provide medical insurance before Medicare kicks in. So add in a hundred grand or two for that.

 

[Aiming_4_55]

MasterBlaster - it wasn't that hard for a smart person like you, you answered within minutes. You even provided a bonus with the healthcare gap. ;-)

Looks like the OP and I have the same target, but I might be changing that as crunching numbers exercise is reinforcing my LBMM lifestyle, but spoiling my kids sometimes get in the way.

Oh you ask those hard questions...

 

[golfnut]

In this equation what does the $18k represent? Should it be $28K?

($60k *12) + ((67-55)*$18k) = $936k.

Just wondering.

 

[MasterBlaster]

In this equation what does the $18k represent? Should it be $28K?

($60k *12) + ((67-55)*$18k) = $936k.

Just wondering.

The $28k is a typo and should be $18k. I doubt that someone making $60k would get a SS payment of $28k a year.

Also thinking about this a bit more I don't think the original formula is correct, the 12X savings bogey is for someone who is 65 years old. My revised formula is...

($60k *12) + ((80% of $60k)*(67-55)) = $1296k

plus the medical savings

 

[golfnut]

Big Difference! So in this case, a retired 55 yr old could draw $48,000 per year (80% of $60,000)?

 

[MasterBlaster]

The 80 percent income replacement ratio was the original design in the "measuring up" table. It included SS payments.

It is a big difference. It's expensive to check out 10 years early

so at 55 you would need nearly 22X your salary (plus medical funding)

at 65 you may need just 12X your salary.

So you just may need twice as much at 55 as at 65.

there are some fine points here that would slightly change the numbers but that just confuses the main issue.

 

[Aiming_4_55]

I think the chart is a good rough estimate for an average income of $60k with a retirement budget/spend of $48k or less. It'll be important to eliminate all normal debt by retirement regardless of age 65 or 55.

But someone with a salary of $100k might/could survive on 50% of salary, thus the 12x or 22x might not be ideal, but a fair starting point, plus medical expense. Depending on your lifestyle, YMMV, just saying.

 

[Independent]

Congratulations! You're living below your means, that's the first step.

As a crude guess, your current 25% savings rate, accumulated for 27 years at a 5% real return, gives you a balance at age 55 of about 14x your annual income. Add in your current $33k of long term savings and you get up to 16x.

Guessing that SS will replace 20% of your income at age 67, you'll need 12 x 0.2 = 2.4 of your 16x to bridge the SS gap. That leaves 13.6x to fund level withdrawals. At 4% you get a replacement ratio of 54% + 20% = 74%.

You're currently spending 81% of your income. After retirement you can drop the 7.65% of FICA taxes but you need to add in private pay medical insurance. It seems that even a portion of your DB pension can fill the gap.

Some return other than 5% would have a noticeable impact.

It looks to me like you're off to a fine start. Circumstances will change (spouse and children usually challenge those early retirement plans ),but if you're thinking about this already I'm sure that you will be quick to adjust your plan as you go.

 

[myself]

The $28k is a typo and should be $18k. I doubt that someone making $60k would get a SS payment of $28k a year.

Also thinking about this a bit more I don't think the original formula is correct, the 12X savings bogey is for someone who is 65 years old. My revised formula is...

($60k *12) + ((80% of $60k)*(67-55)) = $1296k

plus the medical savings

I would think that the formula could be change slightly. After all, the OP is already living off of 81% of his paycheck, so why not use 60%-65% of his current paycheck?
($60k *12) + ((65% of $60k)*(67-55)) = $1188k

Whatdya think?

 

[MasterBlaster]

The formulas are pretty much linear with the income replacement ratio.

If you can live on 65% rather than 80 % then the numbers will indeed go down.

As I recall Dory used to suggest that he could get away with an income replacement ratio of 33%.

Whatever works for you - YMMV

 

[obgyn65]

Hello amithereyet - I think you are doing great. You have already saved a lot for your age and salary. Congratulations.

 

[Independent]

I think "replacement ratios" have to make sense relative you whatever changes you can identify when you retire. When I was 35 I had a mortgage and 3 children. It was easy for me to see that we were incurring expenses that would be gone by the time I was 62.

Amitereyet specifies that he's single and renting, so I'm guessing that most of his current expenses will continue into retirement.

 

[golfnut]

It appears with the mortgage gone and expensive healthcare added in we will be fine living off 60%. YMMV

 

[ronocnikral]

welcome! from someone who is almost 28....you do seem to be doing well and keeping track of your finances. And not many of our peers have the emergency savings, let's face it, not many are debt free.

A couple points, I wouldn't count on the cars as part of my networth. Don't get in over your head with a mortgage.

 

[HornedToad10]

I wasn't 100% clear what your yearly savings were. 25% of yearly salary including employer match?

Alot of your networth is in cars, so hoping you're done with cars for awhile. The one other comment is that your rent seems pretty high for renting (if a mortgage was 25% then it was fine).

Overall I'd say you're doing very well though, just keep going.

 

[myself]

I wasn't 100% clear what your yearly savings were. 25% of yearly salary including employer match?

Alot of your networth is in cars, so hoping you're done with cars for awhile. The one other comment is that your rent seems pretty high for renting (if a mortgage was 25% then it was fine).

Overall I'd say you're doing very well though, just keep going.

Did you by chance notice the OPs message:
Cash - $16,000 (my emergency fund plus a couple extra thousand)
401k - $25,000 (contributing 6% and 100% of that is being matched)
Roth - $8,000 (contributing 5k starting this year)
Mutual Funds - $5,000 (will be contributing annually starting next year. Contribution amount will be all the cash I have after Roth and 401k besides my emergency fund of 12k, probably around 5% of gross income)
Cars - $40,000 (a classic worth 30k and a daily driver worth 10k)

So, I'd say about 57% of the OPs net worth is outside of the cars.
And I don't think it's abnormal for rent to be $1,250/month in certain areas, especially in the major metropolitan areas.

 

[HornedToad10]

Did you by chance notice the OPs message:
Cash - $16,000 (my emergency fund plus a couple extra thousand)
401k - $25,000 (contributing 6% and 100% of that is being matched)
Roth - $8,000 (contributing 5k starting this year)
Mutual Funds - $5,000 (will be contributing annually starting next year. Contribution amount will be all the cash I have after Roth and 401k besides my emergency fund of 12k, probably around 5% of gross income)
Cars - $40,000 (a classic worth 30k and a daily driver worth 10k)

So, I'd say about 57% of the OPs net worth is outside of the cars.
And I don't think it's abnormal for rent to be $1,250/month in certain areas, especially in the major metropolitan areas.

Yes I did notice, but didn't bother to do the calculation on it at the time. Looks like around ~15% of salary not counting employer match and the hoped for after tax contribution to start next year. That's certainly very good, but it's always worthwhile to encourage to do more.

Let's phrase the net worth the other way. 43% of OP net worth is in cars. That's alot. It'll clearly go down as he keeps saving, but I wanted to encourage him to not get too car crazy. The 10k commuter will depreciate and per my understanding the classic will generally hold it's value or slightly appreciate. It probably won't appreciate as much as investments though and is more just stable. I'd say the same thing if 30-43% of someone's net worth was in antique coins, classic magic trading cards, or anything else. It's fine to do it if it's important to you, just be aware of the tradeoffs and try to control going overboard on something you love that has an economic costs. E.g. I'd say it's a pretty safe bet that the $30k would be worth (much) more if invested in a diversified portfolio vs. the classic car. But if it's important and gives personal enjoyment, then that's an important consideration.

$1250 rent is probably fine, but it's always easy to justify more and nicer and I don't know where he lives other than the midwest and that tends to be cheaper. Although re-reading it the rent is probably less than 1250 since it's 1/4 of takehome. $1250 would be 1/4 of gross. Who knows, there might be opportunity to have a friend as a roommate or something depending on priorities. If you can control the cost of cars and homes, then everything else becomes much easier.

 

[DeborahB]

I don't think it's abnormal for rent to be $1,250/month in certain areas, especially in the major metropolitan areas.

OP said rent was about 25% of take home pay - 1250 is 25% of gross. So his rent is considerably lower than that.

Anyhow, I think you're doing fine. Even saving at all at your age is great - not many do.

I wouldn't count the cars in your net worth in any way.

Other than that... You are assuming you will have this job forever. That's less likely than it used to be, so I wouldn't count on the pension. You should find out when you are vested in the company match on your 401k - you can generally remove that (and your contributions) and roll it into a self-directed IRA if you leave this job. That will give you some investment options your 401k probably doesn't provide.

Maxing out your 401k (not just enough to make the company match), maxing out a Roth IRA, and investing as much as possible of what's left is definitely the way to go. I just worry that you are depending on the pension.

It sounds like you are saving as much as possible. If you are also living relatively frugally (but comfortably) - minimize Starbucks and eating out!! - you'll have a much better idea of how you're doing in another 5 or 10 years.

Now - at a young age - is a good time to be invested in equities and get as much return on your money as possible. You have a lot of time for the money to grow. You can afford to take some investment "risk" because the stocks have time to recover from market fluctuations and price fluctuations.

I'm less risk-averse than many on this forum, but make sure the return on your mutual funds is good. IMO the management fee is irrelevant - it's the overall return that matters, unless you are in an S&P index fund or something like that. If it's a managed fund, diversify and look for good returns.

You're doing great! Oh... don't forget to factor in the potential mate/children/house...

 

[veremchuka]

wow you are doing great! however, i would NOT count on that pension it is 25+ years out and a lot of things can happen between now and then.... a real lot.

also i would not count those cars as anything but an expense. cars are not investments unless you buy a barrett-jackson car restored to 100% condition that is highly desirable today. but what about 5 or 10 years from now? cars that were hot just 10 years ago, prior to 9/11, have had the bottom fall out as boomers now have the bucks and they want cars from THEIR youth not their parent's! a car that cost $95,000 to restore and you buy it well for say $50,000 may be an investment. trust me cars are not an investment unless you can buy those rare cars that 99.99% of the population couldn't afford if they took their nest egg's worth at age 65 and cashed it in to buy that car. we're talking cars that cost as much as several houses!

keep saving as much as you can and lbym that's how i retired early and i'm sure most folks here as well.