So, I did a little math. If I stay with my agency for 21 years, contributing the IRS max to my 401k equivalency from the time matching starts (about a year from now) until the end of those 20 years, and if that account earns on average 10% interest for those 20 years, and inflation averages 3%, then by the end of it all, I will be getting the equivalent of a little under 70k in interest from my retirement fund, assuming that when I am withdrawing it’s getting 5% interest. If only 10 years, then 45k. Had I done something comparable with my cmu ira, or my motorola ira, well, I couldn’t have contributed as much, but I suspect I would have at least doubled it.
If any of you have have plans, use them. Regard maximizing your employer matching as the minimum. Stick around wherever it is until you vest. Especially if you are young. Do as I say, not as I do. *wag finger sternly*
Oh yeah, I’m also going to weight my TSP heavily toward the foreign index. Very heavily, like 1/3 in that alone, not counting the stuff from the composite account. You know, just in case, cast a wide net.
I don’t worry so much about it. My father lives pretty well off less than $1,500 a month. No, he’s not vacation on the French Riveria, nor is he driving a Lincoln, but he’s happy. 🙂
http://en.wikipedia.org/wiki/Redneck_Riviera
Too bad it’ll be nothing but cyanobacteria in those waters by the time we retire. Me, I’ll probably look at Appalachia.
Agree with you on that. 401k plan and the like offer free money for retirement. May I ask you a question offline since you mentioned Motorola?
soitanly. just email my id @ livejournal, I’ll get it. Or hit me up on one of my listed im identities.
The question is: What will $70K be worth in the future?
They keep doing that excercise of “If you’re parents had just saved $2k a year starting in 1970, they’d be gazillionaires by now”, and it seems a little hollow that they never mention inflation.
Actually, if you had invested the 1970 equivalent of 10k/year starting in 1970, you would have about $60k/year to retire on right now.
What I can’t figure out is what we’re supposed to do about health care in the future.
past inflation data helper
http://www.westegg.com/inflation/infl.cgi
Also, I’m making the classic “interest calculation” mistake of assuming “10% interest per year” means “multiply your total money by 1.1 every year” and not “multiply your total money by (1+.1/12)^(12) every year” or something equally ridiculous.
If he’s assuming the stated 3% inflation, then 70k in 21 years is only worth 37k of today’s money. Though, his stated assumptions included inflation, so maybe he just subtracted it out and guessed at 7% effective growth? Keep in mind that you’ll be withdrawing with taxes, too – but yes, your point is still valid.
People with matching should also be aware of how to maximize their matching. I dump in max 401k every year, but you need to be careful to spread it out so you don’t exceed the IRS maximum before you mooch your complete matching out.
And certain employer’s (mine) have started offering Roth 401ks. If you work at such an employer, it’s an interesting option – tax rates are unlikely to remain this low for long.
I think the L funds are the most diversified, easiest-to-manage option. I highly recommend them.
Yeah, I was thinking mostly L, with more emphasis on the international markets, just in case the US falls in economic prominence within my lifetime. =)
The L funds already invest in the international markets, so you could keep things really simple by just putting everything into the L.
The main reason the US has been growing more quickly than other developed markets is because of our porous borders and booming immigration. Japan and Europe are not nearly so welcoming to immigrants as we are, and that holds their economies back. However, the dollar is probably still overvalued on international currency markets, and investing overseas is a good hedge against a future collapse of the dollar.
Yeah, but the I(?) fund is only like 10% of the L fund I would invest in and that portion would decrease as it went along. I’m guessing that the rest of the worlds’ economies will grow faster than the US over the course of the next 30 or so years. In that case, I think, weighting my investment towards the I fund makes tremendous sense. And if I’m wrong, and I can’t comfortably retire in the US, maybe I can find a relatively undeveloped corner of the world and live well there. 😉
My retirement situation is so fucked I don’t know what I’ll do…. I’m about to turn 42 and have almost nothing to show for it — not because of careless spending. I’ve just been a freelance musician all these years and not been able to put anything away.
So I’m in denial about it.
*buys powerball ticket*
🙂
I’ll make sure to finish the basement for you. =)
Thanks….
😉
I will not be held prisoner for twenty years by some job that I do not find enriching just so that I can “vest.” What the hell use is having “adequate funds for retirement” if you’ve wasted twenty years to get them? Why retire anyway, if you like what you’re doing? One of the ways the baby boomer generation fucked things up for themselves was EXACTLY by staying at jobs they hated for decades so that they could have their “retirement nest egg”; and then, upon retirement, realizing that they have no idea what to do with themselves because all they’ve done is work.
What’s the point of making your 20’s one big party if your 60’s-80’s will be spent in crushing poverty? =) I mean, if we’re constructing straw men, here, let’s have fun with it.
I’ve heard of having to stay 3 years to vest. I have never heard of having to stay 20 years to vest. And I do find my current job enjoyable. I didn’t stick around in past jobs because I didn’t enjoy them. In part because I picked my undergrad poorly. So, I can’t say I made the most of my 20’s either. I have a bit of trouble forgiving my professional wanderings in my 20’s. I’m hoping my 30’s work out better on that front.
Or you find something you like to do that also happens to offer a 401k. Also, it rarely takes long to vest anywhere these days. Most places only dangle 4-5 year carrots, simply because the world is changing. Some places don’t even dangle tht – frequently 401k matching will vest instantly or only after a year or two, with possibly other stuff at the 4-5 year range. Loyalty to a single company is not rewarded anymore, but it’s not hard to get retirement savings.
Personally, I wouldn’t mind doing parts of my job for a long, long time. But I also wouldn’t mind reaching a point where I just don’t have to care. It would also be nice to build up money to travel on – not to say that I don’t have it now, but if I retired, I’d like to just wander without caring much.
You have an awfully optimistic estimate of the growth rate of your investments. Plan for the worst case. What happens if the growth averages 5% per year?
If you only get 5% growth, your risk tolerance is not nearly high enough. With a 20 year outlook, you should be able to get at least 10% a year.
My figure was purely arbitrary. Your definition of what one “should” be getting is entirely based on a fairly narrow band of past history. The future is notoriously hard to predict, let alone to within a few percentage points of market growth. 🙂
Agreed, I was just trying to make the point that 10% is not unreasonable.
Though I should say you have a reasonable point. You should always oversave, at least to the point where it doesn’t interfere with other priorities. It’s actually somewhat rare for the 401k maximum to be enough to retire comfortably on, but this somewhat depends on what “comfort” means. Some peoples’ spending drops in retirement (house paid off and they don’t do anything), some peoples’ spending rises considerably in retirement (travel, eating out, etc.). I personally would rather have the latter retirement, so I try to budget now.
I figure the worst case is that I end up with more money than I know what to do with. I’m sure I’ll figure out how to spend or donate it.
Ah, but you see, my figure was not. =) Long term historical growth in the stock market has been about 10% since the Great Depression. Or so I’ve heard from multiple financial advisors. My inflation guess was similarly based.
heh, and I’d be surprised to see long term growth in the stock market to match historical growth. I would also question that math, unless you somehow think that we can continue to see the same corporate profit margin as we have historically.
Doesn’t mean you shouldn’t stick every $ you can into a matching 401k though. There aren’t many better places to put your money, and the difficulty in removing it means you’ll probably still have it when you retire.
It also doesn’t mean you need a matching 401k just to have a retirement nest egg. I’ve done well enough so far with just a Roth IRA and non-retirement savings, even though I primarily lived off of savings for about a year in 2001. A 401k is simply *enforced* retirement savings (and if you’re lucky, significant tax benefits and employer match). Some discipline to not spend your nest egg on shiny new toys or a poor investment, and you don’t need a 401k. I wouldn’t mind one, but it’s not that high on my list unless there’s employer match involved, and not many employers offer that any more.
For example, I need a decent chunk of money outside of a retirement plan, if I’m ever going to afford a down payment on a house in california. I’m still maxing out my IRA, but I have to force myself to put additional money away each month as well. And the math I’ve done shows that I don’t want to dip into the IRA for my down payment unless it’ll be more than a few additional years to save that up.
Kudos to you for thinking ahead. I’m not sure exactly where the naysayers who have commented are coming from, except perhaps jealousy?
I do agree with radi0actv, though… You should have a contingency plan in case your money only grows at 5% after inflation.
A relatively politically stable, but economically underdeveloped country sounds like a plan. =)
The stock market averages about 12%, so you might want to smile and bump that up. Then again, I think inflation averages 4-4.5%, as well.
That mostly depends on the time period you’re measuring, and we’re never going to see periods like the 50s again, where single income families were the norm and able to live comfortably.
Single income families can live with few problems, just not inside the more cultured cities.
I was thinking of the 12% since the inception of the NYSE.
I’m kind of curious as to the average of the S&P 500, both since 1957 and since the rocket upwards it took in the mid-90’s. (Then the crash down, and it’s recent rebound.)