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I'm 29, and just started a new job with an excellent mandatory retirement plan. I contribute 5.5 percent of my salary and my employer deposits an amount equal to 8.5 percent of my salary. I have a Roth IRA I've funded previously, but I've never really thought about how much I need--I've always just contributed the max when I can or let it ride otherwise.

Now, I'm at a point where I might buy a house a few years from now, and I need to know whether I should be saving up short term stuff for a downpayment or if I need to further fund long term investments for my retirement. How do I go about planning how much I need to have saved up by retirement?

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Save as much as you can !! You should be ready for anything except nuclear holocaust. –  DumbCoder Jan 9 '11 at 13:54

2 Answers 2

up vote 7 down vote accepted

I wrote a spreadsheet (<< it may not be obvious - this is a link to pull down the spreadsheet) a while back that might help you. You can start by putting your current salary next to your age, adjust the percent of income saved (14% for you) and put in the current total.

The sheet basically shows that if one saves 15% from day one of working and averages an 8% return, they are on track to save over 20X their final income, and at the 4% withdrawal rate, will replace 80% of their income. (Remember, if they save 15% and at retirement the 7.65% FICA /medicare goes away, so it's 100% of what they had anyway.)

For what it's worth, a 10% average return drops what you need to save down to 9%. I say to a young person - try to start at 15%. Better that when you're 40, you realize you're well ahead of schedule and can relax a bit, than to assume that 8-9% is enough to save and find you need a large increase to catch up.

To answer specifically here - there are those who concluded that 4% is a safe withdrawal rate, so by targeting 20X your final income as retirement savings, you'll be able to retire well.

A 2014 update - retirement spending needs are not the same for everyone. When I cite an 80% replacement rate, it's a guess, a rule of thumb that many point out is flawed. The 'real' number is your true spending need, which of course can be far higher or lower. The younger investor is going to have a far tougher time guessing this number than someone a decade away from retiring. The 80% is just a target to get started, it should shift to the real number in your 40s or 50s as that number becomes clear.

Next, I see my original answer didn't address Social Security benefits. The benefit isn't linear, a lower wage earner can see a benefit of as much as 50% of what they earned each year while a very high earner would see far less as the benefit has a maximum. A $90k earner will see 30% or less. The social security site does a great job of giving you your projected benefit, nd you can adjust target savings accordingly.

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Have people been averaging an 8% return over the past 10 years? –  doobop Jan 9 '11 at 14:10
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The return for the 80's and 90's was nearly 16% compounded over 20 years. For the '00s -1%/yr. This is for the S&P. If you look only at the short term, you'd assume either the 16 or -1 depending when you start. I'd be curious what number you'd wish to plug into to such a spreadsheet. I thought I was clear to err on the side of caution, but too low an assumption, say 5%, and you'd need to save at a 30% clip. Given that 1920-2009 averaged just over 10%, I see no reason we'd slow to less than 8 in the next half century. –  JoeTaxpayer Jan 9 '11 at 16:55
    
This is why you think long term- assuming a given return over 5 or 10 years is rather risky, but assuming an average return over a 30 year period is much more reliable. –  Benjamin Chambers Jan 9 '11 at 18:46
    
If you look at moneychimp.com/features/market_cagr.htm and enter Jan '94 - Dec '13, you see a CAGR of 9.22%. The trick is that one should either asset allocate very carefully as they invest, or if they were heavy in stock, enter retirement with a less aggressive allocation. The '00 decade didn't cause me to lose any sleep as my wife and I were still working. Now, semiretired, our allocation can withstand a lost decade. –  JoeTaxpayer Jun 24 at 13:56

Invest in kids, not pension - they never inflate.

Without kids your retirement will be miserable anyway. And with them you'll be good.

Personally, I do not believe that that our current savings will be worth it in 30 years in these times.

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This is why one has to invest to stay ahead of inflation. This is how after 40-45 years of work one can actually have 20 times their final year's income as a retirement account balance. –  JoeTaxpayer Jan 9 '11 at 13:29
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What do you mean exactly by "Invest in kids"? –  JohnFx Jan 9 '11 at 18:31
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Apparently you're unaware that many people just lock their parents in a home and forget about them. Kids are great, and I highly recommend having a few, but don't figure them as your retirement plan. How would you feel if your parents told you that you were expected to contribute 10% of your salary to their retirement? Can you cut 10% from your budget right now, or would that be an unfair burden on you? –  Benjamin Chambers Jan 9 '11 at 18:44
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These locked parents just didn't made it right :-) Helping parents is normal. Probably that differs from country to country. –  BarsMonster Jan 9 '11 at 19:02
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Children do often help out their elderly parents, but rarely is the relationship simply financial. –  jldugger Jan 9 '11 at 20:45

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