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I am a nerd who does Excel for fun, and a friend asked me the old "am I on track?" question, so I've put together a few scenarios to illustrate the power of time and compound interest. Let's say you start with zero long-term savings. Every month you put some money aside. Every year you get a raise, and, mindful of the decreasing time you have left, you save 5% more than you did the year before. You invest this conservatively (but not too conservatively) and earn 4% over 3% inflation, as with my last example. You plan to retire at age 60, convert your investments to a very safe inflation+2%, and begin withdrawing funds equal to $36,000/year today. Every year, on the anniversary of your retirement, you will increase your withdrawals to match inflation. You want to have enough money to last you exactly 20 years. How much money do you need to save, right now? If you are 50, good luck. You'll need it. Start saving at $3693.47/month. If you are 45, even that five years is saving you a bundle. Start saving $2117.28/month. If you are 40, you're still starting late, but you're still 63% better off than if you waited another decade. Start by pegging your 401(k), and save $1364.20/month. If you are 35, start saving $936.72. If you are 30, start saving $669.39. If you are 25, start saving $491.58. You're not quite able to do this on just an IRA, but it's close. If you are 20, start saving $368.19. This is an especially interesting number, because it's almost exactly 1/10 what you'd have to do if you waited until 50. The graph of contributions (in today's dollars) looks like this:  The results are even more dramatic if you play for higher, riskier gains when you're young. Let's say that you can get a bit lucky, a bit more aggressive - inflation+10% in your 20s, inflation+7% in your 30s, and then you play it safe after that, as above. Now if you're 20, you can start saving $276.64. If you're 25, you can start saving $422.10. If you're 30, you can start saving $626.34. If you're 35, you can start saving $919.13. "But Cassius!" you say, "I'm 30 years old! Are you saying if I can't save over $600/month, I'm doomed?" No, not at all. These are conservative numbers, and we do have a safety net (for now). Right now Social Security's average payout is a little over $1250/month, so assuming it doesn't go broke and Congress doesn't gut it or give it to Goldman Sachs, we can expect the inflation-adjusted $15000/year to be there, so really (except for those first few years) these projections give you a present-day-equivalent income of $51,000/year once you clear 65. Also, consider that, if you buy (or already own) a home, you should have it paid off by then. Once you don't have rent or a mortgage to pay, your expenses are low and your savings rate can go way up. On the other hand, the Social Security Administration says that if you make it to 65, you can probably expect to see 85, not 80 as the simulation shows. This whole scenario is a pretty gross oversimplification, just to make a point. My numbers are far from perfect. I just think it's fascinating to highlight exactly how much pain a little saving now can save you, ten or twenty years down the road.
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Feb 17, 2014 16:15
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For each of those scenarios you should calculate the total principal invested. That would make the advantages more obvious, I think.
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Feb 17, 2014 16:21
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SurgicalOntologist posted:For each of those scenarios you should calculate the total principal invested. That would make the advantages more obvious, I think. Sure. If anyone else wants me to mine metrics out of this thing, let me know and I'll see what I can whip up. Let's assume you follow the re-balancing scheme. Rounding to the nearest dollars: If you're 50, you pay in a total of $557,523 and retire with a maximum nest egg of $785,040, meaning you paid for 71% of your retirement in cash, off the sweat of your brow. If you're 45, you pay in $548,300 and retire with a maximum nest egg of $910,077, paying for 60.25% of your retirement in cash. If you're 40, you pay in $541,343 and get to enjoy being a millionaire for a few years, retiring with $1,055,029. 51.31% of that you'll have saved in cash. If you're 35, congratulations. You can get the market to do over half your saving for you! You save $526,443 in cash, which is only 43% of the $1,223,068 you'll have on retirement. If you're 30, you pay in $499,388 and retire with $1,417,871, meaning that you contribute 35.22% of your retirement savings and the market takes care of the rest. If you're 25, you pay in $457,515 and retire with $1,643,702, so you contribute 27.83% of your retirement savings. If you're 20, you pay $401,036 and retire with nearly $2 million ($1,905,500, almost to the penny), contributing only 21.05% of your final savings. Cassius Belli fucked around with this message at 16:49 on Feb 17, 2014 |
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Feb 17, 2014 16:44
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Yond Cassius posted:Sure. If anyone else wants me to mine metrics out of this thing, let me know and I'll see what I can whip up. Maybe I misunderstood the earlier post, but shouldn't you be calculating so that funds at 60 are all the same? Since your plan is a fixed income and a fixed 2% interest above inflationary rate to last 20 years, the amount needed at 60 is all the same. E: For reference I get 588,650 with that fact pattern Bloody Queef fucked around with this message at 19:03 on Feb 17, 2014 |
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Feb 17, 2014 18:54
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Bloody Queef posted:Maybe I misunderstood the earlier post, but shouldn't you be calculating so that funds at 60 are all the same? Since your plan is a fixed income and a fixed 2% interest above inflationary rate to last 20 years, the amount needed at 60 is all the same. No, because you're "X-age right now", and you have so many years in the future. Inflation takes a bigger and bigger bite the further out you are. You could calculate it that way, sure, but then you have to factor your "savings increase by so much per year" to keep readjusting them into "now" dollars. It's easier just to say "I'm increasing the amount I save by 5% every year" and figure out the inflation at the end.
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Feb 17, 2014 18:58
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Yond Cassius posted:No, because you're "X-age right now", and you have so many years in the future. Inflation takes a bigger and bigger bite the further out you are. You could calculate it that way, sure, but then you have to factor your "savings increase by so much per year" to keep readjusting them into "now" dollars. It's easier just to say "I'm increasing the amount I save by 5% every year" and figure out the inflation at the end. I thought the goal was to figure out how much is needed at retirement? The working backwards from there. E: I'm an idiot, you're using inflation adjusted dollars. I get it now
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Feb 17, 2014 19:04
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God, I'm stupid. I'm a self-employed individual and I didn't understand the whole 401k rollover thing and contributed a bunch of money to my Roth 401k a few months ago. My income's pretty unstable so it would have been a much better play to contribute to a standard 401k and roll over during a low income year. Once you contribute to a 401k, there's no way to "undo" it, right? I'd save myself a bunch of money on my federal this year if I could max out my standard 401k instead. (It looks like you can only get money returned to you in the case of an overcontribution - is that accurate?) EDIT: gently caress, looks like not. Well, now I've got a new reason to keep the money coming in - to not feel stupid! Christ I can't believe I just lost thousands of dollars this way wtf. No Wave fucked around with this message at 19:40 on Feb 17, 2014 |
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Feb 17, 2014 19:05
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Yond Cassius posted:If you're 50, you pay in a total of $557,523 and retire with a maximum nest egg of $785,040, meaning you paid for 71% of your retirement in cash, off the sweat of your brow. Awesome, now calculate confidence intervals based on historical variances! j/k
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Feb 17, 2014 19:12
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No Wave posted:God, I'm stupid. I'm a self-employed individual and I didn't understand the whole 401k rollover thing and contributed a bunch of money to my Roth 401k a few months ago. The main catch with 401ks is avoiding the early withdrawal penalty. Pretty much the main way to this is rollover aka a custodian to custodian direct transfer. Pretty much the best retirement strategy is focus on making enough contribution to at least meet the employer match since it's free money once you meet the vesting requirement. For the IRA option you can contribute $5500 max unless you do clever tricks like the Roth IRA backdoor scheme.
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Feb 17, 2014 19:58
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etalian posted:The main catch with 401ks is avoiding the early withdrawal penalty. Pretty much the main way to this is rollover aka a custodian to custodian direct transfer. If you're expecting variable income, it's a better idea to make all of your 401k contributions standard contributions so that you can "smooth out" your income by converting from trad to Roth during low-income years (or retirement years). (Same for IRA.) No Wave fucked around with this message at 21:22 on Feb 17, 2014 |
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Feb 17, 2014 21:09
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I have a dumb question about dividends. Are they factored into the % change of the stock market? Like, when they say "the stock market has gone up %7 per year" or whatever it is, is it the ask price of the stock that has grown %7, or is that including dividend payouts?
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Feb 17, 2014 22:20
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I think it's almost always assumed that dividends are reinvested immediately.
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Feb 17, 2014 22:33
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Leperflesh posted:I think it's almost always assumed that dividends are reinvested immediately. It's quite the opposite - dividends are not typically factored in when talking about "the market went up X% this year".
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Feb 17, 2014 22:37
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Low-Pass Filter posted:I have a dumb question about dividends. Are they factored into the % change of the stock market? Like, when they say "the stock market has gone up %7 per year" or whatever it is, is it the ask price of the stock that has grown %7, or is that including dividend payouts? Usually when you see statements about indexes, they will include the dividend growth as a portion of that total return. However, this is not always the case. Sometimes they clarify this as "total return" if it includes dividends. The term for returns not including dividends would technically be "price return," though I don't think I've ever seen anyone use that terminology. baquerd posted:It's quite the opposite - dividends are not typically factored in when talking about "the market went up X% this year". I think it just really depends on where you are reading. When you read something like this in a book like The Four Pillars or Inteligent Investor, they are probably using total return. If it is on some news website, etc, then it is probably the price return without dividends. The total return would probably never be used in the context of relatively short periods of time (lets say one year or less) because it doesn't make a lot of sense in that context. but when talking about long stretches of time (such as the average S&P return over the last 30 years) the total return can probably be assumed unless stated otherwise. flowinprose fucked around with this message at 22:43 on Feb 17, 2014 |
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Feb 17, 2014 22:39
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Low-Pass Filter posted:I have a dumb question about dividends. Are they factored into the % change of the stock market? Like, when they say "the stock market has gone up %7 per year" or whatever it is, is it the ask price of the stock that has grown %7, or is that including dividend payouts? No things like the S&P and Dow Jones are driven by the change in value of the underlying equities that comprise the index.
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Feb 17, 2014 22:46
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Let's say my company offers a 6 percent match on my 401k. After I hit 6 percent should I keep contributing to the 401k or a IRA?
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Feb 17, 2014 23:54
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Mouse Cadet posted:Let's say my company offers a 6 percent match on my 401k. After I hit 6 percent should I keep contributing to the 401k or a IRA? The usual advice is to max the match, then if you have more money, pay into an IRA: if you hit your maximum IRA contributions, go back to the 401(k) and increase that until you hit that max, and then after that, if you still have more money to save, congratulations you're going to be rich. The reasoning is that you get to pick who you put your IRA with, so you can pick Vanguard or another similar option with very high quality, low-cost funds. If your 401(k) offers excellent fund options, and if you're not trying to do a Roth IRA or something to pay with post-tax rather than pre-tax dollars, you can just concentrate on the 401(k) and ignore the IRA option until your 401(k) is maxxed out. But most 401(k)s seem to be packed with lovely high-cost funds, and if yours is like that, you still want that free matching funds but that's it, until it's your only remaining tax-advantaged vehicle.
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Feb 18, 2014 00:05
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Yond Cassius posted:I am a nerd who does Excel for fun, and a friend asked me the old "am I on track?" question, so I've put together a few scenarios to illustrate the power of time and compound interest. Do you mind sharing the excel you put together? Personally I think I would be happy at an inflation adjusted 20-25k a year. edit: I think my goal atm is a Kevin Spacey early retirement. 1. Get debt down to zero/Save as much as possible. 2. Save as much as possible/pay down a small home. 3. Save save save save save. Put more into the 401k, max roths, do whatever. 4. Get the easiest most laid back job that pays the bills or work part time in my field of expertise. Let the savings compound until I'm ready to quit completely. https://www.youtube.com/watch?v=TJh5wdvdfVE Sephiroth_IRA fucked around with this message at 01:26 on Feb 18, 2014 |
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Feb 18, 2014 01:15
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Leperflesh posted:But most 401(k)s seem to be packed with lovely high-cost funds, and if yours is like that, you still want that free matching funds but that's it, until it's your only remaining tax-advantaged vehicle. Yeah also many funds like Fidelity will try to convince you do their year target funds which are basically a high expense hodgepodge of different sub-funds. The other big downside is things such as Fidelity Target date funds also pay minimal dividend yield for each share which is another big knock against them in my book. Along with regular contributions being able reinvest dividends is another powerful tool to help a 401k account compound over time for critical first 10 years of the account. Instead sift through the options for good low expense funds such as Vanguard or Fidelity offers Spartan Institutional class funds for small/med/large cap companies.
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Feb 18, 2014 02:33
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Orange_Lazarus posted:Do you mind sharing the excel you put together? Personally I think I would be happy at an inflation adjusted 20-25k a year. It's a pretty ugly sheet, and not really built to be adjustable on the fly. I'll make a better version soon and post it, but for now: To make 24K/year (nice simple numbers) in retirement, you need to be save this much every month, under the same conditions as before: Age 20-$184.43 Age 25-$281.40 Age 30-$417.56 Age 35-$612.75 Age 40-$909.47 Age 45-$1411.52 Age 50-$2462.32
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Feb 18, 2014 16:11
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Wolfram Alpha is a neat tool to do some quick savings/income projections. https://www.wolframalpha.com/input/?i=Retirement+calculator
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Feb 18, 2014 16:32
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If you are wanting to play around with numbers, http://www.firecalc.com/ is pretty neat. You can see what kind of portfolio size you need to maintain whatever spending on the first page, then start hitting the tabs to go into crazy detailed scenarios. It bases the data on historical starting points back to 1871, and charts out how each time period would look if you started at that point. Warning: If you are like me, you will burn several hours fiddling with this the first time you look at it 
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Feb 18, 2014 16:36
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I remember that this came up in the past month or two, but I couldn't remember what the consensus was and didn't see anything when I looked a few pages back: If I wanted to max out my IRA contribution at the beginning of each year, where would be the best place to keep my money during the year as I put away money each month? I currently have access to a savings account that gives me 1.1% interest (compounded annually) and have a taxable account holding VTSMX (but it would not be very desirable to put more in as I would have to pay short term capital gains when I converted it to a Roth in January 2015). I would be open to opening up another sort of account as well. Unfortunately, I have no access to a 401k and have already maxed-out my 2013 and 2014 IRA contributions. VVV Cool, thanks!  VVVVVV
Total Confusion fucked around with this message at 16:51 on Feb 18, 2014 |
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Feb 18, 2014 16:43
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It doesn't make any difference in the big picture where you store five grand for a year. 1.1% APY is nice, so just use the savings account and don't worry about it.
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Feb 18, 2014 16:49
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Wasn't there a calculator that let you add in all your prospective retirement account types including pensions and 401ks and it showed you proper withdrawal rates with taxes in mind? I know I've seen it before.
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Feb 18, 2014 18:03
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What's a good savings account out there that's liquid (instant transfers), not too high risk, and doesn't have a high minimum balance?
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Feb 19, 2014 00:09
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I was hoping I could get some advice- my company uses Fidelity for retirement purposes and I'm ready to free myself of the higher fees of the target date funds. Does anybody have thoughts about the following allocations: 30% SPTN EXT MKT IDX ADV (Low and Mid cap stocks, 0.07 expense ratio) 10% SPTN US BOND IDX ADV (US bond index, 0.1 ratio) 30% SPTN 500 INDEX INST ( 0.05 ratio) 30% SPTN GLB XUS IDX ADV (Foreign developed and developing markets, 0.18 ratio) Are there any changes people would recommend? Things that I'm missing? Oh, and I should mention I have about 40-45 years until I plan to retire. Manstrocity fucked around with this message at 06:53 on Feb 19, 2014 |
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Feb 19, 2014 06:28
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burritonegro posted:What's a good savings account out there that's liquid (instant transfers), not too high risk, and doesn't have a high minimum balance? Are there any reputable credit unions in your area? I just setup an account yesterday (wife was a member) so I could apply for a mortgage and they only wanted a $5 balance.
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Feb 19, 2014 14:18
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Don't time the market I know, but I'm still torn about whether to dump my remaining 2013 contribution in now or spread it out between now and April 15. Is it wrong of me to hope for a short term crash so I can put all my money in then?
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Feb 19, 2014 17:07
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kaishek posted:Don't time the market "Dollar-cost averaging" is silly in my opinion: If you have the money now, it makes the most sense to put it in the account now. My strategy is to put it all in on January 1st (or whatever the next business day is) and forget about it; I don't watch every up and down of the market so it doesn't stress me out. On the other hand, if spreading it out between now and April 15 will give you some peace of mind or something, then go ahead, because frankly the difference between the two strategies is unlikely to be very big.
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Feb 19, 2014 17:17
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kaishek posted:Don't time the market I know, but I'm still torn about whether to dump my remaining 2013 contribution in now or spread it out between now and April 15. Is it wrong of me to hope for a short term crash so I can put all my money in then? You are trying to time the market. Don't time the market.
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Feb 19, 2014 17:58
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kaishek posted:Don't time the market I know, but I'm still torn about whether to dump my remaining 2013 contribution in now or spread it out between now and April 15. Is it wrong of me to hope for a short term crash so I can put all my money in then? It's been pretty well proven that time-in-market is more important in the long run than timing the market. For my long-term and retirement investing (i.e., mostly index funds and similar) I just put the money in as soon as I'm ready. So for my IRA it's usually in the first couple weeks of January.
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Feb 19, 2014 19:14
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Thanks for the kick in the pants. Intellectually I know, but there's a big difference between knowing it won't matter in the end and dropping 5 grand at random into the market. For the upcoming year I have auto-debit transactions to go monthly to account for the first $1500 for me and for my wife. I'd like it to be more but I'd rather keep the flexibility into early next year.
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Feb 19, 2014 21:02
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Everybody worries they're going to buy high and sell low, but if you had to ability to predict with even 51% accuracy whether the market will go up or down in 24 hours, you would do best to quit your job and make billions in the stock market. A "buy high" day today is a lot cheaper than a "sell low" )hopefully) will be in 30 years. Don't worry about dropping 5 grand at random!
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Feb 19, 2014 22:15
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Does anyone have any good resources on how to find a fiduciary adviser in the Minneapolis/St. Paul area? I've read four pillars but want someone to sit down with me and work some scenarios. The big unknown for me is gauging what kind of income I will need in retirement. I also have a schwab taxable brokerage account under 3rd party management (1% management fees plus all the funds they pick are crazy expensive). I need to move this but it has a bunch of unrealized long term gains and I'm not really sure what my options are.
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Feb 19, 2014 23:39
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For a Vanguard Roth IRA the minimum for a lot of funds is $3,000. If the maximum contribution is $5,500 per year that makes it pretty limited in what you can buy doesn't it?
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Feb 20, 2014 00:05
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Yes. Buy a target retirement fund, so you'll be diversified. Then after a few years when you have like 20k+, you can switch to a basket of funds you pick yourself to fine-tune your asset allocation while still having at least 3k for each fund you want.
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Feb 20, 2014 00:09
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The minimums aren't specific to the type of account. You can buy the same funds in a taxable account with the same minimums. So yeah in the first year of your IRA you won't have a lot of flexibility which is why doing something like a target-date fund is a pretty good choice. But each year as you add more money (and presumably more knowledge) you'll have more flexibility to fine tune your portfolio. Also, Vanguard ETFs don't have minimum investment amounts and typically have the same ER as the Admiral share mutual funds that they mirror.
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Feb 20, 2014 00:10
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And keep in mind that you have until tax day to put in your 2013 Roth IRA contributions. So if you have the cash available right now, you could put in 11k for 2013 and 2014. That said, Leperflesh's plan is the method I used when I started my Roth IRA.
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Feb 20, 2014 00:45
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Fancy_Lad posted:And keep in mind that you have until tax day to put in your 2013 Roth IRA contributions. So if you have the cash available right now, you could put in 11k for 2013 and 2014. Yeah I plan to put in 11k.
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Feb 20, 2014 01:11
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