Category Archives: Retirement

The Ideal Amount of Savings at Age 30

Written by in Retirement, Saving
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I love looking really far down the road. I love projecting account balances in the future, and I love the idea of compounding interest.

I also like making money today, I like having the ability to spend money on the things I want, and I have no problem paying a little extra for things if I can afford it. I hate stress, so if a few dollars saves me from worrying, it’s money well spent.

So I thought about, in order to retire comfortably at age 66, I’d need $4 million. Why that much? Because it’s such a huge number, that even with inflation and everything, there’s no way I could ever need more than that. It’s very possible I won’t need that much. But I know that in 40 years, if I have $4 million in savings, there’s no way I won’t have enough money for everything I’ll want.

So working backwards, I realized that at an 8% rate of return, I’d need $250,000 in savings by age 30 to hit that mark. If I earn 8% every year, I’d have $367,000 at age 35, $539,000 at age 40, $1.16 million at age 50, $2.5 million at age 60, and just about $4 million at age 66. The “normal” retirement age will probably increase in the next 40 years, so I’ll still be retiring early at age 66.

$250,000 is not an easy target to hit by 30, but the benefits are enormous.

There would be no need to save a dime the rest of your life. Once retirement is fully funded, there’s no need to save extra. As long as you earn as much as you spend, you can spend that money however you want. No more saving 20% for retirement, you can focus on education, the house, travel, or whatever else you’d like.

Instead of saving for huge goals, savings can go toward family vacations, education, and some of life’s pleasures. $250,000 is my goal for 30, and then that extra 20% (or more ideally, 60%) of income that goes to savings can go toward a house or kids.

Readers, what do you think? Is $250,000 a realistic goal? Are the benefits enormous enough to make it worth it?

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Government Could Lower Social Security Benefits Without Anyone Noticing

Written by in Budget, Insurance, Retirement, Taxes
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I’ve believed all along that Social Security benefits as we know them aren’t going anywhere, but it turns out that there are some sneaky ways that the government can reduce the payouts it will have to make.

One step that would definitely save the government a good amount of money would be changed the way it measures inflation. Currently, Social Security calculates inflation based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Both White House officials and Congressional leaders (Republican and Democrat) are proposing calculating inflation for social security benefits using the Chained Consumer Price Index. The result would likely be that social security inflation would be slower than under the current rules.

It would be pretty hard to get away with saying that people don’t deserve the benefits they were promised and to reduce someone’s paycheck by a hundred dollars a month. There would be an uproar because it would be seen as stealing from needy seniors.

But by changing the calculation that determines just how much of an increase people get each year, this change would be much less noticed and the impact would be felt by only a small very amount each year.

The proposed change would put the rate of inflation at an average annual rate of about 0.3% less than the current calulation. So after 10 years, people would receive a check that’s about 3% smaller than what they would if no change is made.

Still, the proposed change would cost the average retiree about $18,000 over 25 years. I’m sure the government would love to save that much per retiree. It comes out to an estimated $112 billion over 10 years, and since it compounds, the savings for the government would continue to grow.

About 60% of seniors rely on Social Security benefits for at least half their income. And by 2020, Social Security benefit payments are projected to total $1 trillion, so clearly we’re dealing with a large issue. Saving $100 million over 10 years is not going to fix the problem, but it would certainly be a start.

Readers, what do you think of this proposed fix? Would it be helpful or is it just a sneaky way of reducing the benefits of seniors?

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How To Find and Maximize Your Social Security Payout

Written by in Retirement
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In an efort to save money, the Social Secuity Administration has suspended its mailing of annual benefit statements. You can still get estimated retirement benefits online by visiting ssa.gov/estimator.

I just went on and found out that their system isn’t working at the moment, so I used their social security estimator, which is weak because I don’t know how much I’ll earn in future years, but based on the information I gave it (the same salary each year from now until I retire), I can expect about $2,000 each month in today’s dollars if I retire in just 43 years (woohoo can’t wait!)

OK, so that’s great, but with social security being the way it is, I’m not going to write that amount down in pen yet. I’ll wait to see what the future holds while funding my retirement accounts any way I can.

For people who are a little closer to retirement age than I am, there are some really interesting decisions to be made. These involve the decision about how and when each spouse should claim benefits, and the difference could be enormous.

The reason there could be differences is that by claiming benefits at age 62, benefits will be reduced by 25% for the rest of your life. By waiting until 70, benefits won’t start for an additional 4 years, but they will be 132% of the amount you would receive at the standard retirement age.

With spouses, there are combinations that will maximize benefits and others that will result in losing money. In order to find out which route you and your spouse should take, check out Social Security Timing, an online social security tool that simplifies these decisions for you. It can should just how much money is at stake and you may be surprised to find that this “simple” decision could earn you an additional $50,000 or more over the course of your lifetime.

Readers, go use the tool and let me know how much is at stake for you!

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Don’t Waste Your Money on an Emergency Fund

Written by in Credit, Insurance, Retirement
60 Comments

Hi. I’m Kevin McKee from Thousandaire.com.

Last November, Daniel wrote about How to Use Personal Finance to Make Friends, which in his case was to steal money from a corporation and give it to a stranger in the store. Daniel is a great writer and a good guy, but we don’t always see eye-to-eye on things. This week, we have a little disagreement on Emergency Funds.

Daniel posted at my site why he thinks Investments and Credit Cards Are Not an Emergency Fund. I say having three-to-six months income sitting around in a 0% or low interest savings account is a big, fat waste of money.

I do truly believe it is essential to have enough money to live for three to six months if you lose your income or have a huge unexpected bill. You don’t want to let one incident ruin months or even years of financial planning and execution. So why don’t I recommend Daniel’s boring emergency fund?

Here is my three step process to covering your financial rear-end without a dedicated emergency fund.

  1. Have enough money in your checking account and liquid investments to cover yourself for 3-6 months (be willing to sell investments, even at a loss, in case of an emergency, or use a credit card or loan if necessary) and use those accounts as your emergency fund if necessary.
  2. Be a rock star at work and make yourself indispensable and always keep your resume updated in case you find yourself looking for work.
  3. Insure yourself against catastrophic situations that could ruin your finances,

My method is a bit more risky than keeping your emergency fund in cash, but with that risk comes the opportunity to substantially increase your net worth via the return on your investments. Why would anyone keep money in an account that returns 0-2% interest when it could be invested in the stock market where the average return is about 8%? The difference between 1% and 8% on a $10,000 balance is $700!

Sure, I could potentially lose money in the stock market. I could have bought at the top of the market in 2007 and sold at the bottom in 2008 and lost 50%. But I also could have bought at the bottom and sold this week and been up 90%. The fact is over a long period of time the stock market has always historically gone up. If you expect that to continue, then I recommend getting involved. Plus, if you do steps two and three correctly, the goal is that you would never even have to tap into this money if you did have an “emergency”.

The real keys to this plan are not losing your job or finding a new one quickly and insuring yourself against unexpected emergencies.

If you work your tail off and make yourself a valuable asset to your company, then you should have no trouble keeping your job or finding a new one if you find yourself unemployed. The most important part of this step is to be honest with yourself about your skills and performance. If you hate your job and just do the bare minimum of what your boss asks of you, then you better not believe you are indispensable. There’s no sense in adding the risk of a negative return on your investment if you are already at risk of losing your job and struggling to find a new one.

Finally, you most likely never have an outrageous unexpected bill if you have insurance to cover any catastrophic financial situations (medical, short and long term disability, auto, home owners or renters). If you have all the appropriate insurance, then keep enough to pay your deductible and invest the rest. I’d also recommend not touching very expensive, breakable stuff that isn’t yours.

By ensuring you are employed and that you don’t have to pay for catastrophic expenses, you dramatically reduce the need for an emergency fund and free up that money to invest at a higher return. Then if all else fails and you do need money, there is nothing stopping you from selling those investments and using that cash. If you’re still short on money at this point, then unless you lost a lot of money on your investments, you would have been out of Daniel’s boring emergency fund as well. At this point you can try to take out a loan or put expenses on a credit card.

Don’t waste your money on a boring, low interest emergency fund. If you aren’t putting your money to work for you, then you’re always going to be working for your money.

If you’re an exciting risk-taker and think I have the right idea, post a comment here and let me know. If you’re one of those lame savings account people, I encourage you to go to Daniel’s article and post a comment supporting his side over there. We’ll tally up the comments at the end of the week and see who wins. Daniel won the first debate (I think it was unanimous) so help me even up the score!

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