Wednesday, January 22, 2014

How Much To Save For Retirement

The easy answer is, "As much as possible." The more nuanced (and realistic?) answer might be this:

With the stock market constantly rising and falling, it's hard to predict what kind of luck you'll have when you retire and how much you should be saving so you don't run out of money. One financial expert, however, has found the magic retirement savings rates for most people.

Professor Wade Pfau, who teaches at financial planner school American College, looked at market returns between 1871 and 2009. Using that wealth of data, he crunched the numbers to find the "safe savings rates" that would guarantee retirement income in any kind of market (bear or bull).

If you have 30 years to save and want to replace 50% of your income, use a 60/40 asset allocation (60% stocks and 40% bonds) and save 16.62% of your salary every year. More proof that saving early pays off: If you have 40 years until retirement, the savings rate drops to 8.77%. ...

Me, I don't believe in magical savings rates. (When you're unemployed it's hard to save anything, but extremely easy to burn through your money stash.) What I do believe in is striving to save regularly, even when you're up against it. A TAG member recently told me:

Even when I'm on layoff, I put $25 or $50 a month into Vanguard's Total Stock Market. I do it religiously. I never touch the money. And I've managed to save thirty thousand dollars over the years. It hasn't been easy, but I'm glad I've done it.

The point is to start an investment program and stick with it. Put money into tax sheltered accounts (IRAs; 401(k) Plans.) Put money into straight-up investment accounts. But put money into something.

The question is, where? There are a bajillion asset allocation strategies, and all of them have varying degrees of merit. I'm a big fan of Larry Swedroe's Big Rocks Portfolio*. It's a stock and bond portfolio that's diversified, but tilts to small cap value; it also slices things up between a variety of funds.

But maybe the last thing you want to do is study mutual fund charts, or stare at line graphs. For investors who want minimal hassle, a simple yet broadly diversified portfolio might be the ticket. Something like this:

Three-Fund Portfolio

Vanguard Total Stock Market
Vanguard Total International Stock Market
Vanguard Total Bond Market Index

What I like about both approaches above is they are 1) low cost, 2) they cut out the Wall Street sharpies, and 3) at the end of thirty or forty years one or the other will provide you with a nice, neat stack of greenbacks for your sunset years. I bring this up now because (once again) we're starting Animation Guild 401(k) enrollment meetings, and I want you (surprise!) to attend.

Oncoming TAG 401(k) Enrollment Meetings

January 28 -- 2-3 p.m. -- Disney TVA (Empire)
January 30 -- 2-3 p.m. -- Film Roman
February 4 -- 10-11 a.m. -- Walt Disney Animation Studios
February 5 -- 2-3 p.m. -- WB Animation
February 6 -- 2-3 p.m. -- Sony Pictures Anim.
February 13 -- 2-3 p.m. -- Fox Animation

* At the link, you'll discover several different structured investment portfolios. Please note that ALL have their points. But some I like more than others.


Ahmad Philips said...

paper depreciates in value... Also paper isn't money, and is completely worthless until you've used it to trade for a good or service.

If the economy were to completely collapse, or America to fall like Rome, all that paper would be worthless, but if you had Gold or Silver or something else of intrinsic VALUE, then you would be much better off.

Mark Dobson said...

Hi All,
It's a good idea to establish a savings target - one that tells you roughly how much you should set aside over time to meet your retirement goals. Thanks

etahn Evans said...

I can agree with Ahmand but i did find this calculator that helped. hope this helps somebody.

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