Friday, June 25, 2010

8% Interest Plus 4% Inflation

We had our yearly retirement seminar from our 401k administrator today. The future looks bleak. He said we need 80% of our income in retirement. We must invest enough to achieve this with an 8% average return minus 4% for inflation. Good luck with social security, if there is any left. Oh, and we are probably going to live for 25 years in retirement. With his plan, I don't think I can ever retire. Good thing I have my own plan.

I did learn one thing, that my employer's contributions to my 401k are not completely vested until year 5. I am only at year 3 1/2. I don't think I am going to make it to 5. I don't think it is very much money. Maybe a few thousand. Certainly not enough incentive to stick around longer at this job. My 401k is merely my back-up retirement plan anyway. Heck, if my current plan turns out well enough I can give my 401k to charity. Wouldn't that be nice?


Dave said...

I never thought that "80% of income" was meaningful. If your expenses are very low and you are LBYM (Living Below Your Means, for those unfamiliar with the acronym), then the percentage of your income you really need will be much lower (as I suspect it is for you, especially after you pay off the mortgage).

For me, I took two pay cuts as I reduced my work hours in 2001 and again in 2007 (to $30k). Combined, they reduced my wage income by 60%. It was only then when my expenses were about 80% of my income. My current dividend income is about $30k, so I was already used to living with that income stream.

As to your vesting, do you have a partial vesting prior to working there 5 years so if you leave before you are fully vested, you can still take some of your employer match contributions to your 401(k)? If you end up 80% vested after 4 years, for example, then it is not such a big deal if you can't keep working there for 5 years (another 18 months from now).

But employer match contributions are the closest thing to "free" money you can get (short of free shares of growing company stock like I got).

If SS is not there when you retire (I don't know how old you are but I suspect you are under 40), you will wish you had another source of income/savings to make up for the shortfall. Even if you roll it into an IRA, at 7% for 35 years it will grow 10-fold. So $5k will grow to $50k, hardly trivial.

Inflation will quickly eat up your savings in the long-term, so having another income stream (SS) or savings (401k/IRA) to counteract that will be crucial.

Lizzie @ her homeworld said...

80% of income. Doesn't sounds like they expect you to be mortgage free by retirement. If i take my mortgage out of my monthly pay then I can live easily, in fact more luxuriously than i ever would, on 50%
Follow your own plans!

Stacey said...

Yes, follow your own plan!

I've always wondered about that 80% "rule," because 50% of my income now goes towards the mortgage (paying ahead, that's what it's such a big chunk of income) and retirement contributions. Yay for LBYM! :-)

You've inspired us, by the way. Once the house is paid off, we plan to cut back to part-time or seasonal work. Time is worth so much more than money.

Dividend Growth Investor said...

Well, the plan administrator wants to get as much funds under management as possible, in order to maximize their income.

The idea of spending 80% of your income in retirement is BS imho. If you stop eating out with your colleagues, cut on commuting to and from work, and stop upgrading your wardrobe in order to look professional and if you can move to a place with lower housing costs, then you can easily live on much less. Also do not forget that in retirement you would likely pay lower taxes - no SS or Medicare and you would likely be in a lower tax bracket as well.

Also most investors should also focus on income investing, in order to generate income from stable dividend payments and not rely exclusively on volatility of stock markets. I am basing my retirement on stocks that regularly raise dividends, which beats inflation and makes me focus on cash flow.

Daizy said...

Dave, I must admit I had trouble staying awake during the presentation. There was a tiny mention of running one's own numbers (and making a budget) at the end of the presentation. I know there are people who don't like to run the numbers. I was planning my retirement soon after I got my first full time job.

Lizzie, they expect use to have lots of travel bills then medical bills, that's why we are supposed to have 80%.

Stacey, so glad I could be an inspiration to you. Good luck with your goals.

Div.Growth Inv, one of the first things the guy told us is that we should bring our lunch to work. I thought that was funny because almost everyone in our office does that most of the time.

Dave said...

Dividend Growth Investor, while I agree that many expenses (taxes, commutation, to name two) will be lower in retirement, one expense which will be higher if you retire prior to turning 65 (Medicare eligibility age in the USA) will be health insurance. For 2010 my HI premiums have exceeded my housing expense (co-op monthly mainteance charges) as my highest expense. And that doesn't include dental expenses which are for me reasonably low because I had some costly dental work done in the 2 years before I retired 18 months ago (at age 45).

Andy Hough said...

Your plan does seem much better than his plan. Your plan is also much closer to my plan so obviously it is a better plan.

Daizy said...

Haha Andy, so true. Living way below our means definitely has its perks which most people don't or can't appreciate.