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And most people in their 20s can't even really conceptualize retirement. It seems impossibly far away, time-wise. But missing that first 15 years has a huge imp
by WildUtah 10y ago
And most people in their 20s can't even really conceptualize retirement. It seems impossibly far away, time-wise. But missing that first 15 years has a huge impact on the total compounding potential.
30 year treasuries are currently yielding 3%. You could get 4% in a less tax favored safe investment. Inflation is between 1 and 2%.
Let's see what that does for that cash saved in your 20s. Suppose you earn a quarter as much in your 20s as in your 40s (most have a higher salary growth ratio than that). Then figure on 20 years of 4% growth, or 2.5% after inflation. 2.5% compounded for 20 years is 64%. So your savings in your 20s ultimately add only 2/5 as much as your savings in your 40s. It's not nothing, but it's hardly the essential key to retirement to start early. You'll be fine starting at 40.
And 10% is nowhere near enough. That's essentially hoping that Paul Ryan doesn't get to undercut Social Security because that's what you're going to be living on. You need to save about 30% of pre-tax pay and invest carefully from age 21. Or 35% if you start soon after age 35. That's to retire in your early sixties. You also have to pay taxes, so figure on 40% or so of your paycheck for take home pay.
Do you know anyone doing that? We're going to have a crisis on our hands, I predict.
- ams6110 10y agoYou don't save for retirement with treasuries in your 20s. You put it in index funds.
- toomuchtodo 10y agoAnd hope you're investing at the right times: http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html http://www.nytimes.com/interactive/2011/01/02/business/20110...
- dgacmu 10y agoYou don't hope. You invest continuously throughout your working life and smooth out some, but not all, of those bumps. More importantly, though, you hope you retire at the right times (large market losses early in retirement are dangerous). But you work around that by building in flexibility into your retirement draw - in a bad year, you cut back and spend a bit less.
- friedman23 10y ago> More importantly, though, you hope you retire at the right times Hope has nothing to do with it, 10 or 15 years before you plan to retire you start liquidating equities and going into bonds and treasuries. If the market is at a low point you hold off on equities until the market rises again.
- paganel 10y agoHow do you know that "the market is at a low point"?. And more importantly, how do you know that the "market will rise again" ?
- zeroer 10y agoI think he means you determine if "the market is at a low point" by comparing to the recent past. For instance, today, I can tell the market is at a high point. It might be a good time to rebalance from stocks to bonds today if that's something I'm looking to do. That the market will rise again has held in the past in the U.S., so it's not so unreasonable to suspect it will in the future.
- friedman23 10y agoIf the stock market crashes and never recovers we are all fucked. Buy guns and bullets in that case.
- dgacmu 10y agoIf you go much under 50% equities, you substantially reduce the percentage of your wealth you can draw on for living expenses. For more: https://pressroom.vanguard.com/nonindexed/2013.10.23_A_more_dynamic_approach_to_spending.pdf https://pressroom.vanguard.com/nonindexed/2013.10.23_A_more_...
- kobeya 10y agoOver 30 year timelines? No you don't have to worry about timing the market.
- WildUtah 10y ago"You could get 4% in a less tax favored safe investment."