Just curious, in your opinion, what should be the net worth target for people making regular tech income in their 30's, 40's and 50's if they want to eek out comfortable living in retirement, inflation-adjusted?
If you want to spend down the principal, the calculation becomes more complex and you need to use software rather than a rule of thumb.
The 4% number comes from a study that discovered that a portfolio with a constant 4% rate would survive any period in US stock market history -- even the Great Depression. But past performance doesn't guarantee the future performance. Try to do this with European markets and there are periods where a nest egg won't survive a 0% withdrawal rate. But yeah 4% is the guess people use when planning retirement.
Thats fine, but in real life you have to be flexible as you approach retirement and keep an eye on the math. The first 10 years of retirement are the critical ones. After that you hopefully built up a buffer and don't have to worry due to the nature of compound interest.
More info:
http://blog.networthify.com/withdrawal-rates/
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
http://financialmentor.com/free-articles/retirement-planning/how-much-to-retire/are-safe-withdrawal-rates-really-safe
http://firecalc.com/Now you know why everyone out here wants to do startups: it's the only way to ever retire!
My wife and I are in our mid 30's, put away about 15% of our income and have defined benefit pensions that we contribute 7% into.
It's totally doable. Last year we spent two weeks in Hilton Head and paid about $80/night, we drove from New York to save about 80% vs. flights/car rental. We live in the city we work in and I commute via bus.
It's also totally worth it. We're living we'll now, and will be able to retire in our late 50's with a paid off house. I will not be the guy in his mid 60s trying to hang on to his job.
It helps if you don't enjoy motorcycles and exotic travel. I do something social about 5 days a week, but that "something social" is usually something like going over to a friend's house to play Starcraft or XBox, or hiking in a state park, or going rock climbing, or worst-case, dinner & a movie. You don't need all that much money for any of these.
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
http://blog.networthify.com
Disclaimer: Networthify is my side project and my savings rate is not 80% but its a lot higher than 25%.
Keep in mind this isn't direct savings. Stock and other investments count.
Also, at the current rate of US inflation; by the time I retire which is in about 40 years, $30K/year purchasing power will become $110K/year. Social security will not exist when I retire and a net worth of 1 million dollar, drawing down on principal will last me less than 10 years.
For folks in your mid to early 40's, how are you guys planning for your retirement?
In short I don't think retirement is something you can "plan" for if it's more than 20 years out or so. It's more like disaster preparation. Save as much as possible, live as far below your means as you can handle, keep your skills valuable. Keep your money diversified and expect your returns to just about keep up with the real and honest cost of living increases until the world economy feels like taking a dramatic shift for the better. We're still "unwinding" from all the previous crises so I don't foresee that happening anytime soon.
This is nearly a self contradictory statement. That is, if inflation were getting out of control, we would see high interest rates accompanying that change.
I'm not saying your advice it bad (savings are a good idea), although maybe a little extreme sounding (too much doomsday feel for my taste). I do, however, wish people would stop it with the "inflation is scary" rhetoric.
Also due to several rounds of quantitative easing, the Fed injected a lot of money into the money supply. However, banks are not lending as much money to stimulate the economy which doesn't trickle down to ordinary folks; part of the reason being big banks such as BoA and Citi needed to bolster their capital reserve against their illiquid toxic assets from the real estate speculation bubble. As a result, QE1/2/3 caused real inflation to money supply while the stock market and personal savings account returns have remained anemic.
I remember I was excited when I got a six-figure job, then I realized that 80K in 1998 amounted to 110K in 2011 and realized that inflation was real.
Inflation is what happens to prices, by definition. "Inflation to the money supply" is nonsense, like if you said int x = "foo" or talked about installing new RAM to store your photo album.
Also, the notion that banks can cause inflation by not spending reserves is baffling.
Things that come to mind that help you save more as you get older:
1. Your previous savings will be compounding.
2. If you're lucky, you'll finish paying off a house which frees up a good chunk.
3. If your career is going well, your salary will keep going up, hopefully faster than inflation.
Quick question: I put $100k in your pocket right now. Would your life be more improved if your mortgage principal was reduced by $100k, or if you went and did something else with it? I think most people could find something better to do -- start a company perhaps? Invest in a rental property? Start a kids college fund?
And again, if you did want to put that into your mortgage: refi.
The idea of personal comfort is interesting, I think people should attempt to quantify the value of being mentally released of debt burden -- maybe for some there is very high value in it. For me personally, I have always been comfortable with the idea of strategic debt as a way to advance certain goals.
I think what your approach neglects is the fact that being conservative is risky as well. In the last five years, of course, it would be hard to make that case. But unless you die soon, there will definitely be times where you will be left behind -- relative to your economic peers -- if you don't finance your activities externally.
I tend to advise people I know to pay down debt first these days, because they're usually paying around 6-7% interest, and where else can you get a 6-7% risk free investment? T-bills are at about 3%, inflation-adjusted T-bills are often less, CDs are under half a percent, and savings accounts are basically nothing. You can potentially get more than that in the stock market, but that comes with additional risk, so for a lot of more conservative folks it doesn't make sense to carry a debt and simultaneously invest in the market.
For student loans, I agree with you, and I'm putting all my extra money into them while saving the bare minimum for a bit of security if something bad happens.
You have to consider things like origination fees and points, though. Everybody thinks they're going to stay in their new house for decades, but the average is something like four years.
Assuming you went to college and got out in 4 years thats only 8 years to put back 1x salary. Given that a lot of those first few years is invested into "setting up shop" getting things like furniture, a reliable vehicle, maybe buying a house, getting married, sometimes having kids, I don't think thats in the cards for many people.