T Nation

How Much Do You Invest?

I’m 29 and have been saving 10% of my pay towards retirement for a few years now, but I don’t remember why I chose 10% and wonder if that’s even going to be enough.

I started looking all over the internet and, of course, I got a bunch of bullshit that just kept contradicting each other.

Now I’m trying to gauge where I am based on other people. So what percentage do ya’ll invest for retirement?

15% is my usual, though I’m putting away almost £1000 a month at present for startup/emergency capital.

I try to save about 15%-25% of my take home. Plus about 9% gross in 401k.

About 10% goes into a pension scheme (25 year plan) and then another 10% gets saved in the bank (rent from property I own) and then maybe 10% goes into the bank.

The big factor is how many people you are supporting. When you first get married and you and your wife/husband are both working you should be able to save one whole paycheck each month. Once kids come along and one of you is at home taking care of them it become much harder.

Search around on this forum, there are multiple threads on investing.

That being said, I started placing 20% of my income into my 401k’s around age 22 or so.

I’m 37 today, and I have around $450k in the stock market. It was $500k a few months ago, but it like the market has taken a big hit.

I should have a few million by the time I’m 50, which means retirement will be pleasant for me.

Just my .02. Start early, invest as much as you can!

Read Dave Ramsey’s work. Total Money Makeover is a brilliant start.

Basically, get out of debt, then start putting as much of your extra income into an investment/IRA account to earn as much money as possible for the long term.

There are quite a few people on here who have read his books, they all swear by them.

[quote]SouthernGypsy wrote:
I’m 29 and have been saving 10% of my pay towards retirement for a few years now, but I don’t remember why I chose 10% and wonder if that’s even going to be enough.

I started looking all over the internet and, of course, I got a bunch of bullshit that just kept contradicting each other.

Now I’m trying to gauge where I am based on other people. So what percentage do ya’ll invest for retirement?[/quote]

You probably picked an amount that ended up maximizing your 401(k) contribution, up to the allowable limit at the time. You should check each year and re-calibrate to make sure you’re taking advantage of the full amount. For 2008, the max 401(k) contribution is $15,500 ( http://www.irs.gov/newsroom/article/0,,id=174873,00.html ). Some people choose a percentage that equals a smooth income stream over the year (so roughly 12 equal payments) - some front-load contributions so it feels like they get extra cash around the holidays.

You can, of course, save more than that - just not with the tax deduction on the income. Also, depending on your expectations regarding your current and future income tax rates, you should consider whether a traditional 401(k) makes sense for you (a 401(k) essentially gives you a tax deduction now, but it turns capital gains into income, taxed at the full income rate, when you withdraw - as opposed to a Roth plan, should you have that option, which gives you no tax deduction now but makes all the gains tax free).

If you own a home, your mortgage is essentially a forced savings plan - but now that you know that, forget about it and don’t treat your house like a bank account.

You should also save outside your retirement plan - at least to the point where you have a several-month cushion for expenses, and then for any other goals you have (like buying a house if you’re not a home owner - you’ll need that 20% down payment).

I would suggest investing the minimum amount in your 401k to get your company match. After that point, fully fund a ROTH IRA. You don’t get any tax benefit presently, but you never pay taxes on the money when you withdraw it in the future. Also, your contributions are always able to be withdrawn at any time, tax and penalty free so it could serve as a temporary emergency (extreme) fund.

After the ROTH is fully funded, return back to fully fund your 401k to the 2008 limit of $15,500. Repeat the same process with your spouse’s income or open a spousal ROTH if she/he doesn’t have any earned income.

After that point, invest as much as you can in an index fund that tracks the broad market. Actually, you would be well served by looking for index funds in all your investments (401k, Roth, outside investments). With index funds you keep turnover low (taxes stay low in taxable accounts) and the fees you pay are dirt cheap, and there are no upfront charges. Most importantly, in the long run 20+ yrs, index funds beat greater than 80% of all funds. Also, think diversification… US stocks, international stocks, REITs, etc.

Try to live below your means as well, that 2007 Mustang GT from a previous post may be breaking this rule a bit. You can usually live on less than you think freeing up money to invest now and forget about until you retire. Probably, the most important thing to remember especially in times like these…invest the money and forget about it. Now is a great time to be buying funds for those of us that are young, everything is on sale.

I have actually taken it one step further. After fully funding our 401k’s and traditional IRAs (income limitations) and setting aside money in a taxable account and emergency fund we have funded (2) 529 plans for children we don’t even have yet, have 25k in these. I view it as another tax-free investing strategy.

Remember, money is like strength and time, you can never have enough!!!

This year I hope to make the maximum contribution to my IRA and open a mutual fund account. Looking at the Vanguard STAR. Hopefully this will allow me to buy my own island in Fiji when I retire.

[quote]BostonBarrister wrote:
SouthernGypsy wrote:
I’m 29 and have been saving 10% of my pay towards retirement for a few years now, but I don’t remember why I chose 10% and wonder if that’s even going to be enough.

I started looking all over the internet and, of course, I got a bunch of bullshit that just kept contradicting each other.

Now I’m trying to gauge where I am based on other people. So what percentage do ya’ll invest for retirement?

You probably picked an amount that ended up maximizing your 401(k) contribution, up to the allowable limit at the time. You should check each year and re-calibrate to make sure you’re taking advantage of the full amount. For 2008, the max 401(k) contribution is $15,500 ( http://www.irs.gov/newsroom/article/0,,id=174873,00.html ). Some people choose a percentage that equals a smooth income stream over the year (so roughly 12 equal payments) - some front-load contributions so it feels like they get extra cash around the holidays.

You can, of course, save more than that - just not with the tax deduction on the income. Also, depending on your expectations regarding your current and future income tax rates, you should consider whether a traditional 401(k) makes sense for you (a 401(k) essentially gives you a tax deduction now, but it turns capital gains into income, taxed at the full income rate, when you withdraw - as opposed to a Roth plan, should you have that option, which gives you no tax deduction now but makes all the gains tax free).

If you own a home, your mortgage is essentially a forced savings plan - but now that you know that, forget about it and don’t treat your house like a bank account.

You should also save outside your retirement plan - at least to the point where you have a several-month cushion for expenses, and then for any other goals you have (like buying a house if you’re not a home owner - you’ll need that 20% down payment).[/quote]

Simple question, but I’ve been wondering what the answer is: if I max out my 401(k) at $15,500, can I then contribute to a Roth for an additional amount above the $15,500?

[quote]Loose Tool wrote:
Simple question, but I’ve been wondering what the answer is: if I max out my 401(k) at $15,500, can I then contribute to a Roth for an additional amount above the $15,500?

[/quote]

Yes, as long as your income is under $101,000, for 2008. The max contribution for 2008 is $5000.

You have until April 15 to contribute to an IRA for 2007. Your income must be under $99,000 to make the max contribution, which is $4000.

[quote]tedro wrote:
Loose Tool wrote:
Simple question, but I’ve been wondering what the answer is: if I max out my 401(k) at $15,500, can I then contribute to a Roth for an additional amount above the $15,500?

Yes, as long as your income is under $101,000, for 2008. The max contribution for 2008 is $5000.

You have until April 15 to contribute to an IRA for 2007. Your income must be under $99,000 to make the max contribution, which is $4000.[/quote]

The above noted income limitations are for single filers, the joint filing limitation is higher, and the married filing separately is far less I think $10,000 max income.

If you are above the income limitations you can get into a Roth through a back door. Invest the max amount in a traditional IRA now, and in 2010 you can convert to a Roth regardless of income and only owe tax on your earnings as you have invested after tax money originally in the traditional IRA. Additionally, you can spread the tax bill over 2 years.

[quote]rrjc5488 wrote:
Read Dave Ramsey’s work. Total Money Makeover is a brilliant start.

Basically, get out of debt, then start putting as much of your extra income into an investment/IRA account to earn as much money as possible for the long term.

There are quite a few people on here who have read his books, they all swear by them.[/quote]

When paying down debt it is important to look at the cost of the debt versus the long term return on investment of the money you would be using to pay down the debt. If it is a credit card with a high interest rate that is essentially a tax free return on paying down the debt. However, if the interest rate on the debt is low you may be better served by investing that money in the market in a broad index fund looking for the average rate of return of around 10%. This is especially true with interest that is deductible, such as mortgage interest, which effectively lowers the actual interest rate you are paying for the mortgage money. A common misconception, that paying off your mortgage early is a financially smart move when it really only has an emotional benefit.

A couple examples, I recently took a $10,000 fee free cash advance on my credit card at 1.9% for the life of the balance and invested it in the market. Also, look for fee free 0% interest rate cash advances/convenience checks from credit card companies. I also did this last year, taking $80,000 (over 4 cards) from Chase interest and fee free for 15 months. Put the money in an Emigrant Direct on-line account that was paying 5% last year. So I made a little more than $4,000 (before taxes) using someone else’s money.