Finances
Longtime readers of my blog may notice a new link on the right side. Under "Other links", I've added my favorite on-line financial calculator. I'm sure it's not the best, but it does it all and it's simple to use.
Those of you considering buying houses can play with the Mortgage mode and see what your monthly payments would be. Just for reference, interest rates are probably 5.75% and you should add on another $200 per month in taxes, insurance, and maintenance.
At work the other day, my friends and I were realizing that we were roughly 1/3 of the way through our carreers. We were wondering what percentage of our financial retirement goal we would have to meet now in order to "be on track". The answer depends on inflation, tax or tax-free accounts, rate or return, and how much you're putting in annually. But we oversimplified everything and the answer came out to ~10% of your goal.
You can see how much money until your retirement... click on Compound Interest mode and enter your current savings in "Current Principal". If you don't have savings, just put 0. Then enter in how much you think you can save per year [perhaps after you start your career]. Enter the number of years you intend to work and a growth rate. I would recommend 7-12% for the growth rate. This is a realistic long-term stock return. This doesn't include inflation; however it also doesn't really account for increase in future savings. Your goal for retirement should be in the $500K-$1Million range or more. It sounds like a lot of money, but it's not that much to get you through another 20-30 years of retirement!
Soapbox Example: Follow along using the calculator... If you have nothing in the bank and you plan to save 6K per year for the next 30 years, (10% return) you can expect almost $1.1 Million dollars when you retire. If you wait 3 more years to retire, it goes to $1.47 Million! Let's say you only want to or can work for 20 more years... dowp! $379K! Even if you double the annual addition for those 20 years (to 12K), you'll still only see $756K. This shows the importance of saving often and saving early.
posted by chewie at 3:49 PM
12 Comments:
Nice practical post. Just to emphasize the saving early (as oppossed to often). Let's say you somehow have access to 20K right now (via parents, student loan, etc). If you put in 20K as your current principal. If you never save another penny, at 10% over 30 years, you have roughly the same amount as in your example of saving 6K per year over 20 years. Then, if you had the ability to save 6K per year...you could easily pay back your 20K "loan" over the course of the next 3-5 years (depending on the interest rate) and then get back in the game. I'm not necessarily advocating going into debt, but at a minimum if you have 20K ready to spend on a car, might be best to hold off as long as possible on that or other major purchases.
11:04 AM
good point, natc. Even if you don't have 20K to spend on a car, if you buy a new car for 20K, you will, in effect, pay out 20K over the course of the next 3-5 years (depending on your loan). Cars and any other consumer debt (such as credit cards) will sap your future faster than you can say "working till I'm 70". Actually, debt is even worse due to the interest that you end up paying... that's a lesson for another post!
12:35 PM
So even though I may appear to some to be in complete financial disarray... Retirement is one thing I'm doing right :) All from a comment I heard on Oprah a while back. Now if I could just get those cc's paid off :)
4:09 PM
I guess I'm always the pessimist when it comes to stuff, but remember everyone to spread your investments out, this includes safe stuff like bonds. It may not see the higher growth that stocks get, but stocks won't always grow at the expected 10% a year forever. Our generation will be the first to see our economy change from a Growth and Innovation Economy to a Maintaining and Innovating Economy as our population levels out in the next 2 decades. There will be a rocky few years in the transition. I just had to say something, sorry.
Barrett
5:00 PM
Ahh, be careful, tho! CC's are so bad that most financial planners would encourage you to first pay them off before you start saving for retirement. The reason usually has to do with the interest rates charged on consumer debt; however, if you play the rotation game and keep those CC loans at teaser rates under 5%, you're probably not too bad off. Anything more and you should pay them off before you start saving for retirement.
A more detailed example:
If you have 1,000 in CC debt but choose to put your 1,000 in a savings account instead, you'd have to make your 8% _PLUS_ whatever your CC is charging you. So if your CC is charging 10% interest, your investment would have to make 10% just to break even and then make 8% more to keep up. That's a total of 18% return! Not likely over time. And if that wasn't bad enough, you're losing out not just on the $1000, but on all the interest you're paying along the way! If you're only making the minimum payments, you're not paying that debt down at all - that's a lot of money that's going to add up over the years!
On the other hand, if you take that 1K and pay off your CC debt, it's a gauranteed 10% return (effectively) on that $1000 and you'll never have to shell out another dime in intrest. The money you would have paid in interest starts going towards your savings.
5:06 PM
Yes! I knew Barrett would post on this and would have been disappointed otherwise!
So Barrett, I've always heard the argument that you're making, but it tends to be a very conservative one. If you look at the last century of stocks (including the great depression), I believe that there is no single 7 or 8 (?? could have been 12!) year period where stocks did not out-preform bonds. Based on that, the advice I'm currently following says that for young people who are more than 10 or 15 years from retirement and who are looking for maximum growth should be 100% in stocks. YOu're right that bonds will "smooth" out the ride, but it comes at a cost to over-all returns. Why would you want to do that if your outlook is so far in the future?
12:26 PM
By the way, all of these principles can also be applied to yeast. I started with a few grams last year, and am looking to retire with a few metric tons.
3:25 PM
Well, its not so much smoothing the ride, but maximizing the ride. Japan is example of an economy that changed much like ours will when demographics stop feeding the economy. Look at the Nekei from 1990 to 2003, it was down 70%. A 13 year decline will seriously hurt your retirment goals. You can't just stick money in something forever. You need to allocate money in certain areas depending on the economy.
Barrett
4:12 PM
I think I'll just stick to Day Trading...at least that way I know at the end of the day what I'm taking home with me.
4:15 PM
well, elle, that's all fine and good, but at the end of the year you can still calculate your percentage gain for the year with your daytrading! And no doubt it will be in the stratosphere, right? 300% gain!
Ahh, I miss the old DTO days... Hmmmm....
4:25 PM
Barrett,
Would you agree with the statement that the single biggest thing that will affect your long-term return on investment is your stock/bond allocation?
4:26 PM
Remember to maximize your Roth IRA contribution after you reach your employer match (if any).
No telling whether the income tax brackets will be in the 70% range
in 30 years!
rs
4:05 PM
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