Jason D. Barr

Read this post today, and I was pretty skeptical. Any time you don’t consider tax consequences pings my radar pretty good. Anyway, I wrote Jim (the author of the blog) an email that I’ll reprint here. All in all, I like his blog; I’ve got it on RSS and read it all the time. I just didn’t agree with this particular post of his.

Hi, Jim,

I’m a reader of your blog, and was curious about your post today, stating that you could save $700/month and retire in 40 years, withdrawing $5000 in 2007 dollars. No offense, but I was immediately skeptical when your first assumption was no tax liability. I think your assumption of 3% inflation rate is low, as this is pretty close to CPI, which exempts food and housing (unfortunately, real people can’t exempt those things). And, just to make things smooth, I assumed an 8% return on investments for the entirety of the scenario. This also assumes that the entire amount saved for the year is placed in the account on the first of the year, to capture the full compounding.

I’m attaching an .xls workbook which shows two scenarios: the first assuming the funds are invested in a taxable account (such as a standard 401k, IRA, or just a normal brokerage account), and the second shows a tax-advantaged saving plan (such as Roth IRAs or a Roth 401k). These Roth vehicles currently have contribution limits ($15,500 for the 401k, and $4,000 for the IRA, for a total of $19.5k a year contribution limit).

As you can see, for the Roth vehicles, you’ll need to save close to $17,750 a year, and that assumes that you deplete your nest egg down to near 0 at the end of the 25 year window. I’m assuming that with advances in medicine and science, one could probably expect to live beyond age 85 (assuming this is the 65th year of the scenario) by the year 2072, and you may want to ensure more length to your balance. A bigger balance will require more savings, obviously. With the fully taxable withdrawls seen in a regular 401k or the like, you’re looking at closer to $2,000 a month contributions; again, depleting your nest egg to 0.

I think you underestimated the amount necessary to withdraw, as inflation will continue throughout the scenario, not just ending at the 40th year.

Anyway, take this for what it’s worth. I didn’t want to post a comment, as I wanted you to have a chance to take a look at my calculations; it’s quite possible that I goofed something up. Enjoy your blog; wouldn’t be a repeat reader if I didn’t. Hope you have a good day, and I’ll look forward to hearing your thoughts.

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Regards,

So, anyway, there you go. You can see the file I put together for Jim here, if you want to look at it. The moral of the story here is: be serious about your retirement savings. You’re gonna need a lot of it.

The Motley Fool says you need to suck it up, and I agree. 10% is a bare minimum, and most of us need to be saving more. Especially in the past few years, the real estate run-up has caused many people to discount the need for savings and view capital gains as a means to ensuring your retirement income. The plateau (and in some places, precipitous decline) in real estate prices caused by a glut of inventory on the market, coupled with the slowdown in sales may have opened some eyes, but I still worry that some folks view it as a temporary speed bump on the highway of home appreciation.

So, what can we do to free up some cash flow for savings?  The usual: cancel your cable, don’t eat out as much, quit drinking lattes, blah blah blah.  All good advice, but it seems to me that, unless you’re actually redirecting that money into some type of investment vehicle (your emergency fund stashed in an ING Orange Savings account, some index funds, or the like), you’re not really improving your financial future.

My counsel to myself was to learn to live on 75% of my income.  Honest confession:  I’m not there yet.  I’m only at 80%, but I’m working my way to 75%.  I believe (especially if you didn’t do what you should have been doing in your 20’s and started with the 10% savings from your first post-school paycheck) that I probably want to put away 15% of my pay every pay check.  I don’t plan on spending my raises, either.  Those go right off the top (as do bonuses) into savings.  And, I give 10% to a charity I believe in.  Every pay check, without fail.  The tax deduction is great, but the intangible benefit I get by sharing a part of my income with those less fortunate than I goes far beyond the reduction in my Adjusted Gross Income.

Later on, I’ll be explaining how I got to where I am today financially, and where I’m going from here.