There's a lot of angst surrounding my personal financial plan in general. Despite this, one area of my financial plan is a happy, confident, closed book: My Retirement Plan.
Why you ask? How can I be so content with my retirement plan when the markets are uncertain and social security is strapped and soon there will be fewer workers paying more retirees?
Because first of all I know what to do. This is key. Budgeting and investing in rental properties requires constant analysis and management and all the variables are constantly changing.
But for all practical purposes, retirement planning is pretty simple. I started early, it's all automatic, and if I keep on keeping on I should end up in great shape (unless the whole system fails, in which case I'll have bigger problems and everybody will be in the same boat anyway!).
Get this:
- I opened a Roth IRA when I was 18 years old, and each January since then I've contributed the maximum allowed. Current Balance is around $21,000.
- I opened a Roth 401k the day I became eligible when I was 22 years old and since then I have contributed 10% of my gross income each and every month. Current balance is around $15,000.
- My employer kicks in another 3% to my 401k (and next year that will bump up to 6%!!).
- All retirement funds are invested in very low cost broadly diversified index funds.
- I intend to keep this up for as long as I'm eligible for those accounts (otherwise I'll save at least 10% of my income in a taxable account).
Even if I stop investing altogether at that point, my retirement funds would grow to be over 10 times that amount by the time I'm 65 (assumes 8% annual return). Of course that's before inflation is factored in, but it's still pretty amazing. Best of all, that money is in tax free accounts from which (unless laws change) I'll be able to withdraw 100% tax and penalty free. And even if I go bankrupt that money will be protected (again, unless laws change).
I intend to keep saving after 35, and I intend to have rental properties paid off and generating additional income - but you never know what can happen. The fact is that my "retirement" is so far off I can't even begin to try to plan or imagine it. But no matter - I'm saving now so that I'll have flexibilty to make plans later. And I'm sleeping soundly as a result.
3 comments:
Earth to Meg - assuming 8% return is absolutely ludicrous given what we've seen the past 10 years...ESPECIALLY since you are an index investor.
@ Optimus Prime - Actually I think assuming an 8% return going forward is not ludicrous at all. Long term returns may in fact average 6% or so if you include the last decade or two, but it may be reasonable to assume moving ON from the worst recession (string of recessions) on the books.
Besides, that 8% doesn't include inflation - inflation alone might average 8% over the next decade or two! In that case I'll have to seriously discount my real return, but my portfolio is very likely to at least outpace inflation.
Of course I'll adjust my figures if need be. But the projections don't matter at all; like I said you never know anything - I'm just saving and investing and saving and investing and that's all I can do.
Meg,
It sounds like you're assuming that the recession will be ending soon and that everything will be heading up from there. I don't know that I'd count on that. I think that a 6% average return over the next 40 or so years is a much more realistic planning figure.
Of course, you are unlikely to stop saving at 35 so you'll be fine no matter what.
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