A target to aim for: what do I need to save for retirement?

KJ: One of the commercials that Fidelity had running a few years ago had a green arrow with a number above each person. The magic number was the amount of money that person needed to have socked away for retirement. But, how did they calculate how much a person needs for retirement? What factors should you think about as your family plans for your future? Well, there have been numerous research studies over the years about a little thing called the ‘safe withdrawal rate.’ This is the percentage of your savings/investments that you could “reasonably” expect to withdraw over a long period of time while letting your savings continue to grow. I.e., it is the amount of income you and your family could plan to live off of in retirement. And, this is such a little understood concept of personal finance that it’s why people who win the lotto or sports players with HUGE signing contracts end up dead broke after spending all of their money.

And, if you do not have a barometer for what amount you need to save in order to retire, there’s slim chance that you can get there successfully. Do you need to have $500,000, $1,000,000, or $5,000,000+? The answer: it depends.

Success On Dartboard Showing Accomplished Progress

Looking at the math
While it is entirely dependent on your age in retirement, expense levels, and other factors, some suggest the safe withdrawal rate is anywhere between 3.5% and 4.5% of your savings. To illustrate this point, if you and your family had annual living expenses of $50,000 per year, you may need anywhere from $1,100,000 – $1,450,000 ($1,100,000 X 0.045 = $50,000) in savings to be able to maintain the purchasing power of your dollars over time while you took your $50,000 per year out of the account. I.e., in a “normal” year (whatever that is!) you could earn some return on your money, take your money out for your living expenses, yet still end up with the same amount of money as you started the year (accounting for the little thing called inflation, that is).

Fortunately, there are income sources like Social Security that may help reduce the overall amount you need to save, so the true amount you may need to accumulate in your savings could be MUCH lower. So, are you on track? One of our prior posts highlighted the milestones you could aim for based on your salary and age. Check it out here.

Other things to consider as you plan:
What does retirement mean after all? – Is it living on a beach, traveling around to play golf at all of the amazing courses around the world, or spending time at home with your family? Each of these has very different implications for what you would need to save and how your savings may need to keep up with your expenses. Thinking about it before-hand means you won’t be spending your days at home stuck to the computer wondering what you’re supposed to be doing with your time!

Expanding life expectancies
Life expectancies are not decreasing, but in fact have continued to increase significantly over the past century, so planning ahead by thinking about how long your savings could last you for the next 20, 30, or 40 years could be the difference between a well laid plan and a complete flop.

Your comfort levels for investments
Who would have thought this would come into play, but it really is an important one – especially when planning for a VERY long time horizon! If you’re not comfortable taking on a certain level of investment risk, you may have to save up more than your friend by shooting closer to the 3.5% target instead of 4.5%, so you can remain more conservative with your savings. Whatever your preferences, talk to your significant other (and an advisor as well) to get a feel for what you are and are not comfortable with when talking about your savings. If you find the stress of stock markets keep you up at night, then maybe you could be more conservative in your strategy. However, with that approach, you may find yourself needing to set aside more savings each month. It’s a bit of a trade-off, but it’s important to discuss before you find yourself making a reactive decision later!

    How do you calculate what you are aiming for?
    What do you do to determine how much money you need for retirement?
    Tell us your retirement success plans.

Image courtesy of Stuart Miles / FreeDigitalPhotos.net.

A target to aim for: what do I need to save for retirement? is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

The simple secret to building long-term wealth

KJ: So, here goes. The simple secret to building long-term wealth. A strategy so simple, how can it possibly be true? Is it a genius idea, is it working 70+ hours per week, eliminating your weekends from your personal life, is it abandoning all fun in your life? Nope. The simple truth is that you only need two very important, but very basic things: time and discipline. While that super genius invention that everyone in the world will need to use combined with your expert business savvy could be factors that get you there; chances are that isn’t likely the path for you (or most everyone in the world out there).

Time
We’ve written about this before, but time is one of the greatest assets available when you’re saving for your goals – especially very long-term goals like retirement. Really, the compounding effect of interest over time is amazing. It’s all about putting your savings to work for you over time, and the longer it’s at work, the more and more beneficial it is for you. Don’t believe it…just look at the chart below on how time can work in your favor.

JP Morgan Investing Early and Compounding Interest Over Time

It’s never too late to start though, so stop putting off your goals and savings until a time when you will have fewer expenses. Don’t delay, and start today!

Discipline
Now that you’ve got step one of two down on this list to building long-term wealth, it’s time to work on your discipline. And, one of the easiest ways to build savings discipline in your family’s budget is to make it both automatic and calculated, so you don’t even have to think about it.

Have your savings (retirement, travel, emergency fund, etc.) siphoned off each month at predictable times. That way, you make savings part of the rule and not the exception. Your net worth will thank you over time by making your savings systematic. When you don’t have it at your disposal to spend each day, week, or month, you’ll be amazed what you and your family can live on (or without!).

Live below your means. We don’t spend as much time talking about this as we do actually living it, but getting a raise doesn’t equate to increasing your budget. It equates to retiring earlier. Find a comfortable financial station that you and your family can reasonably live with and stay there even as you build your earning potential well beyond that point. I won’t judge your 15 year old car if you won’t judge me for retiring at 45.

Set specific financial goals. Think about what your savings needs are to achieve your goals – whether it’s a house down payment, vacation travel fund, or an emergency fund – and figure out how long you have to accomplish them. Some goals may vary on the exact timing, but that shouldn’t stop you from estimating when you think you may need those funds. Just do a few simple calculations, and see if your timing and goals are realistic. If you need $10,000 for a goal one year from now, but you only have $100 per month to save toward that goal, chances are it’s not going to happen in your original timeline! So, be specific on what you need to save.

    What strategies have worked for you to build you and your family’s net worth over time?
    What are you doing to get time on your side?
    What disciplined savings habits work for you?

The simple secret to building long-term wealth is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Eight super fun things to do with your tax refund

KJ: With the average tax refund for 2012 coming in at a whopping $2,803 – just shy of the average for 2011 that was even higher at $2,913 – what should you do with your income tax refund? With this very significant sum of money that many families receive, it’s time to reflect on some smart money tips…so, here’s my list of super fun adult things to do with your tax refund. Okay, so maybe “super fun” was misleading for some of these…but hey, in the long-run, heading the advice of the first few before looking at the options that follow will allow you to live financially secure sooner and enjoy much, much more than you thought possible!

Pay down debt – the bad kind
Seems easy, right? If you have some of the bad debt – ongoing credit card debt, lines of credit, etc. – then this should be stop number one for your to apply your income tax refund.

Pay down debt – the better kind
Usually within this category falls home loans, so consider taking a chunk and paying down your mortgage a little bit quicker. If you still have a car payment, then consider making a dent in that loan to get it paid off quicker, so you can start applying that monthly payment toward your goals!

Pay yourself
Fund your emergency fund. If you haven’t already begun saving to it, then start it up now! Get it to $1,000 as soon as you can, then work to $5,000, and then 3-6 months of your living expenses. If you’ve done all this (woohoo for you!), then consider saving more to your retirement accounts or investment/brokerage accounts.

Invest in yourself
Class – or certification – you’re interested in that will help further your career to increase your “human capital” – i.e. earning potential. The payoff in the long-term may surprise you. Plus, many companies reimburse you for those relevant classes and certifications, so think of it as just a temporary deposit that will be returned to you.

Replace that shoddy appliance
So again, not as fun, but it can be! Our vacuum cleaner went kaput a while ago, and we decided it was time to retire our existing one once and for all.

Maybe your fridge is on the fritz. Might be time to invest in a newer, more energy efficient model. You might be surprised what monthly energy savings you would have by getting a newer model!

Pad your vacation fund
Maybe a nice relaxing getaway is what you and your significant other need. Hopefully this year’s refund can get you closer to those relaxing days on the beach sipping [insert drink of choice]!

Buy energy efficient light bulbs
Time to upgrade those crappy bulbs that die every couple years with some energy efficient lightbulbs. LED are the latest craze for energy efficiency. We’ve bought a lot of the Cree lightbulbs for our house, and it’s made a huge difference on our energy bills. Not only do they burn about 1/6 the energy, they last much longer than regular lightbulbs, plus they also produce less heat which indirectly means less cooling costs in the summer! A bit of an initial investment, but if you’re going to be in your house for a number of years, then it will be well worth the investment!


Pay it forward
Consider paying it forward. Donate to your favorite charity or use it to support someone in need. Not only will you feel good about it, but chances are it may help your tax bill this year too – win/win!

    What will you be doing with your income tax refund?
    Have you already spent it?
    What do you typically do each year?

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Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Why you need an emergency fund

Emergency fund 101KJ: So we had a bit of a real-life experience this past week on the importance of funding your emergency fund. Not only do you never know when you will need to dip into it, but you don’t know how quickly you may need access to it either. Plus, money is the last thing you need to be stressed about when dealing with an emergency. So, how then do you make sure you have enough money in your emergency fund for when you really need it? We’ve written about it quite a bit over the last couple years of our blogs, but this past week really hit home on the WHY we save like we do. Not only was our recent dip into the emergency fund stressful and woefully unexpected, matters would have made the situation worse had we not been prepared financially when it came time to pay the piper. Hey, just because you’ve built up your emergency fund doesn’t mean it’s any less painful to spend it when the time comes! Let’s start with some information on what an emergency fund is, what it isn’t, and what you should do to protect you and your family in an emergency situation.

What is an emergency fund?
Any good emergency fund should have the following characteristics:
It should be highly accessible. Don’t plan on equity in your home to serve as your emergency fund. That’s a terrible idea as people saw firsthand in the 2008-2009 real estate bubble bursting. But, your emergency fund should be invested in highly accessible cash, be it a money market account or a savings account. Once you’ve built up your various buckets, for the first $5,000 of your core-emergency fund, don’t bother trying to do anything fancy with Certificates of Deposit (CDs) or any investment product at a brokerage firm with today’s low interest rates. You NEED it to be highly accessible and penalty free when you’re in a bind, so having the flexibility in just a regular savings account is often preferable.
It should have a minimum of $1,000 quickly. It should be filled with at least $1,000 to get started right away, but it should be built up with enough funds to cover your home, health, and auto deductibles should something crop up unexpectedly (not quite as rare as you may think!). Then, look to build it to that magical 3-6 months of your living expenses, so it can serve that additional purpose in the event of a job loss.
It should be reserved for emergencies ONLY. This one is plain and simple. Don’t use this for when that TV of yours breaks, upgrading appliances, or taking a trip. Hold strong and use it for its intended purpose!
It should protect you and your family. Any good emergency fund should be able to provide your family with the cash you need, so you don’t have to rely on high interest credit cards or lines of credit. Those just add fuel to the fire and make your emergency situation just that much more difficult to dig out of.
It should provide peace-of-mind. Once you’ve saved the proper amount, your emergency fund helps take the added financial stress out of the situation. The last thing you need to stress about when dealing with a health, home, or auto emergency is the financial aftermath, so why make the situation worse. It’s easy to get behind, so dig your heels in and get ahead before it’s too late.
A way to ensure you won’t be a burden to your family. This is particularly important to us in an emergency, as what you need most from family is emotional support and not financial support. An emergency fund protects both you and your loved ones.

What an emergency fund is NOT.
It is not to be used for regular living expenses. As in the above writing, don’t use it for everyday needs. Oh, my checking account is low, or, I need a better pair of shoes. NO! If you find yourself wanting to dip into the account for these purposes, then head on over to our earlier post on finding a surprisingly free (and simple) budgeting tool to give your budget a quick start, so you can quick-stop your reliance on your emergency fund for every day use.
It is not illiquid. Don’t rely on real estate, rental real estate income, or investments to be your core emergency fund. Sure, over a VERY long period of time, you could come out on top if you could eek out a little extra return, but the lack of flexibility when you need the funds most can be a huge issue.
It is not pushed aside and never looked at again. Just because you have built up your emergency fund one year, doesn’t mean it will forever be the same amount your family needs. Periodically check to see if there may be more you need to save up. Maybe your expenses are higher or your risk factors for health issues have increased, meaning you need a higher balance in your emergency fund. Again, start with $1,000, then build to $5,000, then build to 3-6 months of living expenses.
It isn’t a planned expense. An emergency fund is for just that: an emergency. Don’t use it to fund a known expense coming up for a roof replacement, new fence, etc.

So, how then do you plan on using your emergency fund?
Have quick, direct access to your account to transfer funds to a checking account. If it takes multiple days for cash to be available and is at another institution than your checking account, that can be troublesome at times.
Know how and where to go. Don’t bottle this up and keep information from your significant other. Make sure both of you know how and where to go to raise funds as needed. It doesn’t help to have saved the money and have it available if you don’t both know what to do. Think of it as a little at-home cross-training.
Lean on your everyday credit card. This one carries a big caveat, but if you have properly built up your emergency fund, then simply putting the expense on your credit card, and then subsequently transferring cash to your checking account to payoff the bill ASAP can be an a-okay solution. We wouldn’t have been able to do this recently had we just graduated from college, but as we’ve continued to build our credit, we’ve increased our access to credit too (actually quite scary what the credit card companies think is OKAY to have access to!! But, we’re responsible, so we’re not racking up ANY credit card debt in the process that isn’t paid off in full each month).

    Do you have a fully-funded emergency fund?
    What amount do you need for your emergency fund?
    Don’t delay, and start an emergency fund today!

Why you need an emergency fund is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.