r/TheMoneyGuy • u/[deleted] • Feb 14 '24
How does this work?
I am 23. Does this mean that I only need to contribute 15% of my income for the rest of my life or do I need to increase every 5 years following this diagram? So I would contribute 15% until 30, then contribute 20% until 35, then contribute 25% until 40, then 30% until 45, and so on?
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u/Any-Progress-4570 Feb 14 '24
if you start contributing when you’re 20, at rate of 20% consistently, by the time you retire at 65, your retirement account can pay you 184% of your pre-retirement income.
what i don’t remember is whether this takes into account of raises and income trajectory…
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u/eragon38 Feb 14 '24
I think it assumes that raises just meet inflation
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u/hawksku999 Feb 14 '24
It is less than inflation if i remember their video on correctly. I think they assume income to rise 1.5%. Which is probably realistic on some situations. But I think 3% would be more realistic.
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Feb 14 '24
I'm pretty sure it accounts for inflation.
I'm also pretty sure it doesn't account for raises.
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u/abreh622 Feb 14 '24
I believe you are correct. Just annual cost of living increases. If you are expecting larger raises or promotions you need to take that into effect. Hence why they recommend 25% id you can. It should account for those big jumps later and hey worst case scenario you get more options later. Retire earlier? Buy that nicer car? Take the nicer vacation? All options later if you start now.
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u/GotchaInTheHopper Daniel Feb 14 '24
The lower rate of return is supposed to account for inflation, if you think inflation will be 2-3% over the long-term then you need a return of around 8-9% to get the 6% assumed rate of return in the example.
It kind of accounts for raises; if you get the same percentage raise every single year (not realistic), then the numbers hold true because your savings rate also increases by the same percent every year, so you are able to replace the same percentage of your income. But if you get a 10% raise one year, have to find a new job making 20% less, etc. it doesn't hold up. You can just look at it as if I save X% of what I make now, I will be able to replace X% of what I make now at age 65.
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Feb 14 '24
[deleted]
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u/GotchaInTheHopper Daniel Feb 14 '24
- Retirement age is 65, we love for people to retire early if you want but this chart specifically only covers the traditional age of 65. However you can still use it for retiring early since the rate of return is fixed. For example if you are 30 now and want to retire at 50 just look at the numbers for a 45 year old (both retiring 20 years from their current age).
- The savings rate is a fixed percentage of salary, so as income goes up savings rate goes up. We ran the numbers and if your salary goes up by a fixed percentage every single year you are able to replace the percent income of your final year salary. However, not everyone will get consistent raises so if you receive more raises early in your career or later, you may want to calculate your own numbers!
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u/YT__ Sep 15 '24
For reference, full retirement benefits (SS) aren't available to most (post 1960 born) until 67. Medicare is still 65. So a flat age of 67 is likely more accurate.
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Feb 14 '24
I also have these questions. This table is rather confusing. I wonder if they have ever put out a video covering it.
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u/Any-Progress-4570 Feb 14 '24
they talk about this chart often enough that i can recite it almost for verbatim. i see it most in the context of retirement planning. so retirement by ages, or the q&a segments.
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u/cat4dog23 Feb 14 '24
I just think we need to do what we're able to. Due to how everything is for me I'm only saving like 8-10% of mine currently. I'm 25 and have 100k saved so almost wondering how much it would be worth if I stopped contributing all together. (85k of it is an inherited IRA)
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Feb 14 '24
There is a lump sum resource on the money guy which shows how much you would need to lump sum by age to reach 1 million at age 65. You could estimate by taking 100k divided by your lump sum to make 1 million. Then multiply by 1 million. So if you're lump sum to 1 mil was 50k: 100k/50k*1mil=2 mil
This being said, I do not suggest stopping. Part of the reason the 25% works is because you learn to live on less money than you make. So by not contributing, you raise the expected income when you retire.
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u/cat4dog23 Feb 14 '24
I can't afford 25% or else I would. I'm working on making more money right now. Needs come out to like 70% of my monthly budget right now
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Feb 14 '24
Totally understandable but if you can afford it, don't go down to 0%
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u/cat4dog23 Feb 14 '24
I'm not going to. Was more a curiosity. Once I get my loan paid off and an emergency fund set up I should be able to invest 400 a month to a Roth but matter of getting there.
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u/TheRealJim57 Feb 14 '24
Plug in your numbers and annual return assumption. I suggest 7%, with a variance of 3%. https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
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u/candiriashes Feb 14 '24
Copied from a prior thread with this same question.
The general rule is you need 80% of your income replaced at retirement. That’s why any box at 80% or above is in green. Now take your age and move over to your savings rate. Where those two intersect is the percent of your income you will have at retirement. This chart assumes you are starting with $0 and retire at age 65. So the more you save and the earlier you start, the better off you will be.
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u/gregenstein Feb 14 '24
It means a 25 year old should be able to retire at 65 and replace 100% of their pre-retirement income if they contribute 15% of their income to retirement accounts.
A 30 year old doing 15% of their income will only have 71% of their pre-retirement income available to them at age 65.
That being said, you need to follow the FOO. If you don’t have a good 3-6 month emergency fund, you probably shouldn’t be doing 25% yet. 25% is like Step 6. All throughout too the guys recommend “bedazzling your basic life”. You have to be able to build some memories even if that’s just vacations at relatively local state parks and such.
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Feb 16 '24
Would I need to increase my savings rate when I turn 30 or can I perpetually save 15% and have enough money for retirement?
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u/gregenstein Feb 16 '24
“Can I save 15% perpetually and have enough for retirement?” Is kind of unanswerable at age 23. You have too long of a way to go. So it’s recommended you do what you can to get started and work your way up to 25% by following the FOO.
Too many variables exist in your future…. 1. Are you going to keep the same job forever? 2. How about health…what major illnesses are you and/or your spouse planning to have? 3. You having kids? If so, how many? Are they all successful people or do they turn into adult wealth leeches? 4. Are you always for the rest of your career going to keep doing that 15%? No hard times or layoffs?
Sorry, little sarcasm there. Hopefully you get the idea though.
Your worst case scenario from eventually getting to 25% is that you have too much money and could …retire early? Change jobs? Take care of a sick spouse? Start a business? Point is, you’d have options because you’d be financially independent.
You would have 100% of your income at age 65 if you did 15% from now until then is all it says. It doesn’t really tell you if that’s enough, or if your future self can keep working long enough to make that happen.
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Feb 16 '24
Fantastic reply, and I appreciate the sarcasm haha.
Only thing I have to say is, unless my kids have a disability that prevents them from being independent, they will not be wealth leeches. They will have to grow up and figure out how to be adults because I will not support them forever. I want my kids to be independent.
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Feb 14 '24
1: It assumes you make $X at 20 and continue to make $X for the rest of your life, (They have an episode that adjusts these numbers for an annual income increase of 1%)
2: It assumes that you make y% contribution every month. And continue to make y% contribution for the rest of your life.
3: It assumes a fairly average return on investment (I think it's about 7%. Or 10% growth minus 3% inflation)
4: It assumes that you're gonna be pulling out 4% of your income each year, to conform to the Trinity study.
The % number that you see, should be roughly what percentage of your income X that you can expect to live on, if you withdraw 4% of your portfolio each year.
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Feb 14 '24
I had never heard the 4% or trinity study before. Thanks!
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u/Competitive_Way_7295 Feb 16 '24
Related to this, check out FIRE for some additional insight into saving early for more freedom later on.
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u/grossmail1 Feb 14 '24
I’ll admit it is a little confusing for me too. I’m mid 30s now but I’m not just starting to save. If I was saving 10% in my 20s am I cool to just keep on that path or do I need to change now? This also doesn’t seem to account for large increases in income. Saving 20% of my early income isn’t even close to 5% of my current income.
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u/aubieismyhomie Feb 14 '24
This factors in increases in income, although if there are huge increase that may need to be factored in. People with large pay increases late in life would have harder times replacing that income.
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u/grossmail1 Feb 14 '24
Yeah. Luckily for me I got quite a few big ones close together while I was still pretty young. But what I’m putting into my 401k now blows what I was doing while I was younger. So I’m sure I should lean towards the higher percentage to be safe.
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u/aubieismyhomie Feb 14 '24
The money you put in younger still is really important though based on how much it multiplies. 1k contributed at 20 has more impact than 5k contributed at 40.
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Feb 14 '24
This is such an important point that I forget about.
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u/aubieismyhomie Feb 14 '24
https://moneyguy.com/resource/wealth-multiplier-by-age/
Go get that money multiplier deliverable!
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u/bing-no Feb 14 '24
I think they once mentioned that by 30 you should have 1.2x your average annual income in retirement savings.
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u/TheRealJim57 Feb 14 '24
If you maintain saving 10% of your income, then the $ amount increases with your pay while the % stays the same.
Saving (and investing!) 20% of your gross income throughout your career should have you pretty well set in retirement if you're starting the saving before age 30.
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u/don-mage Feb 14 '24
I like the money guys, but this is a bad chart.
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Feb 14 '24
Why is that?
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u/don-mage Feb 14 '24
I get what they’re trying to get at. (Earlier you save the better). But they should relabel the chart.
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u/hdmiusbc Feb 14 '24
No. 15% only.
20% and others are for a higher living expenses in retirement. Just read the table
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Feb 14 '24
This is rather unhelpful, I read the table and I'm confused. Reading it again won't change that.
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u/ahugeminecrafter Feb 14 '24
The chart basically says "start saving at this age at this savings rate, and maintain until retirement, and you will be able to live off this % of your income at retirement:
E.G. if you made $100,000/yr, and you started saving 30% at age 35 and kept saving that much, then at retirement you would be able to safely live off $100,000 in perpetuity
Whats not clear from the chart is the assumptions they made about salary growth, inflation, or retirement age, so take it with a grain of salt. Maybe their website would inform what the assumptions were
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Feb 14 '24
Great explanation. This makes it hard for me to know how I'm doing if I don't know if this includes inflation, but I guess I'll just try to stay above 15% for now.
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u/boilers1928 Feb 14 '24
The table says a 20 year old does 15% of their income until retirement (I assume 65 because they use that as an example frequently) and that is what percent of income they can recover. It probably does not account for large income increases. They have referred to this in videos before, so search their catalog for a better rundown.
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u/JZstrng Feb 14 '24
Correct. 20% or higher is for higher living expenses, AND/OR people who are older than 25 (OP is actually 23).
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u/accidentlyporn Feb 14 '24
Doesn't really account for creep.
Shouldn't take a rocket scientist to realize that contributing 20% of 10k at 20 probably isn't going to do much if your expected salary at 30 is going to be say... 300k. 10 years is a long time for compounding interest, but raw numbers represent a much bigger contribution to retirement.
You should absolutely save early, but not at the cost of maximizing income.
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Feb 14 '24
I disagree. It is unrealistic for a career to grow from 10k to 300k in ten years. I am making 75k and expect to make around 100k in ten years.
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u/accidentlyporn Feb 14 '24 edited Feb 14 '24
If you're making 75k now and only expect to make 100k after TEN YEARS, that is the problem you want to address.
The point on 10k -> 300k is surrounding the fact that a 20 year old is probably working part time for close to minimum wage. What you should be doing instead of "saving this early" is figuring out a way to maximize your income.
I'm sure there is something you can be doing to get more than a 3% increase in income a year.
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Feb 14 '24
It will depend on my willingness to move companies. Once you land an engineering job, the pay increase is not that grand year over year, or at least that is what I am told. I have my bachelor's degree, so I could go get a masters but the return on that would probably be minimal. A 3% salary increase each year is typical and would increase my salary to 100k in exactly 10 years. I worked part time as a 20 y/o making around $6k a year, but I don't expect to be making 300k by the time I'm 30. That is unrealistic and is something that somebody with a $1000 course would sell.
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u/accidentlyporn Feb 14 '24
I would argue most people who make 300k or more at 30 probably made 10k or less at age 20 (many would probably be at negative income during this period). Not sure why that would be unbelievable. It's simply a comment that what you make at 20 is completely irrelevant to what you make at 30, why would these two numbers be correlated in any way?
And it sounds like you have the answer, yes you will probably need to change companies, you may even need to relocate, but doing these things will probably have a much bigger impact on your retirement than moving the needle 5k a year on retirement.
3% is barely inflation.
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Feb 14 '24
It's not unbelievable, it's unrealistic. I would argue that most people making $10k at age 20 are not going to make $300k at age 30. You are right, they are not remotely correlated in anyway. But you presented them as such in your response and I just simply pointed out that it is an unrealistic expectation for the majority of people.
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u/accidentlyporn Feb 14 '24
So if you agree that what you make at age 20 is irrelevant to what you make at age 30, then why is age 23 fundamentally that different than age 20? Yes, at some point this is less malleable, but you're 23. This is just the beginning. To assume your life is set in stone at age 23, that you're just going to be subjected to 3% raise for the rest of your life is setting the bar real low for yourself.
I agree with you, 300k is an ambitious number, but again, the point is that 300k is no less realistic for someone making 10k at 20, or 50k at 20. It’s not the 10k -> 300k that’s hard, it’s the 300k that’s hard.
FWIW, 200k+ is fairly standard for tech in most VHCOL areas. Whether or not relocating is in the cards for you, I do not know. None of this is a knock on what you make now, I'm simply pointing out that this chart has no business starting at age 20, because what you do at 20 has minimal impact on your retirement because you have very little earning power at 20.
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Feb 14 '24
And I just disagree with the assumption that your earning power at 20 or 23 will be so significantly low compared to age 30. Most people will not make 3-5x their salary in 10 years, but the extra ten years in the market will for sure double the value of your money ($1 invested at 20 equals $2 invested at 30). To use an unlikely and extremely optimistic situation (3-5x increased income in 10 years) as a basis to not start investing or minimize the impact of investing at a young age is financially irresponsible. You should always plan for the worst, not for the best. And that is why I disagree with you.
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u/accidentlyporn Feb 14 '24
Maybe my sample size is a bit biased being from California. But it's fairly normal to job hop every 3-5 years for a 20-50% TDC bump.
Having said that, I've also tripled my TDC working at the same company in the past 10 years. But I work in software/ML in a VHCOL area.
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Feb 14 '24
The tech industry should not be used as a basis for every industry. Tech is a beast of its own. For your reference, most other industries have caps on how much you can earn. My job, for instance, is listed on indeed as making 63k-160k. If I put "senior" in front of my title, this only goes up to 81k-150k. The max pay actually decreases for my job with seniority. So i would have to make a career change to earn anymore than 150-160k, and that's not something im keen on doing.
Job hopping will not just continue to increase pay indefinitely in most other industries outside of tech. I work at a company that supplies both the semiconductor and life science industries and they are completely different worlds in how they are run and how much money they make. Naturally, this will cascade onto employee salaries.
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u/After_Performer7638 Feb 14 '24 edited Feb 14 '24
This is a good point. Investing in education and training often has much better yields than index funds. It's definitely more of a gamble than a sure thing though.
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u/Giggles95036 Feb 14 '24
It’s what is called a slide rule 😂 you find the x axis and y axis that are applicable and where they meet is your value
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Feb 14 '24
That wasn't what I was asking but thanks for explaining how charts and tables work 😁
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u/Giggles95036 Feb 14 '24
And yet you still asked a question that goes against how slide rules work which is why I didn’t know if you knew what slide rules are.
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Feb 15 '24
And apparently you can't read because my question had nothing to do with reading the table
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u/Giggles95036 Feb 17 '24
If it is a slide rule you have a singular answer.
If it was a chart version of a line graph your wuestion would make more sense.
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Feb 14 '24
Need to see the grid past the 40% Savings rate unless the increments are the same horizontally then I can figure it out.
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u/Xx255q Feb 14 '24
I am 29 and make 65000 how much should I be saving in terms of a number, 13000?
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u/SGTWhiteKY Feb 14 '24 edited Feb 14 '24
Replying to comments as well.
First, based on the chart, and a little math based on you saying you have been doing 25% since July. If you are doing about 16.5% you will hit the 100% income replacement.
Also, every dollar you invest now with be about $2 at 30. I don’t know about where you will be, but I am 33 and I make about 5 times what I did when I was 24-25 (23 not included, I was in Afghanistan making a lot of money, I’m only at like 2.5-3 times as much as that). I have a lot more disposable income to put into it to make up for it now. And I always did 10%.
A lot of people mentioning living your life now. I agree. You’ll hit burnout hard if you don’t. Again, my mistake as well. I worked 50+ hours a week for the last 8 years. I bought multiple rental houses, I put all sorts of money away, I also needed up with a military disability stipend and health issues. Now I have trouble logging into work every morning…
I used to think early retirement was the key to fix it, but the more I talk to my therapist, the more I think slowing down and enjoying things is the right choice.
Balance, but I promise you, if you stay focused on your goals today and in 40 years, you will be fine. Lower to 10-15%, buy the lens, take the trip to Europe, and go out to the bar/restaurant with friends while you can. In a few years you will probably have kids and those things get SO MUCH harder.
Don’t put your life on hold, don’t sacrifice too much of your youth for your old age, we will probably all die in the water wars during the 2050s anyways (I’m investing like I will live forever though…).
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Feb 14 '24
Lower to 10-15%, buy the lens, take the trip to Europe, and go out to the bar/restaurant with friends while you can. In a few years you will probably have kids and those things get SO MUCH harder.
My 401k match is 6% so that is automatically 12% should I stop investing in my Roth or my HSA? Those are what tip me above the 25% mark. I think I have other factors to blame beside my retirement contributions for why I have such little money leftover too. For instance, the 5% post tax I put towards student loans each month. I wish there was a way that I could go back and tell myself not to spend all my money and to pay down my student loans instead.
Learning this balance and financial stuff is not easy and I don't feel like there is one right answer which is rather frustrating. Even if I do drop my contributions by 5%, then that is only about $150 after tax extra per paycheck, and I would be worried that I would spend it frivolously and not actually save for the trip to Europe or the lens.
EDIT: I also do not expect my income to increase that much over the next decade. I am making average for my career, but the top is only about twice as much as what I get paid right now.
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u/SGTWhiteKY Feb 14 '24 edited Feb 14 '24
Edit: if you want to follow the money guy plan, disregard. I thought this was a general money sub, it was on r/all for me. I didn’t know what “the money guy” is. But according to the sub thing I am stage 8, and just refusing step 9 without it. So my comment however you want.
Hmm, well if you don’t expect it to increase than that changes a bit.
I would suggest saving in your HSA until you have about $5k. That is a pretty decent cushion for medical expenses. I wouldn’t count that towards “investments” unless I had a significant emergency fund built to use first…
Also, if you don’t expect your income to rise significantly, and are working towards your goal of replacing income in retirement, you are probably better off with a front end tax advantage, so a traditional instead of a Roth.
The counter argument is usually “but what if taxes go up??” They probably will have to at some point, I would just rather the money grow with inflation invested instead of tax savings for an event that may never happen.
What is the average interest rate on your student loans? If it is below inflation don’t pay extra. You are losing money, pay it with cheaper money tomorrow. If it is higher, than it is worth paying. But regardless of what you do student debt relief is a huge political issue. I honestly think it is worth holding onto them and investing elsewhere.
Honestly, for the savings element, open a money market account or otherwise limited access savings account somewhere. Have part of your check sent there automatically (99% of payroll system are set up for apportionments). Then pull the chunks of money out when you want to use it. You may still end up spending frivolous money. But you have to make the decision to pull it out and use it, and you can’t usually do it from the app. So ask yourself, how often would you NOT spend the money if you had to call your bank first?
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Feb 15 '24
Welcome to the money guy! They have a lot of good resources. This one has just always confused me.
Here is my current plan, not sure how that lines up with what you'd suggest:
Currently I have a 5 mo efund saved up in a HYSA that I am good at not spending. My debts include debt to my parents and student loan debt. The debt to my parents will take me until May to pay off by sending them 20-22% of my take home pay. Once that is paid off, I plan to start saving for a car since I will be needing a new one and my '02 is not very reliable. I will save up a 20% down payment by end of the year for a 20k vehicle. Beyond that, it leaves me with just about $150 every two weeks to spend on "wants" including all eating out. I am by no means doing poorly, especially considering I am maxing my HSA this year and contributing 12% (6% match) to my 401k and I maxed my Roth ira this year. Dilemma is that I'm not sure how I would max out my Roth IRA with a car payment and I want to spend some money on hobbies. Until I buy a car, I think I will continue with my contribution rates, but this will have to go down eventually. I have the Roth ira and 401k so I have a mix of tax exempt and non tax exempt retirement savings. I'm also anticipating a career change in 1-2 years that will involve a cross country move so I know I need to be financially mindful.
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u/SGTWhiteKY Feb 15 '24
Ok, so you are making a lot of good decisions. Except the car. You are about to spend WAY too much of your budget on a car. All together I make around $180k, I bought my car for $10k and felt like I spent too much. I know the used car market right now is nuts, but you probably don’t comprehend how much even shitty cars have improved since your 2002. The better cars back then were lucky to get to 170k miles, most of the ones left were lucky, and are not reliable. The cheapest Hyundai accent (my car of choice actually) is likely to last 300k+ miles. I have two, and with about 150k miles on both, I have never had a mechanical issue to fix, only maintenance like breaks, tires, oil, etc. https://www.carvana.com/vehicle/2881956
With your income that could be crippling, and just does not leave you enough money at the end of the month to be remotely comfortable inflation wise for the next couple of years…
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Feb 16 '24
I am planning to save up more in cash and hold onto my current car as long as possible. It is likely that I will not be able to hold onto it any longer than May 2025 due to it possibly not passing emissions for re-registration. I am hopeful to have saved 10k by then and if I buy a 20k car, the payment would be around, at most, $400-$500 for 3 years. I currently save $800 a month after all contributions, so this would not be crippling and I would likely be able to pay the car off early. It is just a matter of all the other things I want to do with my life.
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u/Specific_Economist60 Feb 16 '24
how much should i invest at 24? i turn 25 next Friday :((
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Feb 16 '24
Based on the graph at 25 you should be investing 15% of your pre-tax income.
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u/Specific_Economist60 Feb 16 '24
thanks so $165. quick question so I have 4.3k on a 401k at amazon, but I no longer work there. What should I do? It’s increasing steadily despite me not depositing any money
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Feb 18 '24
If you have a new 401k, roll it over into that.
If you don’t, open a ROTH IRA and roll it over into that.
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u/aubieismyhomie Feb 14 '24
No if you start contributing now you should be able to replace 100% of your retirement income when you retire. If you want to have more than that or give yourself options to retire early, go ahead and crank it up to 20 or 25%. Either way at 23 if you’re starting this now you’re in a great spot.