[Jim Doran]

I turn 50 later this year and this makes me eligible to contribute an extra $5500 in catch-up contributions to my employer sponsored 401(k) program. While the eligibility is a good thing, spending more of my monthly pay on savings for future use, does have an impact.

I've been contributing the 401(k) fed max for several years now along with receiving a company match, but still feel like I am not adequately prepared once I scale down earnings. Given the likelihood of less social security and greater health care liability, seems like the current <55 generation is in for some rough times ahead.

While I'd like to spend ALOT more on my car hobby, but I'm constantly torn between retirement and college savings for my family. Curious what the rest here do to try and balance the budget and balance spending on hobby ?

As a planning metric, assuming a 4% return, $1,000,000 will net your $40,000 year ( gross ) on expenses. This plus SS needs to cover ALOT of things. If your luck enough to have to still have a genuine pension, then add that in and your probably better than most.

[Stuart]

I've been contributing the maximum catch-up amount every year since I turned 50, if you have the ability to do so I would recommend it.

[Cerberus]

Good idea as long as the government keeps their fingers out of it.

[Old Blue 66]

Well, two hings come into play here.

First, when was the last time you had someone look at your investment portfolio in your 401K? I have it done annually (actually for PY 2014 we have an appointment tonight).

Second, There are tons of places to put and extra $5500 per year other than a 401K. If you have certain amounts saved up, you can open accounts that require a minimum that will yield a better return. Thats all depending on which investment firm you use of course. Some you pay tax on now, others you pay tax on later. Its a gamble because taxes may be less now than when you retire.

[The Boss]

Jim, the problem you are having will become compounded as you start paying college tuition bills! Because you have been prudent and socked money away you will not receive any financial aid and likely no "Need" scholarships. My first year of college payments are behind me now (5 left) & I will be transitioning my car holdings into more real estate in the next 10+ years. By the time I reach 65 (15 years from now) my primary mortgage will be paid off, and I hope to have multiple other properties that will provide a regular monthly income/dividend to me.

Lets face it, Social Security will never make it through the Boomer period. If you don't expect Social Security will be around and plan accordingly, you won't be disappointed!

[Jim Doran]

Chris you are exactly right. As I'm trying to sock away for my 2 high school kids college, there just isn't enough to go around and it forces sacrifice and priority calls.

I'm assuming worst case on college tuition funding as you describe and expect no handouts. Perhaps some merit based scholarships, but not much else.

Agree SS is likely not going to amount to much for our generation, which just kills me when I look at how much they take from me monthly.


Would be a useful exercise to list out the expenses and amounts that someone incurs upon the transition to retirement lifestyle. I don't think retirement is a binary stop working, but rather a gradual ramp down on hours worked and type of work.

For instance, health care 'gap insurance'
Larger co-payments of health costs.
Rising gasoline prices
Food costs
property taxes
heating / utility costs
automobile expenses

Interested in real experiences

I can very quickly add up monthly expenses where even a modest lifestyle would cost someone $60k - $80k / year for the REST of their life.

[vidguy]

My wife and I both took advantage of the catch up over the past few years, however we stopped maxing out a couple years ago. We come close.

One reason was that we have been doubling our mortgage payments focused on paying the house off.

My company here, (I'm an owner and she works for us) Does matching.

Our financial planner who also manages our 401(k) here for my corp in our planning meeting last year, gave us the advice that with some impending college expenses with a daughter still in college and costing us money, and a Son out now, and costing us money :-) that Cash is King. Something we hadn't really thought about. Have that taxed cash available.

It's great to have the 401(k) and it's great to double up on your house payments. But if you need to pay for something, It's good to have cash.

Our mortgage balance is real low, for California anyhow, having lived in the house for 25 years. So we have great equity.
We have a decent savings account. And a good bunch in our 401(k)'s. Never enough though.
He felt we should have more Cash on Hand.

His advice was -
Since we can manage our house payment, we have good equity and we can always sell and pay the mortgage off in a dire emergency, and we in fact are not planning on moving and buying up anytime soon, stop doubling up on the mortgage payments, pay it each month without stress and put that extra amount into the bank and some towards maxing out again.

It is an option to leave the mortgage (which hopefully at a nice low rate) in place. Make the comfortable payment and not strap yourself each month. Instead bank and SAVE the money. And if you have a big ticket event, tuition, emergency, home repairs, etc. you have cash and you can deal with it. A savings account will provide some buffer between SS and 401(k) if you decide to "retire" earlier.

He also suggested having a low rate - line of equity in place, which we have. We did this a few years ago. We will use that to pay off a car this month.

He also described calculating the SS amounts each of you will get and when and choose who's to tap first.

[Tim john]

I am a FIRM believer and follower of Dave Ramsey and the principals he recommends and that is to become debt free first then fully fund a ROTH IRA which grows tax free, do this next, then Invest in good Growth Stock Mutual Funds that have a proven (long) track record (minimum of 5 years) in four categories such as Growth, Growth & Income, Aggressive Growth and then International. Put 25 % into each of the four types of your (15 % of your annual income combined in your retirement savings/investing) income. This will be towards your 401 K if offered and at a minimum to gain the company match if one is offered. My gains have not been less than 14 % over the past five years and last year the earnings for the whole year was 26.7 % YTD (Year to date average). I made more money last year in interest alone than my annual salary. If you would like additional details drop me a PM and I can explain in greater detail. If you have not taken Dave Ramsey's FPU (Financial Peace University) class I would highly recommend it ! Here is a hyper link to the class, http://www.daveramsey.com/fpu/home/ watch the trailer found here for a summary of what it is all about. This has been the very best thing I have ever done in my entire life towards financial freedom. An interesting tool on his website is the investing calculator, bring that up and plug in your real numbers and you will see what compound interest will do for you. Click on "Tools" then click on "Investing Calculator". Plug in your current balance, then an interest rate, then how much you contribute each month, then how many years to retirement, hit "calculate". Play around with the numbers such as interest rate and how much you contribute each month and it is a real eye opener. The funds Dave Ramsey taught us in the FPU class (posted above) has earned an average over 50 years of between 12.0 % & 15 % YTD. I have not earned less than 14 % and as much as 34 %. It goes mildly up and down but we are talking averages here. My retirement is right on target and in fact better than I could hope for but I am very intentional on my saving and investing so I do not miss my contribution commitment each pay period.

I am not a wealthy person by any stretch of the imagination but what I do have I do my homework and invest it to the best of my abilities. I always knew where and what I wanted to have at retirement but did not know how to get there, Dave Ramsey has been that vehicle.

You do NOT want to go into retirement with a mortgage payment ! Your income is the greatest wealth building tool you have and when that income stream halts you now will be stressed to make that payment, something will have to give. Pay the home off ASAP, live on beans and rice, rice and beans and throw everything at it until it is gone, now you can really start building significant wealth. Just imagine not owing anyone anything, you know what you can do when you are totally debt free....anything you want !

Being completely debt free is amazing, it gives one a feeling that is indescribable. It us without question worth all the sacrifice to get there.

As noted above by Vidguy, "Cash is King" I agree and this is also what Dave Ramsey reccomends...CASH, if you do not have the cash you can not afford it.

Tim john---

[vidguy]

Being Debt Free is great. I agree. Our only debt is out Mortgage. At this point some people might owe more on their family's Cars then I do on my house.
But I do now believe that I don't want to be Real Estate rich and Cash Poor.

Choose good funds in your 401(k) and you will do well over the long term.

[Stuart]

Originally Posted by Jim Doran

As a planning metric, assuming a 4% return, $1,000,000 will net your $40,000 year ( gross ) on expenses.

One point...it appears your example assumes you'll never touch the $1 million you start with, and only live off the returns. Chances are you'll also use some of the principal every year as well; that will reduce the annual returns, but you'll likely have a greater yearly income over the course of retirement (assuming you don't live to be 110.)

[Jim Doran]

I'm familiar w/the process, discipline, and steps to put the pieces in place. All great points on debt free, balancing liquid vs 401(k); I'm personally a strong Dave Ramsey advocate as well.

What I worry about and am interested in points of view and experince , is the dose of reality on how much all of us are REALLY going to need to fund a lifestyle and the basics.

Then we can reverse engineer from there are how to achieve those target requirements.

[Jim Doran]

Stuart, agree; I see the principle as an inflation hedge and will eat into it as needed to combat inflation against the 4% return;

[vidguy]

Jim- To your question about spending..which I ignored.
I don't spend much on the hobby personally. We don't budget a certain amount for me. Others might spend less but others clearly spend way more then I do. I try to do "upgrades" as cheaply as possible and if that's not a good idea in certain situations, then I don't do it..
I live with stuff..

In 2013 I spent about $3000.00 on my GTO and the 75 Formula.
2012 was about $1500.00
2011 was about $1000.00
2010 was about $4000.00 as thats when I put the engine and trans I rebuilt in the Formula..

I can see that not changing much.

I spent about $800.00 on the GTO last year starting to put the few remaining pieces that are not original back on it..

The remainder, about $2200.00, was for the Formula which got one expensive upgrade but mostly maintenance and cosmetics. New seat covers, Headliner, wires, brakes, rebuilt rear end upgrade. It's my daily driver.
I don't think I could do more then that and feel OK about it in our situation.

Come to think of it, that is one way to be debt free - drive only a 1975 car, that you build yourself... I guess I am a cheapskate...

[Jim Doran]

Feel free to change / debate and alter assumptions. You won't hurt my feelings. I want to estimate the end number. Keep in mind, these are AFTER tax expenses. I've taken annual assumptions and broken into monthly bite size chunks.

OK, that's $300 / month for Hobby from James; good estimate unless your a racer
~ $600 / month for Property taxes
~ $500 Food
~ $400 / month gasoline / car repair
~ $??? Heathcare gap insurance ?
~ $300/month Misc. Healthcare costs
~ $400/month utilities ( heat, electric, cable, cell )
~ $300 / month vacations / trips / events

Keep em coming !

[AROWHED]

I reduced my 401K to the minimum for company match, and increased my Roth IRA to twice as much. Taxes are never going down, and likely to keep creeping up..so pay them lower now and not higher later.

[Tim john]

Jim, Shoot for a minimum 8 % growth and just like you said to cover the inflation rate of 4 %, so at 8% you will cover the inflation and the other 4 % will be growth/ gravy. If you can have enough at retirement to have that work harder for you than you are working then you will be just fine. Have enough working for you so that you can live off the interest and the nest egg never gets touched, this is what you will leave behind as a legacy to your family / kid’s, causes, etc… Don’t leave the kid’s the balance without some guidance, have your trust written up so they can only gain access to the interest and never the balance this way it will always be there for future generations. How nice would that have been if someone in your family tree had done this for you. At 8% growth, 4 % will get consumed by inflation (hypothetically) based on our generations past years rates. I am personally gaining much more so even if I am half wrong on what we will need we will still be in good shape. Taking that Dave Ramsey FPU class really put me on target, it gave me a road map on how to get there. You are still pretty young and have plenty of time for significant wealth building as long as you have a plan so plan your attack then attack you plan.

Also check with your employer to see if a "RHCAP" is available. This is a "Retirement Health Care Assistance Program". How ours works is that whatever we put in, the company will match it dollar for dollar at retirement and it will and can only be used for health care premimums. If I were to leave the company prior to retirement I will only get back what I put in (no match) and if I were to die prior to retirement my benefactor will only get what I put in. What I put in is also managed for growth but by the company, not me. There is a maximum amount that can be put in this program per month and everyone I know here does the maximum.

Tim john---

[lockec]

Originally Posted by AROWHED

I reduced my 401K to the minimum for company match, and increased my Roth IRA to twice as much. Taxes are never going down, and likely to keep creeping up..so pay them lower now and not higher later.

I think the idea is to pay the taxes after retirement when your income will be lower putting you into a lower tax bracket.

I was fortune enough to pay my house off at 40 while making several sacrifices like driving a beater, eating beans and potatoes or whatever is on sale cheap. Did this for 5 years while selling off excess items. It was not fun but I am so glad I made myself do it.

My 401K has been maxed out every year along with the catch up for the past 3 (53 years old). Now with no debt I am living much better than I ever did while still saving as much as you can pre tax plus putting away cash. First time in my life 3 years ago I bought my first new car with cash. Great feeling!

[The Boss]

Originally Posted by vidguy

Being Debt Free is great. I agree. Our only debt is out Mortgage. At this point some people might owe more on their family's Cars then I do on my house.
But I do now believe that I don't want to be Real Estate rich and Cash Poor.

Choose good funds in your 401(k) and you will do well over the long term.

Same here, own all the cars, and both my trucks/business equipment the only debt I have is my mortgage which like you I'm paying double my principle every month & have for several years. I just ran a simple calculator and if I keep it up I'll cut 10 years off my mortgage overall saving over 150k in interest!

[tom s]

I found as soon as I was able to do a IRA rollover my money started doing way better when I controlled my destiny. I invested in dividend paying blue chip stocks and reinvest the dividend.Also I put 1/3 of my protfolio into into tax free bonds.I live on the tax free income and don't touch the principal.It takes long range planning.Tom

[Jim Doran]

All good advice and sounds like most have an approach. Honestly, nothing new here that we all haven't heard before, but execution is the hard part.

Now, the real question is how much is needed at what age ? Yes there are calculators based off of current salary, etc. But given expenses across the board are going up, and SS is going down, I'm guessing $1.5M is needed around the age of 65. This assumes you stop working. You can reduce the amount by working longer and maintaining medical benefits, but for round numbers this gives you like $60k / year GROSS. Not including if any social security or other sources of income.

How much do each of you think is needed ?