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The magic of social media is that it allows me a direct portal to reader concerns. When I asked y\u2019all to tell me what you were worried about, someone wrote, \u201cI want to know how behind I am.\u201d I was struck by this, since most of the other submissions were very specific in nature: Should I focus on my 403(b) or IRA? Where should I house my emergency fund? <\/p>\n
This one felt distinctly different, so I posted it and asked if anyone else was wondering the same.<\/p>\n
Within an hour, I had 25 messages echoing some variation of the same: <\/p>\n
\u201cI know I\u2019m behind.\u201d<\/p>\n
\u201cI don\u2019t want to know how behind I am.\u201d<\/p>\n
\u201cI feel this way constantly.\u201d <\/p>\n
So the good news is, it seems like we\u2019re all awash with feelings of inadequacy. Yay! Solidarity in pain!<\/p>\n
But the question that remains is, behind what<\/em>? <\/p>\n After toying with this question for awhile, I think I know what makes the most sense. We have to work backwards to know for sure. Otherwise, \u201cbehind\u201d is arbitrary.<\/p>\n And because it\u2019s helpful to use examples that you can then apply to yourself, I\u2019d love to provide this retirement calculator<\/a> resource that I used to make these determinations for myself, and walk you through it so you can do it, too.<\/p>\n It makes sense to me to look at this question factually, because it\u2019s clear so many of us are sensitive or worried about it. We\u2019ll get into the psychological component a little later in this post, but before we do that, I want you to truly know where you stand \u2013 maybe it\u2019ll comfort you. Or maybe it\u2019ll simply make this nebulous, far-off concept of retirement feel a little more real, and it\u2019ll get you all jacked up on Mountain Dew.<\/p>\n As I manipulated the calculator, I noticed how sensitive the outcomes were. Think about it like shooting an arrow at something 500 feet away (like, a really f***ing powerful arrow, OK?). If you move your bow half an inch to the right, it feels like a pretty small change \u2013 but the distance between where it would\u2019ve originally landed and where it\u2019s going to land now are vastly different. <\/p>\n That\u2019s how investing works. The direction you point the arrow now represents your decisions in present-day, the distance it has to travel is the time (35+ years), and where it lands is your outcome.<\/p>\n I feel very Khaleesi-esque using medieval weaponry as an investment metaphor so now that I\u2019ve sufficiently embarrassed myself, let\u2019s do this thing.<\/p>\n My hope is that by providing actual numbers, you\u2019ll have a small benchmark \u2013 not to compare yourself, but rather as a sanity check. I always find that having some measuring stick against which to prop myself allows me to expand my consideration set for what I\u2019d be capable of. <\/p>\n For example, I went on a walk the other morning with my friend who\u2019s very into financial independence and early retirement. He\u2019s 30, and he\u2019s retiring at the age of 36. Yup \u2013 he\u2019s saved so aggressively that he\u2019s about to hit his \u201cFI number,\u201d or the number at which you can live off your investments\u2019 interest, before he\u2019s 40. This made me feel like my goal of 54 was WAY too lax, and I started imagining all the cool shit I could do as a 35-year-old retiree.<\/p>\n I want to warn you that we\u2019re going to dive headfirst into some decently heavy-hitting financial terms and numbers and I encourage you with all my heart to tape your eyes open now, because I think actually understanding the objective reasoning behind why you may or may not be \u201cbehind schedule\u201d will help you take some of the emotion out of this conversation. Scared yet? Let\u2019s begin!<\/p>\n Here\u2019s what the calculator requested of me, and you know what? I\u2019m going to share \u2013 because walking the walk when it comes to transparency matters on this blog.<\/p>\n Age<\/strong>: 25 (closer to 26, but who\u2019s counting?)<\/p>\n<\/li>\n Pre-tax income<\/strong>: Combining my full-time job and multiple part-time jobs, between $75,000 and $80,000 (we\u2019ll say $75,000 for this exercise)<\/p>\n<\/li>\n Current savings<\/strong>: $120,000<\/p>\n<\/li>\n<\/ul>\n PAUSE<\/em>! Let\u2019s assess what we mean when we say \u201csavings,\u201d because this came up a lot in my DM conversations.<\/p>\n Savings<\/strong> = your savings and investments. In this definition, we\u2019re including savings accounts, 401(k), IRAs, taxable brokerage accounts, checking, and more. This is not limited to literal<\/em> \u201csavings,\u201d so don\u2019t worry.<\/p>\n<\/blockquote>\n Every month I save<\/strong>: <\/p>\n $1,065 in the 401(k) monthly ($600 + $465 match)<\/p>\n<\/li>\n $500 in my Roth IRA (to hit the annual maximum of $6,000)<\/p>\n<\/li>\n $700 in my General Investing account with Betterment<\/p>\n<\/li>\n $300 in my regular savings account<\/p>\n<\/li>\n Total: $2,565<\/strong><\/p>\n<\/li>\n<\/ul>\n<\/li>\n Then came the future stuff \u2013 what do I want for myself in retirement?<\/p>\n How much do I want to spend per month in retirement? <\/strong>$5,350 (this was a guess; it just feels like an amount that I wouldn\u2019t really worry about)<\/p>\n<\/li>\n Other expected income? <\/strong>$0 (catch me teaching water aerobics at the retirement community gym for free)<\/p>\n<\/li>\n What age do you want to retire?<\/strong> 54 (only so I can keep up with my parents and show them they didn\u2019t raise no fool)<\/p>\n<\/li>\n Life expectancy? <\/strong>UGH, so morbid! I put 90, but who knows \u2013 my very healthy grandfather just passed suddenly of acute leukemia at the age of 84, so I feel like my expectations were a little shattered by that experience. It taught me life can sometimes be a lot shorter than you think \u2013 we thought he\u2019d live to be 100. <\/p>\n<\/li>\n Investment rate of return? <\/strong>7%. I\u2019m guessing based on the average for the last 100 years. You can play this more conservatively if you want. I\u2019ve seen really conservative estimates use 4%, so it might be good to do a range. <\/p>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n According to all the inputs above, this glorified spreadsheet told me:<\/p>\n I can retire at age 54 with $4.14M<\/strong>, and I\u2019ll only need $3.97M<\/strong> to live until I\u2019m 90 on my savings.<\/p>\n Now, this is obviously 11 years sooner than \u201cretirement age,\u201d but I think it\u2019s reasonable.<\/p>\n Immediately, there are a few caveats that need to be made.<\/p>\n I\u2019m assuming the average rate of return on the investments will be 7% \u2013 but a few \u201cbad\u201d years (read: low or negative returns) either in the very beginning when the principal balance is setting the tone or late in the game when I\u2019d start using the money would really throw a wrench in this example. Even if you lowered the average rate of return to 6%, I\u2019d only have $3.45M (HA, \u201conly\u201d), and we know that\u2019s not enough since I\u2019d need $3.97M to make this hypothetical scenario work.<\/p>\n KEY TAKEAWAY<\/strong>: It doesn\u2019t matter if, 10 years from now, the market tanks -15% because there will be other years where it\u2019s up 20%. The important thing is that the average rate of return, if you were to take all the results over the ~30-year period we\u2019re using, is 7% or better. In a happier scenario, if it goes up to 8% on average, I\u2019d have $5M. The average rate of return since 1957 is roughly 8%.<\/p>\n<\/blockquote>\n I\u2019m including all my savings here, and some of it isn\u2019t invested to the same degree that the rest of it is. For example, my emergency fund is in a Betterment account called \u201cSafety Net\u201d that\u2019s technically<\/em> a taxable brokerage account (read: invested), but it\u2019s only 15% stocks and 85% bonds. The growth in this account will never mirror the growth of the S&P 500 because it\u2019s simply too \u201csafe\u201d to do so. That\u2019s about $15,000 \u2013 there\u2019s also approximately $12,000 in cash across a checking account and two savings accounts. The rest ($90,000) is invested in more aggressive accounts:<\/p>\n The Roth IRA is entirely in VTSAX<\/em>, which is a Vanguard index fund that tracks the entire stock market<\/p>\n<\/li>\n The 401(k) is in the Vanguard 2060<\/em>, which is a Vanguard index fund that\u2019s intended to reallocate over time for a target retirement date in the year 2060 (are you paying attention? If I want to retire when I\u2019m 54, that\u2019s 28 years from now \u2013 2048 \u2013 I\u2019m intentionally using a longer timeline so it\u2019ll stay \u201criskier\u201d and therefore more heavily invested in stocks, longer)<\/p>\n<\/li>\n The brokerage account is a \u201cGeneral Investing\u201d account with Betterment that\u2019s 90% stocks\/10% bonds<\/em><\/p>\n KEY TAKEAWAY<\/strong>: This calculator is an imperfect tool \u2014 I can\u2019t input the more nuanced breakdown of all these different accounts, and truly, it would probably defeat the purpose of \u201crough estimate\u201d anyway, since this isn\u2019t precise enough to warrant that level of detail. The bottom line, however, is that you can\u2019t assume you\u2019ll make an average 8% rate of return on a savings account because it\u2019s not invested<\/em>. This is why I always encourage people (and I need to follow my own advice here!) to put the emergency fund aside, then lay off saving cash and invest instead. The $12,000 I have scattered across different checking and savings accounts isn\u2019t doing a damn thing for me.<\/p>\n<\/li>\n<\/ul>\n Yay, a positive twist! <\/p>\n In this scenario, I\u2019m saving $2,565\/mo. for the next 28 years and never increasing it. My intention is to increase this handedly as I make more money, but again, there\u2019s no way to tell this calculator, \u201cHey! By the time I turn 30, I hope to be saving $5,000+ per month. Can you factor that in, please?\u201d<\/p>\n All that to say, don\u2019t be discouraged if the amount you\u2019re saving right now results in a deficient outcome<\/strong>. It\u2019s likely that you\u2019ll be able to save more as you make more (and as you pay off student loan debt, which I know is a hot topic for a lot of us).<\/p>\n For example, I messed around with it and saw that I\u2019d need to save $3,500\/mo. (about $1,000 more than I am now) to retire at age 50 with the same parameters. I don\u2019t know about you, but being told I\u2019m an extra $1,000 per month away from retiring at the ripe old age of 50 really lights a fire under my ass. An extra $1,000 per month is truly not that hard to come by.<\/p>\n While the calculator can\u2019t predict or account for big raises or serious changes, it\u2019s assuming your salary will increase by 2% per year. This means a $60,000 salary this year will be a $61,200 salary next year. That\u2019s a pretty safe bet, I\u2019d assume, since most people probably receive some sort of merit increase or raise on an annual or biannual basis. <\/p>\n It\u2019s also accounting for 3% inflation.<\/p>\n And while you\u2019re expecting a 7% rate of return in the years leading up to your Golden Years, it assumes only 5% after you retire (because you\u2019ll make your portfolio less risky once you know you\u2019ll need the money). <\/p>\n In short, it\u2019s doing a lot of things really well.<\/p>\n So depending on your personal situation, you\u2019re either feeling very relieved or very panicked right now.<\/p>\n Either feeling is OK, and you know why? Because you have time.<\/p>\n You know why else it\u2019s OK? Because some of the things that might be holding you back aren\u2019t your fault.<\/p>\n I dig into some data in this post about how to pay off debt efficiently<\/a>, but student loan debt is nearly inevitable and insanely high for most people who went through the standard 18-year-old\u2019s approach to college. <\/p>\n Do we know now<\/em> that you may have made some different choices had you known the full story? Probably. Can we blame High School You for doing what you thought was best for your future? Absolutely not.<\/p>\n In some cases, student loans aren\u2019t crippling. Even $100,000 in student loan debt is manageable if you become, say, a dentist.<\/p>\nMy path to retirement, according to this calculator<\/h4>\n
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Now for the fun part: Where will I be when I\u2019m 54?<\/h4>\n
The average \u201crate of return\u201d is a tricky mistress because we don\u2019t live in a mathematically perfect vacuum<\/h4>\n
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The only \u201csavings\u201d this math applies to is the savings that\u2019s actually invested<\/h4>\n
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My intention is to save more than this every month as my income goes up, and yours probably is too<\/h4>\n
Assumptions this calculator is making<\/h4>\n
Now that you know how to figure out if you\u2019re on track, let\u2019s talk about this feeling of being \u201cbehind\u201d<\/h4>\n