Savings, Debt and Retirement

[Fez]

I'm great at automatic savings for long-term stuff, I suck at the rest. So I have my automatic student loan payment and my 401k contribution and I pay a bit extra towards my student loans each month to try to get that principle down faster. But I'm no good at saving for big purchases or vacations. Instead, I have four windfalls each year (the two months that I get three paychecks instead of two, my annual bonus, and my tax refund) and whenever I get one, I take the extra money and spend it on something big. 

 

I recently got a fairly substantial raise. I increased that extra monthly student loan payment, my monthly charitable contributions, and my 401k contribution, and still had a decent amount of extra money coming into my pocket each month. But I don't have any extra money at the end of the month, instead I'm just spending more on various things.

 

For the most part I'm okay with this arrangement (although any purchase larger than one of those windfalls, like a new car or a house, would be tricky). I put a fairly high premium on current life satisfaction vs. future life satisfaction and I don't see the value in living overly frugally now just so I can live less frugally later (to a certain point, at least).

 

Also, I do have a rainy day savings account from several years ago that I never touch, that, when combined with unemployment insurance benefits, would have enough to cover my expenses for about a year with only minor cuts in spending. So I do have a cushion if I ever need it.

 

Despite technically having a negative net worth (those student loans dwarf any assets), I recognize how different my situation is from most people though. I've been lucky enough to have a lot of advantages in life. Its easy to forgot that though, usually being surrounded by people who've had even more advantages. Peoples' work and social circles really can be a bubble sometimes.

[lessthanluke]

Getting on the housing ladder is both a big deal and a huge feat for people our age. 

Truth. I am 26 and I know very few people I went to school with have their own homes. I personally have no interest in getting a mortgage any time soon. Too much of a long term investment. I want to be free to move whereever I want on fairly short notice.

[IheartIheartTesla]

I have about 10.5% of my salary in my retirement account (4% matched and 6.5% choice), havent really fudged about with the investment blend they have going on right now. It is a bit unnerving watching that balance go down when the stock market tanks.....

 

Apart from that, I use a 529 plan for college for the kids. Didnt really have any student loans, so the debts I have right now are mortgage, car loan and credit cards in that order.

 

I'm probably not saving enough, but once the kids leave the nest there should be opportunity for saving more.

[Fragile Bird]

Many people don't start seriously saving until their late forties. Their kids have grown up, the mortgage has been paid down if not paid off, they've reached peak earning years and they suddenly realize they were 47 or 48 on their last birthday with almost nothing saved for retirement.

[Lord of Oop North]

Take advantage of that RSP matching! A lot of employers cap it to a certain amount, say, $5,000, but if they will match dollar for dollar go for the full amount if you can.

Yah, they will 100% match up to $5,000. Not huge, but better than nothing.

[Littlefingers In The Air]

I make too little money and travel too much to save much. I'll save when I make enough to save. But between paying bills and enjoying not being bored, I don't save much now.

[Iskaral Pust]

Many people don't start seriously saving until their late forties. Their kids have grown up, the mortgage has been paid down if not paid off, they've reached peak earning years and they suddenly realize they were 47 or 48 on their last birthday with almost nothing saved for retirement.

 

That's far too late to start.  Even with low investment returns likely in the next couple of decades, it is still necessary to start early to accumulate compound returns for longer.

Even starting at 40 is too late.  Start as early as student debt allows, no later than 30, and at least contribute enough to get the maximum employer match.

 

A high savings rate also makes for a lower target: if you have $50k net of taxes but start saving $10k, then you get used to living on $40k.  Now the amount you need to replace your lifestyle in retirement is 20% lower and you are making real progress toward it.  A high savings rate during peak earning (usually ages 35-55) is important to smooth consumption/lifestyle over your life, as is debt in your early years.

[Fragile Bird]

Yah, they will 100% match up to $5,000. Not huge, but better than nothing.

Dear lord, if you socked away $10,000 a year (half from you, half from your employer) and did that for 10 years only, you'd be in decent shape when you retire from compounding alone. But you'll add to that over time.

If you put $10,000 a year in your RSP and make 5% a year, which is a conservative estimate of returns considering the historical return on the TSE is 8%, you'll have $720,000 in 30 years, $980,000 in 35. If, over the long term returns revert to the average, that increases to $1,292,000 and $1,979,00 respectively. I started saving much later and higher amounts, but with much less time I'm no where near the lowest number. :)

There are lots of on-line calculators you can play with, here's one: http://www.getsmarteraboutmoney.ca/tools-and-calculators/compound-interest-calculator/compound-interest-calculator.aspx

Note - I compounded quarterly, like many mutual funds do, if semi-annually the results are lower.

[Guest]

My employer has a 401(k) equivalent (or the non-profit version) that they do not match.  But there's also a pension which everyone has to pay into.  Not sure if that's better or worse, but the pension sounds pretty attractive to me.  It's not insanely generous, but one tends to make half of their peak earnings annually in retirement if they worked there for a big chunk of their career, and kind of like social security you can get it earlier if you're willing to take a less generous version.  You can also take the lump sum option, but there's a new tier to the system for newer employees, and I guess there's no lump sum option for them.

 

Unbreakable Kimmie Schmidt or some show had a joke about taking lump sum options which had to do with putting it all into some investment that had good enough returns which meant it was actually the better of the two options, but I've not researched how valid that is or is not.

 

The pension is interesting to think about because it means that even if one does nothing to save but still works at that employer for a long time they had some stream of income though if you never made more than, say $60K the pension would only be like $30K a year.  But if you made into the six figures you could end up getting paid over $50K for all of your retirement years.

[Wise Fool]

Fuck this thread is depressing as fuck.

[Fragile Bird]

My employer has a 401(k) equivalent (or the non-profit version) that they do not match.  But there's also a pension which everyone has to pay into.  Not sure if that's better or worse, but the pension sounds pretty attractive to me.  It's not insanely generous, but one tends to make half of their peak earnings annually in retirement if they worked there for a big chunk of their career, and kind of like social security you can get it earlier if you're willing to take a less generous version.  You can also take the lump sum option, but there's a new tier to the system for newer employees, and I guess there's no lump sum option for them.
 
Unbreakable Kimmie Schmidt or some show had a joke about taking lump sum options which had to do with putting it all into some investment that had good enough returns which meant it was actually the better of the two options, but I've not researched how valid that is or is not.
 
The pension is interesting to think about because it means that even if one does nothing to save but still works at that employer for a long time they had some stream of income though if you never made more than, say $60K the pension would only be like $30K a year.  But if you made into the six figures you could end up getting paid over $50K for all of your retirement years.

Trisk, I made a mistake when I first joined one of my employers, because one of the other lawyers in the department said he'd never join a pension plan because it becomes a ball and chain. He said he knew people who had grown to hate their jobs but decided they couldn't leave, because they'd take too big a hit to their pension plans if they left early.

Eventually the HR guys convinced me that FREE money was FREE money and I should never turn it down. The company I worked for once had a proud legion of long-term employees, but by the time I was there they were notorious for getting rid of people before they could hit the 10 year mark, which apparently bumped them up in status.

Now, with the wisdom of age, I realize I should have signed up from day one and just expected to bite the bullet when the time came. Isk mentions the fact that he left a pension plan at his previous employer after ten years, to his regret, but for the sake of his career he needed to leave that company. That's the wisest approach.

[Fragile Bird]

Fuck this thread is depressing as fuck.

I'm sorry, Wise Fool. I wish there was some advice I could give you. Here in Canada we have a pension plan, like social security, that everyone pays into, plus what's called Old Age Security to lift people out of poverty if the CPP is all they have, plus supplemental income on top (not much). It only comes to about $18,000 a year, but it has really lifted seniors out of poverty. :(

[Frog Eater]

I save 12% of my pre tax earnings in my 401(k), the company puts in 5%. I know I should be putting my money into a Roth instead of the 401(k), but I still use my 401(k). If I continue to put in 12% of my pay, continue to get 5% pay raises, and get an 8% annual return from the market, I will have a million bucks when I retire at 65. And it wont be near enough. 

 

I also save for both my kids college through Coverdell Education IRAs I maintain at TDAmeritrade, I am able to buy individual stocks and Mutual Funds and the accounts have no service fees. My oldest daughter also has a prepaid tuition plan, that will provide her 4 years of tuition at a state school. 

 

I do a poor job saving enough outside of my 401(k). I know I need to do better. 

[Wise Fool]

I'm sorry, Wise Fool. I wish there was some advice I could give you. Here in Canada we have a pension plan, like social security, that everyone pays into, plus what's called Old Age Security to lift people out of poverty if the CPP is all they have, plus supplemental income on top (not much). It only comes to about $18,000 a year, but it has really lifted seniors out of poverty. :(

Move to Canada, is what you're saying. Or basically anywhere that isn't the US.

 

It's a nice idea, but I'm so chickenshit attached to my familiar surroundings and my people. I wish a bunch of us all got together and had the idea to do something like that as a group, then I might try.

[Guest]

You must be the one to lead them, Wise Fool.

[maarsen]

Take advantage of that RSP matching! A lot of employers cap it to a certain amount, say, $5,000, but if they will match dollar for dollar go for the full amount if you can.

The drawback with these plans can be the limited options that are given to you to actually invest in. I am 9 months away from retiring with a hospital pension. Fortunately, the Ontario Hospitals pension plan is probably the world's best. And no, the government does not contribute a cent to it and never has. I have always been a saver, even when living hand to mouth at temp and casual jobs in my youth. Don't ask, but I managed to cut my lifestyle down to the absolute minimum needed to survive. If interest rates stay low, why then invest in that tried and true widows and orphans standby, BCE stock. 3.8% dividends do help.

[Fragile Bird]

The drawback with these plans can be the limited options that are given to you to actually invest in. I am 9 months away from retiring with a hospital pension. Fortunately, the Ontario Hospitals pension plan is probably the world's best. And no, the government does not contribute a cent to it and never has. I have always been a saver, even when living hand to mouth at temp and casual jobs in my youth. Don't ask, but I managed to cut my lifestyle down to the absolute minimum needed to survive. If interest rates stay low, why then invest in that tried and true widows and orphans standby, BCE stock. 3.8% dividends do help.

My best friend is a member of the plan. She literally knows how long to the day it will be before she retires (2 years, 6 months, 17 days kind of counting). She's a hospital executive, and I wonder if she will actually go at the time. They have not paid off their mortgage yet. Her husband got laid off five years ago and never seriously looked for a job, just became the house husband, much to her frustration. She figures if he had found a job they'd be mortgage free by now.

Oh, and yes, I have BCE shares. You can never be complacent, though. Keep an eye on them.

[Guest]

FB - I'm not sure I'm following your last one about the pension and the HR situation.  But I can see how one would feel afraid to leave once one had gone too far down the path at a place with one.

[Fragile Bird]

FB - I'm not sure I'm following your last one about the pension and the HR situation.  But I can see how one would feel afraid to leave once one had gone too far down the path at a place with one.

Oh. At my senior level I had the choice to opt out of the plan. Pretty well all other employees below my level had to be in the plan.

One day a few years later I was discussing pension issues with the HR folk and I mentioned I wasn't a plan member, and they jumped all over me and told me to sign up. So I did. The thing is, in Canada the government doesn't allow you to have both a company pension plan and the full ability to put away money in your own pension plan, the thing that LoON mentioned, an RSP, a Retirement Savings Plan. They offset the value of your pension against your contribution space to your RSP, so, for example, if you could put in $10,000 I could only put in less than a $1,000 because of the value of the pension. I had been socking away money in my RSP until then. After I left the company I was allowed to rollover the company pension into a locked-in plan, which seemed like a good idea at the time because the stock market was going gangbusters. Took me years to recover what I lost in the crash after 9/11.

That's the huge thing about a defined benefit pension plan, it doesn't matter what happens, the company pays you the defined amount of your pension. That's why companies have systematically been trying to wipe them out, or replace them with a defined contribution plan, where the company puts money in for you and you make choices about where to invest the funds. You get what you get when you retire. Brutal for people who retired after the 2008 crash.

[Guest]

So a defined benefit plan is pretty good as long as it's not a place where the job doesn't crush your soul or they cut you lose a month before you qualify?