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November 01, 2007
How to sock away a lot of money
I have this crazy idea that it would be nice to retire by the time I'm in my early 50s. All the retirement calculators on the Internet tell me I'm nuts, I need to triple my income to dream of exiting the rat race in just 20 or so years. But I think I can do it, especially using today's loose definition of "retirement," which often means "working part time."
There are a many elements to my retirement dream, including paying off the house early. Ben's really awesome about tacking on some extra money to our principal payment every month, which puts us on track to own this place in 20 years, instead of the 30 years outlined in our loan. What I want to write about today, however, is an epiphany I recently had about my 401k contributions.
I can maintain my standard of living from one year to the next, and at the same time increase the amount of money I put toward my retirement by close to 30 percent, or possibly by much more. And so can anyone else. Here's how, using example figures that are somewhat close to my actual salary and 401k contribution levels:
Let's say that in year one, my salary is $35,000, and I am putting 10% of my salary into my retirement fund. That's $3,500 toward retirement, $31,500 in remaining pre-tax pay.
If in year two I get a 3% raise my salary will grow to $36,050. I can take home most of that extra money, but what if I decide to leave my pre-tax, post-retirement-contribution salary where it was in year one -- at $31,500? To do this, I will have to increase my retirement contribution to roughly 12.6% of my pay. I'll now be putting $4,542.30 toward retirement, and with my remaining pre-tax pay at $31,507.70.
To recap: I can increase my retirement contributions by 29.8%, without any cut to my take-home pay pay. And I can do it while only increasing the amount I put into retirement by 2.6 percentage points. Pretty neat.
One oversight in this plan: I'm not taking inflation into account. Like most people, I probably have enough wiggle room in my budget to absorb that extra inflationary bite for a year or two, but every third year it might be a good idea to just accept the full raise without adjusting your retirement income so I don't feel like I'm falling behind.
If I can significantly increase my retirement contributions, I think I should have a good sized nest egg by the time I'm 50 or a bit older. At the same time, my living expenses should drop dramatically with the final payment on our home. I don't want to start drawing down my 401k until I get closer to 60 years old, maybe a bit older even. But with the house paid off and lifestyle expectations kept in check it should be easy to significantly cut back on hours and my take-home pay without feeling like I'm making a major sacrifice.
Of course, a lot could happen to disrupt this dream in the next 20 years. By the time I hit 50, I'll probably be laughing at my idealistic optimism, or crying that I didn't enjoy my income when I had the chance. What can I say. I'm just going to keep trying to do the best I can with the information I have available to me.
Posted by Courtney_Sherwood at November 1, 2007 05:48 PM
Comments
I approve of this plan (increasing 401(k) contributions at every raise) because it was what I did at Kinko's. Just because you start taking home more money doesn't mean you are required to increase your standard of living/expenditures.
I'm hoping that I can have the discipline to maintain my current standard of living when I have an income that is 100% greater.
Posted by: underwhelm at November 1, 2007 08:25 PM
That will probably be hard, simply because more will be expected of you.
I know that as I have made more money, I have been expected to spend at least some of it for work-related stuff - like nicer, more expensive clothes that require drycleaning (another expense). But you could always try to keep your spending growth very modest. You may also be expected to go to lunch with colleagues, and it will probably cost more than the lunches you might take out alone. A lot of little things add up.
Posted by: Courtney at November 1, 2007 09:38 PM