“Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations. You have to pay attention to money, but it shouldn’t be about the money.” –Tim O’Reilly
Just before my birthday I got an email that contained a retirement factoid I’d never heard before:
Fidelity suggests that by age 35, you should have at least one times (1X) your yearly income saved to meet your basic needs in retirement.
Nothing like a little extra retirement anxiety on my birthday. Thanks Fidelity!
Update: Don’t put too much stock in rules-of-thumb. A year later, Fidelity sent me an email that said:
Fidelity suggests that by age 35, you should have at least two times (2X) your yearly income saved to meet your basic needs in retirement.
It looks like they’re sticking with “2X by age 35”. Fidelity just produced a video with the following benchmarks:
Update: I’ve since learned that a far better indicator of retirement-readiness is aiming to reach a point where “your assets now equal 25-times your annual spending”. With Fidelity’s rule-of-thumb, age and salary are largely out of your control—and as your salary increases, counter-intuitively that pushes back the goalpost on retirement (because it assumes a proportional level of lifestyle inflation). Using savings and spending as the indicators puts financial independence squarely in your control. Want to retire before age 67? Reduce your spending and/or increase your saving.
But it did succeed in getting me thinking about how I measure up. If I combine both my Roth IRA and my 401(k), I’m a hair over 50% (or 0.5X) of my salary. If I also include my brokerage account (which isn’t strictly earmarked for retirement—it’s more medium-term savings), it bumps up to just over 60%. So by that yardstick, I’m coming up short. Their email obviously had the intended effect, because I increased my 401(k) contribution from 6% to 75% just in time for my final paycheck of 2014.
The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur.
It reminded me of my initial foray into investing, which I mistimed right before the housing bubble burst, perfectly captured in my blog post, What a crappy time to have started investing in the stock market. The post has a graph of an S&P index fund from October 2007, when I first started investing, through June 2008, when I wrote that post. At that point, the index was down 17%—and, unbeknownst to me, the bottom of that bear market was still 10 months (and 56%) away.
Compare that graph to now, 7 years on. The S&P 500 index is up 19% from where I started back in October 2007.
S&P 500 index from October 2007 through February 2014
What follows is a meaty excerpt from Warren Buffett’s 2013 Shareholder Letter, extolling the virtues of index funds for non-professional investors.
For the first time in several years, I have the ability to contribute to a 401(k) plan through Sincerely’s new parent company, Provide Commerce. There were only two index funds available among the predictably limited mutual fund offerings: the Spartan 500 Index Fund (FXSIX) with a rock-bottom expense ratio of 0.05% and the Spartan International Index Fund (FSIVX) with a respectable ratio of 0.17%. The rest were all managed funds with expense ratios between 0.8% and 1.2%. Given that my existing investments at Schwab are all index funds with an asset allocation of 40% large cap, 40% international, and 20% bonds, I skipped the bonds and just went with 50% large cap (aka domestic) and 50% international for my 401(k).
I like to take some time at the end of each year (or in this case, well past the beginning) to look back on the financial decisions I’ve made and think about the year ahead.
Last Year
Not much happened in the first eleven months of 2012 besides dutifully making our first year of mortgage payments. One down and 29 to go. It feels like an important milestone, though I can hardly fathom the next 29 years. Given how dramatically the housing market in San Francisco recovered last year, we started thinking seriously about refinancing before the year was up. If the value of our condo had appreciated to the point where we had 20% equity, then we could cease flushing nearly $400 down the drain each month paying for private mortgage insurance (PMI).
Once a year, I like to look back on the financial decisions I’ve made and think about any changes I anticipate making in the year ahead.
Last Year
Financially speaking, not much happened during the first eleven months of 2011, besides the steady evaporation of my travel savings. I did, however, accomplish the few financial goals I set for myself in my last “Learning how to save” post: I increased my exposure to international equity—predictably right before the eurozone economies slumped, I sold off my managed retirement funds (in favor of index funds), and I rolled over my Roth 401(k) to my personal Roth IRA.
When Stephanie and I returned to the United States in August, we had $10,000 as a post-travel savings buffer, an arbitrary amount that seemed reasonable in order to restart our lives. That estimate turned out to be prescient, as there wasn’t much left of it when our first paychecks showed up in the middle of October. It goes without saying that we were both exceptionally fortunate to be offered jobs within a week and a half of our return to San Francisco.
That would be the end of this post, if it wasn’t for something I wrote way back in 2007 (and subsequently acted on), shortly after starting this “Learning how to save” series. In my post, Thinking ahead (about real estate), you’ll find this little gem:
My 31-year-old self would probably want to take my 27-year-old self out for a beer and thank me profusely if he looked at his savings account balance and found $50,000. Of course, between then and now, there’ll probably be a lot of plane tickets and other spontaneous large expenses to account for. So saving $50,000 might take a little longer.
