Savings and Retirement

[SoulCakes]

I asked this a while ago as part of a two-part question, and everyone focused on the other part.

Say you can save 20% of your income. How much would you put in your retirement account, and how much would you put in your short/long-term savings?

Would you be happy with that? If you could save up to 30% total, how would that affect how you split it?

TIA!

[its_betty]

I would go by actual dollar amounts, not percentages. 20% of $100,000 is a lot different than 20% of $20,000, KWIM?

If I already had a good amount of short/long term savings, I'd put more in retirement. If not, I'd put half in each (so that the retirement gets started so compound interest can do it's magic) and then adjust when I had a good amount of short/long term savings. The amount needed in short/long term savings would depend on what I was saving for and the need for an emergency fund of 6 months or more, and if I had any impending possible large expenses, like saving for a house or college expenses.

It also makes a difference how old you are, how many kids (and do you plan to pay for college for them), do you already own a home and reliable cars, etc etc etc. If I could go back in time and was still 20 and had no kids, I'd be putting as much as possible into retirement for a few years, then buy a cheap condo, and then worry about other savings after that. (Oh past me, why didn't you spend more wisely!)

You also need to consider what kind of retirement account(s). Save tax now but pay it in the future? Or go with ROTH IRA, pay tax now but not in the future (and have the ability to pull principal out to pay for certain things like college)? Or both?

[SoulCakes]

Hrmm, ok. So after taxes we bring home about $7500 a month. Just over $1000 goes directly into retirement accounts (we're in the UK; they're tax-free on either end). We have several little things to save for this year, so not including what's going toward those we have about another $1000 to put toward long-term savings. I wish it were higher, but that's about the best we can do until next summer and those other costs are out of the way.

We already have at least six months' living expenses saved and want that to be higher before we'll truly feel comfortable. We also have significant equity in our home.

The downside: I have massive student loans (around 70k, currently) that are only going to increase in the next four years. I'd like to start working on the loans with the highest interest rate sometime soon. I guess I'm just overwhelmed by it all--I'm not sure how much to pay off, how soon, and how much to save. I love that we're putting so much into retirement (my old self will thank me later), but I'm also worried that we're somehow not going to have enough for now.

[sanguine_speed]

Originally Posted by SoulCakes

The downside: I have massive student loans (around 70k, currently) that are only going to increase in the next four years. I'd like to start working on the loans with the highest interest rate sometime soon. I guess I'm just overwhelmed by it all--I'm not sure how much to pay off, how soon, and how much to save. I love that we're putting so much into retirement (my old self will thank me later), but I'm also worried that we're somehow not going to have enough for now.

If you have money to save, perhaps you'd be wise to use that money for school rather than taking out even more loans.

As to the retirement question, I work backwards. I figure out how much I'll want/need for retirement, then figure out how much I need to save to have a very good likelihood of having as much as I want/need, and then balance my portfolio to mitigate risk over time.

For us in Canada, we actually save the tax on the front end, so any retirement contributions result in a tax refund of around 40% of our contributions the year we make the contributions.
So in our case, we're prone to make the contribution then use the tax refund to fund the other, short term, savings goals.

[SoulCakes]

I'd rather not pay for my schooling out of pocket, as my expenses exceed the amount we could save at the moment, loan interest rates are incredibly low right now, and I still want the buffer of extra cash on hand. Otherwise I agree that that's a fine idea.

In the UK, we don't actually get/need to file a tax return. Only those in exceptional circumstances do (e.g., trustees, extremely high income, or the self-employed). I miss that annual pick-me-up!

Originally Posted by sanguine_speed

As to the retirement question, I work backwards. I figure out how much I'll want/need for retirement, then figure out how much I need to save to have a very good likelihood of having as much as I want/need, and then balance my portfolio to mitigate risk over time.

Hrmmm... this is interesting. I'll have to look into this.

[sanguine_speed]

Originally Posted by SoulCakes

In the UK, we don't actually get/need to file a tax return. Only those in exceptional circumstances do (e.g., trustees, extremely high income, or the self-employed). I miss that annual pick-me-up!

We don't consider tax-time a pick-me-up because historically we owe. It's only when we have invested in tax-refundable RRSPs that we get any back.
I don't know how so many people get these tax refunds every year I keep hearing about.

[SoulCakes]

When my ex and I were still together we'd usually get over $5k back each year. We weren't overclaiming dependents on our W2s, but we'd get so many exemptions and credits for education, child care, charity donations, etc. It was always a nice bonus.

[sanguine_speed]

Originally Posted by SoulCakes

When my ex and I were still together we'd usually get over $5k back each year. We weren't overclaiming dependents on our W2s, but we'd get so many exemptions and credits for education, child care, charity donations, etc. It was always a nice bonus.

Oh I see!
Here, we exempt these with forms before taxes are deducted, so there is not much left to exempt later.

[sunnysandiegan]

I answered all three parts of your question the first time around.

Regardless, I would need more info on your financial situation to give the details you are asking now. New pieces of the puzzle keep cropping up in your threads. Generally, people pay off loans and other debt as well as save for retirement and short-term savings and build up reserves (called all sorts of things...you call it 6 months expenses, I call it mid-term savings). Expenses need to be taken into account, also. Those can usually be adapted by behavior, too, in order to allow more room for other aspects of one's financial "picture".........

[SoulCakes]

Originally Posted by sunnysandiegan

New pieces of the puzzle keep cropping up in your threads.

This is exactly why I need to get organized.

And thank you if you did answer all three questions! I'll go take a look and see if I missed anything. I do think I've finally coughed up all the important financial pieces:

- $70k in student loan debt, about $14k of which is over 8% interest. That $14k is what I want to start paying back while I'm still in school.

- Take-home pay about $7500 a month

- Automatic, employer-matched retirement of around $600 and another $400 into another retirement account

- About $1000 for long-term savings after monthly expenses and other, short-term savings are deducted

- Currently have around $40k in savings

- Have about $150k equity in our home, still owe about $275k

- Forgot to add in this thread: any money we put into our mortgage offset account lowers our monthly mortgage payment.

- Annual education expenses for me are about $15k. This will go up next school year unless I get a studentship or other funding of some kind (crossing my fingers...). Not yet certain how much they'll be total if I can't get funding.

Sorry for all of the "arounds" and "abouts"; I'm converting everything from pounds to dollars.

Most of my concern stems from the fact that we've been tearing into our savings the last few months, and I'm trying to curb it as fast as I can. When I do the monthly budget, everything looks ok. But I joined the no-spend thread this month and am keeping track of every penny I spend because if I'm not looking, the money just vanishes... scary. And not good. If I knew for sure that we'd save $1000 every month, I'd be perfectly fine with that. But I want to add as much padding to our savings as possible so we don't find ourselves scraping the barrel in a matter of months.

So I guess my financial goals are:

- Replace lost savings (around $15k), and after that determine a comfortable amount to add to long-term savings each month

- Begin paying off high-interest student loans

- Start paying off low-interest student loans and then attack the mortgage

- Die from shock if everything actually gets paid off

[sunnysandiegan]

I think you are doing fine financially. Your expectations may need to be altered a bit, though. Your savings and retirement all seem on track. Expenses seem to be the real issue and I don't have any details on those except that you are in school costing about $15K a year. If you have $40K in savings, then I wouldn't worry about replacing $15K in "lost savings". You used *some* of your savings. I'd evaluate what I spent the $15K on and decide if I wanted to do that again or not, but I wouldn't spend a lot of effort trying to rebuild it when my schooling was costing that much per year and my monthly expenses were $6500.

I'd focus on lowering expenses, which you seem to be doing this month with the no spend challenge. Good place to start!

Then, I'd discuss priorities with DH and see where you both are comfortable and not comfortable with your financial situation. It sounds like there are inconsistencies in this area. I think it is really important for couples to be on the same page financially. Even when two adults don't actually have the same financial philosophy, it is still important to discuss them and understand them and collaborate on making both people feel heard and understood and meet at least one major point for each person.

With your income and expenses, I'd look at interest rates closely to decide which way to go. Is $14K of your $40K savings earning more than the interest rate your $14K of student loans (8%+)? Age also plays a part. If you and DH are under 30, I'd pay off that $14K of student loan with the $40K savings in a heartbeat because it is less than half and it still leaves you with a very good cushion AND, most importantly, you have time to rebuild it. If you are in your 30s, I'd probably pay part of the $14K off with savings and then divert the $1K savings towards the rest until it was paid off. (Then go back to adding the $1K to savings.) If you are in your 40s, then I would just divert the $1K for a year and then pay it off from savings after 12 months.

From your threads and comments, it sounds to me like either you or your DH are not very comfortable with money. I'd encourage you both to examine those beliefs and do whatever it takes to become comfortable with money. Your financial picture of high income, high expenses, high savings, and high debt is more typical of people who ARE accustomed to having and managing money efficiently.

[SoulCakes]

Originally Posted by sunnysandiegan

From your threads and comments, it sounds to me like either you or your DH are not very comfortable with money. I'd encourage you both to examine those beliefs and do whatever it takes to become comfortable with money. Your financial picture of high income, high expenses, high savings, and high debt is more typical of people who ARE accustomed to having and managing money efficiently.

Would you elaborate a little on this? I'm not comfortable with money at all. It terrifies me. My experience as a child was of completely unstable financial support--my parents were accustomed to and tried to live a very high-end lifestyle but it would always crash land into utilities being disconnected, personal possessions sold, having to move, etc. So now I have two fears playing tug of war on my financial habits: the fear of not being able to get something I need/want, and the fear of money leaving the bank. It basically leads me to overspend and then feel horrified when our savings dwindle.

You're right, though: we are ok. I just really want to believe that being ok now = being ok in the future. I'm also taking a risk in graduate school because while I'm racking up student loans, I don't have the guarantee of a high-paying job (or any job, really) in the end. I've calculated how much I'll have to pay per month on the $70k I already owe, and that's nearly enough to give me panic attacks.

[sunnysandiegan]

It was a general sense that led me to that conclusion, SoulCakes. I have a degree in finance and worked in securities and banking for years. In my experience, a person's attitude towards money and their relationship with money determines their long-term financial success far more than any other factor.

Your unstable upbringing is spot-on for what I was sensing. I offer empathy and hugs. Beyond the emotional camaraderie, I highly recommend you find a way to come to terms with your financially insecure childhood. This probably belongs in the personal growth forum. There is no one way to go about doing so, as everyone is unique. Some serious soul-searching is going to be required and how you go about doing that is very personal. You can talk to a professional. You can read books. You can do all sorts of things. The key point I am trying to make, though, is that you will need to be proactive or this will always effect you negatively in some way, shape, or form.

[SoulCakes]

Poop. I ask about finances and get sent to the shrink. But seriously, thank you so much for your insight and advice. So far I've found that even just tracking my spending has opened my eyes to how I was treating money on a day-to-day basis (like I have to spend it quick before it vanishes), which in turn has already helped me gain confidence that that's not a financial life I have to be living.

Thanks again. I really appreciate the help.