Joakim Persson
December 17th 03, 09:31 PM
(Steve)] wrote:
[ 62 lines in misc.invest.financial-plan ]
===================
>Basically, I am married and almost 40 and have about $65K currently
>locked into a company 401(k) account (~$50K) and my wife's traditional
>IRA account (~$15K). We recently had our first child, and want to
>start saving for her college eduaction, also. We have some bills to
>pay off in the short term, but hope to be clear of everything but a
>mortgage and a car payment in a few months. I currently put away
>~$400/month in my 401(k) with an employer match of 50% (making it
>~$600/month). I also get a pension of ~$300/month. My wife does not
>work, and we haven't contributed anything to her IRA in well over a
>year.
>
>My goals are to ...
>
>1. Start an education plan for my child immediately, so that she will
>ave enough money for college when she reaches that age. This requires
>knowledge about college savings plans, which I have started
>investigating. One problem I have is trying to figure out how much
>will be enough. Education expenses are skyrocketing and am trying to
>understand how much she'll require in ~18 years.
>
>2. Put more money into retirement. I figured if I continue my current
>course, we will have <$500K for retirement. This isn't a whole lot by
>today's standards, and even less when inflation is factored in over
>the next 25+ years. So, I am guaging how much to put away without
>over-doing it. I'd hate to lock all that money into retirement, and
>then I lose my job or something and cannot get hold of any of it.
>
>3. Start an emergency fund. This is actually my first priority. I
>want to put as much money as is needed into an emergency fund in case
>I lose my job or something. I've heard various amounts like 2x, 3x,
>6x and even 12x your monthly income. I figure 3x is probably enough,
>but the recent economic times, I've heard people looking for jobs for
>over a year, too.
>
>Any suggestions (short of talking to a qualified financial advisor)?
>
>Regards,
>Steve
You are on the right path. First priority should, indeed, be to build up an
emergency fund, covering about 3-6 times monthly net expenses. Second, if
you have money to spare every month, try to put it in tax-deferred plans
(since I'm not a US citizen, I do not know the details of 401(k)s, IRA's
and education plans -- but those are where the money should go to first).
After that, it boils down to some financial guesswork. Namely, what do you
expect will happen to inflation, costs of education, interest rates and
equity returns? If anybody knew with certainty those things, they would be
busy exploiting them, so we cannot do more than guess.
Just for the sake of the argument, let's make some assumptions. Say that
the inflation rate will be approximately 2%/year over the next 25 years,
that bonds will return 3%/year and that stocks will return 5%/year.
Starting from scratch, this will mean the following (approximately):
Investing $100/month ==> $58k if invested in stocks until you are 65, $39k
if invested in bonds
Investing $200/month ==> $117k stocks, $77k bonds
Investing $300/month ==> $176k stocks, $116k bonds
.... and so on. These calculations are extremely sensitive to future changes
in inflation, bond return and stock return. If we keep inflation at 2%, but
instead increase expectations of stock returns to 7%, you would get:
$100/mo ==> $78k
$200/mo ==> $157k
$300/mo ==> $235k
Of course, this is before adjusting for new expenses in the year 2028. If
inflation is 2%, $235k would be worth $135k in today's dollars -- at 3%,
only $103k.
Then, if you would invest in equities, you would still have to face large
risks. Even if you could get 10% returns during 20 years, five bad years in
2023-2028 could mean disaster for your nest egg. Many advocate shifting to
more bonds and less stocks in later years for this very reason.
Note: all figures above are before taxes, but has not included your savings
in your retirement plans. Also note that during retirement, a 100%
allocation in bonds can provide you with enough interest to cover much of
your expenses, if your nest egg has grown large enough. The $235k in the
7%/year stock appreciation scenario would, if invested in bonds paying
3%/year, give you $7k/year to supplement other income. If your goal is to
have as much income when you retire as you have now, you probably need to
invest a lot of money.
--
Joakim Persson
M.S. student, CS/CE @ LTH, Lund, Sweden
Libertarian -- Heavy Metal fanatic
-- http://www.efd.lth.se/~d00jp
[ 62 lines in misc.invest.financial-plan ]
===================
>Basically, I am married and almost 40 and have about $65K currently
>locked into a company 401(k) account (~$50K) and my wife's traditional
>IRA account (~$15K). We recently had our first child, and want to
>start saving for her college eduaction, also. We have some bills to
>pay off in the short term, but hope to be clear of everything but a
>mortgage and a car payment in a few months. I currently put away
>~$400/month in my 401(k) with an employer match of 50% (making it
>~$600/month). I also get a pension of ~$300/month. My wife does not
>work, and we haven't contributed anything to her IRA in well over a
>year.
>
>My goals are to ...
>
>1. Start an education plan for my child immediately, so that she will
>ave enough money for college when she reaches that age. This requires
>knowledge about college savings plans, which I have started
>investigating. One problem I have is trying to figure out how much
>will be enough. Education expenses are skyrocketing and am trying to
>understand how much she'll require in ~18 years.
>
>2. Put more money into retirement. I figured if I continue my current
>course, we will have <$500K for retirement. This isn't a whole lot by
>today's standards, and even less when inflation is factored in over
>the next 25+ years. So, I am guaging how much to put away without
>over-doing it. I'd hate to lock all that money into retirement, and
>then I lose my job or something and cannot get hold of any of it.
>
>3. Start an emergency fund. This is actually my first priority. I
>want to put as much money as is needed into an emergency fund in case
>I lose my job or something. I've heard various amounts like 2x, 3x,
>6x and even 12x your monthly income. I figure 3x is probably enough,
>but the recent economic times, I've heard people looking for jobs for
>over a year, too.
>
>Any suggestions (short of talking to a qualified financial advisor)?
>
>Regards,
>Steve
You are on the right path. First priority should, indeed, be to build up an
emergency fund, covering about 3-6 times monthly net expenses. Second, if
you have money to spare every month, try to put it in tax-deferred plans
(since I'm not a US citizen, I do not know the details of 401(k)s, IRA's
and education plans -- but those are where the money should go to first).
After that, it boils down to some financial guesswork. Namely, what do you
expect will happen to inflation, costs of education, interest rates and
equity returns? If anybody knew with certainty those things, they would be
busy exploiting them, so we cannot do more than guess.
Just for the sake of the argument, let's make some assumptions. Say that
the inflation rate will be approximately 2%/year over the next 25 years,
that bonds will return 3%/year and that stocks will return 5%/year.
Starting from scratch, this will mean the following (approximately):
Investing $100/month ==> $58k if invested in stocks until you are 65, $39k
if invested in bonds
Investing $200/month ==> $117k stocks, $77k bonds
Investing $300/month ==> $176k stocks, $116k bonds
.... and so on. These calculations are extremely sensitive to future changes
in inflation, bond return and stock return. If we keep inflation at 2%, but
instead increase expectations of stock returns to 7%, you would get:
$100/mo ==> $78k
$200/mo ==> $157k
$300/mo ==> $235k
Of course, this is before adjusting for new expenses in the year 2028. If
inflation is 2%, $235k would be worth $135k in today's dollars -- at 3%,
only $103k.
Then, if you would invest in equities, you would still have to face large
risks. Even if you could get 10% returns during 20 years, five bad years in
2023-2028 could mean disaster for your nest egg. Many advocate shifting to
more bonds and less stocks in later years for this very reason.
Note: all figures above are before taxes, but has not included your savings
in your retirement plans. Also note that during retirement, a 100%
allocation in bonds can provide you with enough interest to cover much of
your expenses, if your nest egg has grown large enough. The $235k in the
7%/year stock appreciation scenario would, if invested in bonds paying
3%/year, give you $7k/year to supplement other income. If your goal is to
have as much income when you retire as you have now, you probably need to
invest a lot of money.
--
Joakim Persson
M.S. student, CS/CE @ LTH, Lund, Sweden
Libertarian -- Heavy Metal fanatic
-- http://www.efd.lth.se/~d00jp