Things like a savings rate for retirement seem so trivial in the grand scheme of life, right? I’m reminded of that as I watched my youngest daughter, Landrie, get baptized today.
My primary goal in life is Glorify God and enjoy him supremely, and I want that for my children as well, which is why today is such a special day, as it probably was for you when you think back to your child’s moment of accepting Christ or making their public proclamation of faith and obedience towards Christ with baptism. But alas, there are those pesky verses in Proverbs that remind me, “Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it” (Proverbs 21:20) or how about, “In the house of the righteous there is much treasure, but trouble befalls the income of the wicked” (Proverbs 15:6).
The point is when I lack discipline in any area of my life, it’ll most likely spell trouble. This is why Whitaker-Myers Wealth Managers is here! To ensure your financial house is in order and to ensure that you are enjoying God fully through your wealth (we could spend days on that topic right there). This is why we are so connected and convicted with the teachings of Ramsey Solutions. It’s common sense, practical and Biblical wisdom around your money. As you’re most likely aware, if you’re reading this, Baby Step 4 is when you begin saving and investing for retirement. My friends at Ramsey Solutions have done many great articles on this topic, but let me spend some time on the question of whether the 15% I’m budgeting towards retirement should be considered with my employer match or after it. Meaning if my company gives me a 5% match, can I get away with only contributing to 10% to reach my 15% number? Well, let’s try and answer that question below.
Dave’s Answer
My friend, Dave Ramsey, would tell you that it needs to be 15% of your income before considering your match. This shouldn’t be a hard number to hit for the person that has followed his plan. Why? You’ve worked hard to budget your money, so you’ve got great control over the cash flow coming into and out of your household. You’ve paid off all your debt, other than your home, which is many causes, was much more than 15% of your income. For example, when I spent the early part of my career in a large bank’s Private Banking office, it was acceptable for someone to have 45% of their income going towards debt. To be fair, that was the upper end of the bracket, but it still was acceptable. So if you were even half of that, meaning you were paying the bank 22.5% of your income, you were still giving much more than 15% to the bank. Now we’re telling you to put 15% towards your future retirement. Less than you were most likely paying in household consumer debt! However, on the other end of the spectrum, I’ve heard many CFP professionals recommend something less than 15%, and I’ve seen those plans come out ok, so it begs the question, who is right?
The 15% Example – Landrie
In honor of my daughter's baptism today, let’s start our analysis with her and her hypothetical future husband as an example. She gets out of college and is ready to start working and saving at age 25. Let’s say her husband makes $50,000, and she makes $40,000. Therefore a total household income of $90,000. For them collectively to be saving 15% they need to put away $13,500 this year. In addition, if they lived in the state of Ohio, they’d be paying $17,119 (approx.) in Federal, State, Local, Social Security, and Medicare-based income taxes. That leaves $59,381 for them to spend discretionarily or nearly $5,000 / month. Can we then assume that because my daughter, hopefully being brought up under the Ramsey Solutions teachings, will live within her means and will not go into debt? Thus their lifestyle is built around that $5,000 / month, just inflated over time. I’ll assume they never get promotional raises, just cost of living raises, and that they retire at the age of 65, which would be 2062 (if they’re 25 today). They would have roughly $4.9 million by the time they reached retirement, at a 7.22% rate of return. You can see the sample I created and check my math here.
Using the 4% rule, she’d be able to take around $196,000 / year without hitting the principal, and the estimated growth of her $5,000 / month lifestyle ($60,000 / year) has been inflated to $129,882 (2% inflation rate) by the time she reaches retirement. Since we assumed she saved in a Roth 401(k) and Roth IRA for her 15%, there should be no tax liability thrust upon her, so they can take their $129,882 and still have $66,000 leftover under the 4% rule. And this doesn’t account for any Social Security they’ll be getting at 67 or later – in my estimation, because of reforms that will come down the pike in the future, Social Security will probably come to them around 70 to 75.
In addition, perhaps my daughter wants to retire before the age 65. Then the question is at what point, saving 15% of her income on top of the match, does she get to an asset base where she has saved enough to retire, using the 4% rule (taking out only 4% of the portfolio each year to give it a high probability of lasting through her life). By the time she reaches age 59 ½, when you’re able to take from your retirement without a penalty, she would have approx—$ 3.1 million. Using the same 4% rule, that comes to $124,137, and her inflated living expenses of $5,000 / month are now looking like $120,261 in that year. This means because she followed the Baby Steps, in their written and verbal form, she is able to retire earlier than most of her peers with around $3,000,000 in retirement assets, many of which are highly favored towards Roth. Excellent job, Landrie!
The 10% Example – Arthur Example
Now let’s dive into Arthur.
Poor Arthur – he would always get picked on in Dave Ramsey’s Ben & Arthur example in Financial Peace University. Now here he is again, getting beat up in this article, as the simpleton that won’t listen to Dave’s advice. So Arthur and his wife make the same amount of income as Landrie and her husband did. $50,000 and $40,000, respectively. They decide that they need more free cash flow to have fun and live life now, so they’ll save 10% of their income towards retirement and have their employer chip in the remainder, since they get a 5% match. Here are Arthur and his wife's numbers.
When reviewing their assets at age 65, you’ll notice it’s estimated they’ll have $3.5 million by retirement, so roughly $1.4 million less. Using our 4% rule, that gives us $140,000 a year, which Arthur and his wife could take out without worrying about running out of assets. Because they lived on more of their income (remember they only saved 10%), their lifestyle is built around $64,000 / year (as opposed to Landrie, who lived on $60,000 or $5,000 / month), and thus their inflated lifestyle number by retirement is around $141,000. So in the case of Arthur, the fact that he and his wife only saved 10%, they barely made it to retirement with enough income, when using the 4% rule, to meet their lifestyle expenses – sans the $1,000, which we’ll consider is a rounding error for purposes of this excise.
And suffice to say that since they just saved enough, using their 4% rule to cover their expenses, they’ll most likely not be in a good position to retire early.
I should note in both of these cases, we did not give weight to assumptions around health insurance, Social Security, travel expenses and a myriad of other things you might consider in a fully-encompassed retirement plan. The point of this excise was to give credit to Dave’s recommendation that you should strive to save 15% of your income.
Conclusion
Wow! What a ton of numbers and math. If you got through that whole conversation without having to reread any of it, you should probably contact our office to apply to become an Associate Advisor because you’ve got a great brain and comprehension for this stuff.
The bottom line of this scenario we saw was the person saving a full 15% of their income did two things that will make them more comfortable in retirement – it gave them margin, and it gave them the ability to make decisions around when to retire, they weren’t forced to continue to work until age 65. The person saving 10% was still able to retire, right? Absolutely! They just didn’t have the same flexibility that our first couple had.
During discussions with hundreds upon hundreds of retirees over my career, I've learned that sometimes you’re at the peak of your career, and you don’t want to retire even at 65, and sometimes you can’t wait to ring that retirement bell. Saving 15% of your income today gives you the opportunity to make those decisions. Nothing is guaranteed, but as we saw with Landrie and her husband, they were better positioned to make retirement decisions on their timeline. As Dave always says, Dave-ish is a wish, and as the writer of Proverbs says, The way of a fool is right in his own eyes, but a wise man listens to advice.
If you would like to start running retirement projections for your individual situation, we have this great tool that can be found here.