Saturday, October 3, 2009

Retirement Savings: u r doin it rong

I started doing some research this week on retirement savings. I've been saving at least 6% of my gross salary since I started working about 12 years ago (minus one year in grad school). So I assumed I'd be fine.

What should I be saving?
When I started playing around with the calculators, it seems I am underfunded by about half. My Pudding Score is 52. The more I researched the more I came to believe, however, that there is no real way to tell how much one needs to save to retire. All of the calculators make you make rediculous guesses about expected investment returns and other factors that if you knew you'd be a millionaire from being able to read the future.

I did find a few more simple, logical guidelines. Dave Ramsey says save 15% for retirement. Apparently T.Rowe price says the same thing.

I feel kind of cheated to be learning this now. I had always heard that I should be contributing 6% of my salary to retirement. I think I would have contributed more if I'd had known I'd be "behind" at this point.

Non-Deductible IRA?
I had been planning to max out my 401K contribution this year which takes me to a little more than 10% of my gross saved. There's not really any other tax-advantaged way for me to save, as I don't qualify for a Roth IRA and if I were to contribute to an IRA, it is not tax-deductible. It seemed at first this was still a good deal, but I like how this CNN article describes the advantage. Basically it will only help me if I convert it next year to a Roth IRA. I think I will end up doing that. So even though my stragtegy was to have as much cash as possible for an apartment down payment, I think I'm going to throw an extra $5K into my IRA to take me to both the contribution limit and 15% of my salary saved. Even one of my fave bloggers thinks 15% is high, but since I am apparently sooo behind in my savings, I think I'll do it this year. I've hit my social security taxable income limit, so I should get about an extra $2K to contribute from that.

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