Reaching Our First Retirement Savings Milestone
Kyle and I are both celebrating our 28th birthdays this July. We’ve been flirting with having one year’s income in our Roth IRAs and after the big upswing in the stock market last week I decided to take a closer look to determine if we had finally passed that one year mark. Wouldn’t that be a wonderful birthday present to ourselves?
The one-year’s-income-in-retirement-accounts milestone isn’t some objectively big accomplishment. If you poke around the web for “retirement account balance by X age” information you find a few articles that suggest having one year’s salary saved by age 30 or 35. I actually think this isn’t an ambitious enough goal (especially for relatively debt free people like us), so I am pleased that we are ahead of “schedule!”
I took at peek at our Roth IRA account balances in Mint after the market close on 7/12/2013. (I try to only look at our Roths after big upswing days – that way I always feel good!) This is what I saw:
The top is Kyle’s Roth IRA and the bottom is my Roth IRA. So the total we had in our retirement accounts on that day was $55,628.24. That’s the easy part – how does that compare with our income?
I don’t know about you, but to me that question is a bit tricky! Do I compare it with our income from last year? From this month extrapolated to one year? Should I count side hustle income? How about interest income and investment returns?
I decided to compare our retirement account balances with a few ways of calculating our income.
1) 2012 gross income, straight off our tax return: $55,325
2) June 2013 salaries, up to a year: $55,610
3) W-2 income from the first half of 2012 (salaries plus Kyle’s side hustle), multiplied by 2: $56,791
Looks like we’ve squeaked past that one-year mark if you just take into account our income from our primary jobs, but not if you could Kyle’s small job at church! Darn side hustle increasing our income! We do contribute 15% of all extra income we earn toward our Roths so I think it’s fair to count that income “against” the goal.
Of course with more market volatility the balance may swing back so that we don’t even meet the lower goal, but even with some volatility we should be safely past our highest estimate of one year’s income within a couple months just from our contributions.
We can pat ourselves on our back or whatever in that moment, but by the time we actually turn 30 I expect both of us will have real jobs, which means I’m hoping to fall way behind on this one-year’s-income milestone! That’s one reason why we’ve been particularly aggressive about saving through grad school – 17% may be a high percentage right now for someone not striving for early retirement, but its absolute value isn’t much once we look at our expected/hoped for salaries.
But for now, I’m really happy with our progress. I’ll have another post soon on how we’ve saved so much while living on stipends once we’ve safely reached that one-year goal. Sure, our low income means our target amount was small, but that also means that basic living expenses eat up a large chunk of our income. 🙂
Do you pay any attention to age-based retirement milestones? When you use your income for calculations, how do you estimate it? How are your retirement accounts faring?
Filed under: retirement · Tags: estimates, one year's salary, Roth IRA
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We actually use our expenses as a measure of progress rather than income, partly because our income bounces around so much, but mostly because with our high savings rate, our expenses are a much better measure of how much we’ll need when we are drawing from the accounts than our income.
Mrs. Pop @ Planting Our Pennies recently posted..Homeownership and Happiness?
ITA about viewing the balances in terms of years of expenses rather than income – especially in your situation when the expenses are more stable – but for now they are both very poor indicators for how “on track” we are. If we assume we spend everything we make aside from retirement savings, giving, and taxes, we have about 1.7 years in retirement savings. However I fully expect our expenses to be far higher in retirement.
Congrats on the milestone! I think it gets easier as momentum begins to snowball. And new jobs will make things even easier as time goes on.
Financial Samurai recently posted..The Main Reasons Why People Want To Quit Their Jobs
That is our hope! It’s fun already to see how much of our IRA balances are from growth rather than contributions. I have higher aspirations for our savings rate once we have real jobs.
Sounds like you guys are going great! Personally, I like to measure how well we’re doing by figuring out how much we should be contributing and seeing how close to that we actually are. Given the market fluctuations, and the imprecision of rules of thumb, I just think measuring progress by savings rate is a better reflection of personal progress. But it definitely sounds like you guys are in a really good spot, and it’s definitely fun to hit those milestones. Good work!
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I have very little idea how to figure out what we should be contributing! There are going to be too many changes between now and when we retire that we just don’t know yet. Our strategy is to just save more than we comfortably can. I agree that savings rate is the better metric to track. I like our track record so far of never decreasing our savings rate even when we stretch to achieve a new one.
I like the PoPs primarily use expenses as a ratio on savings. The three numbers I track most are: Networth/Yearly Expense, Debt/Networth, Networth/Income (to see how efficient at savings I am).
Good job by the way on saving this while still in school, very few people do that!
Thank you. 🙂
Those all seem like very relevant numbers. I barely track our net worth, though. 🙂 I figure Mint has all the info (aside from the very low values of our cars) if I ever want to look at it.
For you – your investments are the bulk of your networth so not much different. We have more funds spread out between house, retirement accounts, other investments, etc. . that it makes more sense to track networth.
I may hit one year’s base salary saved in retirement accounts later this year, but it’ll take another year or two to hit one year’s total gross salary. I usually use expenses to calculate that instead. I have approximately 2 1/3 years’ of expenses in retirement accounts right now. I use a rolling calculation of the last 12 months’ expenses to get that number.
When I use my income for back of the envelope calculations, I usually use my base salary. In my spreadsheets though I use the company stock price my employer used in their calculations for the year to calculate how much I can save and what my income will be. I was using the 52 week low price, but that has turned out to be way off usually.
My retirement accounts are doing quite well! With the recent upturn (well and my contributions), my 401(k) balance has turned another $10k marker past $60,000! 😀 I love watching that balance go up. Once I make the 2013 contribution, my Roth IRA should be above $20,000 too, which will be cool.
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I could probably check this by looking at your site, but do you contribute to taxable retirement-designated accounts beyond your 401(k) and IRA? Or are you just focusing on your mortgage after you max out the tax-free growth benefit?
Congrats on the growth in your accounts and getting close to your base salary! I’m sure for you it’s much more relevant to look at banked years of expenses since you invest such a high proportion of your pay.
I have a bit of money in stock index funds in a taxable account at Vanguard and also some Series I Savings Bonds through Treasury Direct. So I’m mostly focusing on my mortgage after I max out the tax-advantaged growth benefit, but I do occasionally throw some money at the stock index funds at Vanguard when I get tired of throwing it all at the mortgage.
Congrats on having so much in your Roth IRAs! I wish I’d started contributing to mine earlier.
Leigh recently posted..Independence Day Long Weekend Mini-Vacation Budget
Congratulations on hitting your milestone! I think it’s a good marker, though as you noted the figures are likely to change as you get new jobs, markets fluctuate, etc.
Done by Forty recently posted..Why We…Take Navy Showers
If we didn’t look at this rather irrelevant markers we would have nothing but round numbers to celebrate! 🙂
Wow! Good job saving so much on a low income! Our income is about twice yours but we only have $77K saved up and we’re an average of 31 years old. However, we now save 20% of our income so I think we’ll hit 1 years salary really soon and should get ahead of the curve by 35 or definitely 40.
Sounds like you got a late start (or your income jumped recently) but you have a great saving rate now!
you guys are doing so great! That’s good news! I don’t know that we’ll have a year’s salary by the time I’m 30, but our retirement income will be supplemented by both of our pensions. We’re still saving aggresively but I haven’t taken advantage of the Roth. I like the idea of putting side hustle income in our Roth!
Side hustle money into the Roth would be a great idea. I like making the extra manual payments every time Kyle gets paid (the normal ones are on autodraft, naturally). I’m sure it’s difficult to figure out how much to save when you have defined benefit as well as defined contribution options, but a pension is AMAZING to have for young employees these days.
Wow that’s awesome!
Thanks! I trying not to brag much to my grad school friends.
Congrats Emily! That’s awesome. We don’t have a number per say right now since we have only been working 1 year, and are so young. I think maybe in another year or so, we’ll start figuring out more strategic goals for our investments. Right now, we are just contributing as much as we can.
SavvyFinancialLatina recently posted..Revenge is A Dish Best Served Cold
That’s exactly how we started – just throwing as much as we could into the Roths as soon as we had full-time income. I think there is time for planning later. 🙂
Great job!
Sometimes I look at age-based milestones but we don’t use them to make decisions or anything. Right now we’ve kind of blown them away. At age 28 (first year of non-graduate school income), not so much.
nicoleandmaggie recently posted..Why I paid off my student loans early
The age-based milestones bake in a lot of assumptions that may not be true of most people, let alone PF nerds.
Congrats! That’s an awesome achievement.
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Thank you!
That’s awesome! But I think you can allow a little fudge factor and say you have ~1 years income saved up, and that’s close enough. Though I do admire your exact numbers.
I tend to focus more on how many years expenses I have saved up instead of annual income, just because that’s more relevant for FI. But I think having this much by age 28 puts you way ahead of the game!
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If I had estimated our income before I actually looked at it I would have pegged it at $54k or $55k, not $57k! I’m always underestimating it because I mentally have my salary pegged at $24k because that’s where it was when I started grad school (only COL increases since then). I agree expenses are more relevant for FI, but I don’t think our current expenses are particularly reflective of anything!
Congradulations. Although the problem with relative numbers is that they are easier to reach at extremes. I have half of my annual income saved in my IRA, but when you consider that I’m on track to only earn $15k this year, that isn’t saying much.
Edward Antrobus recently posted..Sometimes an Extended Warranty IS Worth the Money
You are very right! If one of us is unemployed for a time or we both get high-paying jobs that 1-year mark could swing around quite a bit.
Congrats Emily on you two hitting the milestones. I think the way people will choose to measure their success will be different but hey you have goals that you are trying to hit and I think thats the most important aspect to remember. Set goals and achieve them. For wifey and I we look at a number we want to have to cover expenses for one year. That has to cover both of us losing our jobs and not working for the whole year. Since I was always bouncing from one job to the next with salary increases it would be hard to point something based on salary and bonus. By using our expenses it was more of a set number that we could set and achieve. We are almost there but when its in the stock market some days you are a lot closer than you will be the next.
Thomas | Your Daily Finance recently posted..When Is the Right Time to Change Jobs
This isn’t really a way I would choose to measure success but it’s, you know, something. We actually don’t have goals set in the retirement savings/net worth area – we’re just trying to save a lot! Are you trying to save that 1 year’s expenses for an EF or in retirement savings?
Good to hear that you are “ahead of schedule” on your retirement savings. Fidelity Investments, which is probably one of the places you looked, says that
At age 35, you should have saved an amount equal to your annual salary.
At age 45, you should have saved three times your annual salary.
At 55, you should have five times your salary.
When you retire at age 67, you should have eight times your annual pay.
I think all of these are low. My wife and I are on target to have 14 times our annual salaries saved when we retire. As others mentioned, this comes more from estimating our annual expenses at retirement multiplied by 25.
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I think I’m much more comfortable with the 4% rate of withdrawal rule (or even 2%) than relying on principal during retirement, but I also don’t think it’s a disaster if we don’t quite get to 25-50x spending by the time we stop working. There’s a lot of uncertainty in trying to plan that far out especially with regard to governmental entitlement programs, so we’ll just continue to try to save a lot!
[…] @ Evolving Personal Finance writes Reaching Our First Retirement Savings Milestone – I’m not sure if I can officially say that we’ve reached one year’s income […]
Kudos on reaching your milestone. In the view of this financial planner the two of you are doing extremely well for couple your age, keep it up!
Roger @ The Chicago Financial Planner recently posted..Is My Pension Safe?
Thanks for the encouragement!
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