How Big Should Your Nest Egg Be?

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Happy Thursday!

We’re now two-thirds of the way through the first quarter, so let’s do a quick rundown on where the markets and economy stand to date.

• Stocks faced a rough month in February, particularly the companies in the Dow Jones Industrial Average, which was down 4.2% for the month and 1.5% year-to-date. While the S&P and Nasdaq ended February in the red, year-to-date they’re still up 3.4% and 9.4%, respectively. Here’s hoping March looks more like January’s rally. 🤞
• As stocks fell, bond yields soared. The yield on ten-year Treasuries hit its highest level since November on the last day of February. If you’re looking for more info on what this means, CNN has a good explainer on the link between stocks and bond yields.
• Consumer spending is on a tear — the latest numbers show it rose 1.8% in January. While that’s normally a sign of a healthy economy, some experts say consumers are reaching a breaking point as savings dwindle and debt rises.
• No surprise here, but consumers are saving less as we pay more for pretty much everything. Today’s personal savings rate sits at 4.7% — far below the pre-pandemic rate of 8.8%.

If you’re among those with less money to set aside each month, you might be starting to wonder, how much do I actually need to save for retirement? Keep on scrolling to find the answer to that question, as well as more headlines and our new “Figure in focus” feature.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are few links to resources and past stories relevant in these turbulent times:

• FWIW’s Guide to Long-Term Investing
• Some of our favorite inflation-fighting strategies (and a few more)
• How to Research ESG Funds and Stocks
• FWIW Guide to Cleantech Investing: Sectors to Watch (covering over a dozen innovative sectors to anchor your research on sustainable investing options)
• How to Practice Faith-Based Investing
• “Siri, What Is a Recession?”

News you can use

• We love the explosion of financial content on TikTok, but as NPR warns, be careful not to rely too much on influencers for investing and budgeting advice. Personal finance experts say that social media can be a starting point but not a key driver of financial decision making. If you’re looking to widen your perspectives and news sources, we have some reading and watching recommendations for value-aligned investors, and we also think you may find these stock and fund rating resources helpful.
• Child labor isn’t just an issue in developing nations. The US Department of Labor just reported a 69% increase in illegally employed kids since 2018. Meanwhile, the New York Times published a report on the exploitation of migrant children, who are working jobs for major brands like Cheerios, Fruit of the Loom, and J. Crew. If you’re curious how the companies and sectors in your portfolio measure up on labor issues, good places to start include the KnowTheChain benchmark and the Department of Labor’s List of Goods Produced by Child Labor or Forced Labor.
• As Women’s History Month kicks off, a new survey finds stress is the #1 emotion women feel about money. The good news: nearly 90% are tackling that stress head-on by taking steps like opening IRAs and bolstering their emergency funds.

Figure in focus: $39 billion

That’s how much funding the Biden administration will be providing to the US semiconductor industry as part of the bipartisan CHIPS and Science Act aimed at stimulating innovation and growth here in America. This week it invited applications from companies planning to construct, expand, or modernize factories making leading-edge, current-generation, and mature-node chips. The offer comes with strings attached — chosen manufacturers will need to provide affordable childcare for workers, limit stock buybacks, and share a portion of excess profits with the government.

If you want to learn more about these non-delicious but vital chips and the ways to invest in them, we got you.

How much should I save for retirement?

It’s the big question many people ask themselves when they start taking home a salary… then they usually put it on the back burner. Old age may still feel distant (or right around the corner if you woke up with a crick in your neck today), but experts say planning for the time when you may not work every day needs to start decades in advance.

Retirement is a touchy subject for many — it can trigger feelings of anxiety, and it’s hard to generalize and talk about savings benchmarks with different incomes and backgrounds. Every few months a headline about savings goals spreads panic or is mocked as we saw a few years ago with the viral and hilarious “By Age 35” meme.

But the sooner you have the retirement conversation with yourself, your partner, and your financial advisor, the better. After all, you will want to make the most of this time (no deadlines, no endless email boxes, no “all-hands” meetings). 🎉🥳  Knowing you’re on top of things (or at least have a roadmap to get there) will help you rest easier the next time a news article tells you you’re falling behind or you hear your avocado toast is to blame.

Let’s start with the basics.

When and how should I start saving for retirement?

As soon as possible. No, really, the best time to start is today, even if it’s a small amount. Experts say once you’ve paid down any expensive debt and created an emergency savings fund to cover three to six months of expenses, you should start putting money aside for retirement. The best way to grow cash for the long term is by investing it in a diversified, well-balanced portfolio consisting of stocks, bonds, and a sprinkling of other asset types.

When it comes to investing, time is your super power due to a phenomenon called compounding. Over the years your profits will get reinvested and have the opportunity to earn more profits on themselves. This snowball effect helps you accumulate much more wealth than you contribute if you give it enough time, as shown in this chart from the New York Times. Hooray for math!

Starting early also gives your portfolio time to recover from downturns and allows you more flexibility at an older age when you may have more responsibilities. As this chart from US News shows, a person who invests $200 a month from ages 25 to 35 will have a bigger nest egg at age 65 than someone who does the same from ages 35 to 65. It’s clear that when you start investing actually matters more than how long and the total amount contributed.

How much will I need for retirement?

There are a rare few among us who want to die with our boots on. The majority look forward to the day when we can trade in our files, uniforms, or computers for traveling the world, spending significant time supporting a cause or a community organization we value, or launching a whole new lifestyle. The age at which you can comfortably retire depends on how much money you save up and the lifestyle you hope to maintain.

The first step to planning your retirement is determining roughly how much your older self will need. There are several online retirement calculators to help you figure this out, like this detailed one from Finra or this basic one from NerdWallet. The numbers they spit out may be daunting… hence the “start early” advice above.

An often mentioned guideline is that you’ll need 80% of your pre-retirement income each year, including social security and other income. Research says this rule works well if you make around $50,000 a year, but if your salary is higher, your needs may fall closer to the 50% to 60% range.

For another back-of-the-envelope calculation, the experts at Fidelity looked at loads of national spending data and found that if your pre-retirement salary is between $50,000 and $300,000, you will need to generate about 45% of that income (before taxes) from your savings annually when you retire at 67. This assumes the rest will come from Social Security (we know… yet another story). So, for example, if you retire with a salary of $80,000, you’ll need to withdraw $36,000 a year after that from your savings. If you assume that your spending remains constant for 25 years until age 92, you’ll need a total of $900,000 in retirement savings. This would be lower if you have other sources of income, like a pension, annuities, inheritance, rent, and money from selling assets or a business.

Although that six or seven-figure goal looks very intimidating, you have the means to achieve it if you start saving in time. Another bit of good (but also depressing?) news is that spending after retirement doesn’t remain constant and tends to decline as you age past 65. Of course, the cost of those around-the-world plane tickets can add up…

How much should I save each year for retirement?

A popular rule of thumb is 10% to 15% of your income. You can see how much that will leave you with at age 67 using a simple investment calculator. For example, if you’re 30 years old making $60,000 a year, and you start investing 12% ($600 a month), you would have a little over $950,000 when you retire, assuming a 6% annual return rate. You will reach your goal faster if your salary and contributions increase.

Some things to keep in mind:

• Use retirement accounts with tax advantages to grow your savings. These include the traditional 401(k), traditional IRA, Roth 401(k), and Roth IRA. If you’ve hit your limit on these, there are other places you can keep saving, like a regular brokerage account, annuities, and health savings accounts.
• Take advantage of employer-matched contributions where offered on retirement accounts. This is quite literally free money you don’t want to leave on the table.
• Consider using target date funds if you’re unsure how to allocate your assets as you get older and closer to retirement. These funds will automatically adjust their investment strategies with your age.
• Do not panic-sell your retirement investments when the market is volatile. As long-time readers of FWIW know, taking your money out with the hope of buying at the right time can cost you returns and derail your plan.

Before you go -

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