QI am a public employee in my early 40s and mandated to contribute 5 percent of my gross salary to a pension plan. I have contributed the max to a Roth IRA ever since they came into existence (and converted my then existing regular-IRA to a Roth and paid the taxes owed on it). I also make small contributions to a deferred compensation plan.
Question: When "rules of thumb" talk about 15 percent being enough for a comfortable retirement, does this mean gross salary or take-home after taxes? What about the money I have pulled out for my health plan and optional life insurance payments?
I need to pay off a small credit card balance and build up an emergency cash reserve, so I'm considering ceasing contributions to my deferred comp plan to meet those goals. Your thoughts would be most welcome.
PATRICK, ST. PAUL
AThe rule of thumb when it comes to savings is that people should strive for saving between 10 and 20 percent of gross income. The standard figure is that 10 percent or so goes into the retirement fund. The reason I prefer emphasizing the higher, 20 percent number is that it includes both retirement money and other savings, such as an emergency fund. It's a more realistic goal (although hard to do).
Now, rules of thumb are guidelines rather than hard-and-fast rules. Many factors should go into the how-much-to-save-for-retirement calculation. For instance, when did you start putting money aside into a retirement plan? Was it at age 22 or 32 or 42? The later you start, the more you should try to contribute.
I'm a big believer in adding to savings outside of tax-sheltered retirement plans. And that's despite today's low interest rates. The money can be used to help pay for a future known expense, such as a new car, without taking on debt. But it also allows for people to embrace all kinds of transitions over time, from voluntarily downsizing to part-time work to getting the skills you need to start a long-dreamed-of business.
From a purely investment point of view, parking money in savings accounts, bank CDs and Treasury bills seems like a no-growth, no-return strategy. But the eventual return-on-savings may be huge since the cash also represents an "opportunity fund" to pursue dreams and passions, the wherewithal for reasonable risk-taking and adventure, while, at the same time, a way to stay out of debt when expected and unexpected expenses come along.
Now to your specific question: I would definitely suspend putting extra payments into the deferred compensation plan. I would get rid of the credit card debt and build up your emergency-opportunity-fund savings. You'll be in much better financial shape if you do.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to email@example.com.