retirement savings redux

A while back, I asked - how much should you save for retirement? Since then, I’ve been thinking a bit more on the issue, mostly because my financial picture will be looking quite a bit different next year.

This year, I have some debt, but I also have a steady, well-paying job and cheap rent. I also have a mortgage, but the tenants cover the full cost. I live relatively frugally and channel most funds into debt repayment or savings.

Next year, I will have no debt, but I will also be on a fellowship (resulting in an almost 70% reduction in income) in another country. Ideally, I will still have tenants to cover the mortgage. But, I do not know what my rent and living costs picture will look like. Ostensibly, it will be cheaper. I have also toyed with the idea of staying at my current place of employment part-time to finish out my current project.

So, in anticipation of not being able to save much next year (including towards retirement), I’ve made some changes this year. My immediate retirement goals are:

1. Funding IRAs for 2008 and 2009. The current goal is to fully fund my IRA for both years by the end of this year. That will require $10,000 in savings. This is based on the expectation that next year I will not be able to save for my IRA.

2. Putting a little extra towards my 403b this year. In what is a gross violation of the rules of retirement, I actually do not save towards my 403b. I used to put in a percentage for my 401k at my old job, because they matched. At my current job, my employer automatically puts a percentage of my salary towards my 403b, so I have less incentive to save. But a few months ago, I changed that and starting contributing.

Between the two options, I have about 16% of my salary amount going towards retirement this year. This might be a little high, but it’s also taking into account what will not be going in next year. The two-year average is about 13%. And to complicate matters just a bit more, I plan on taking some time to travel in 2010, and will likely not take a salary for about half the year. This means, assuming I have my current salary (for simplicity) that year, I will only save about 5% of that yearly salary.

Generally speaking, you want to save about 10-15% of your salary for retirement every year. This assumes you’ve been saving since you were in your 20s or at the latest by age 30. If you’re starting later, you will want to put away more. I’ve been saving since I was in college, thanks to my financially savvy mom. It also assumes you will invest these funds for an approximate 6-8% return (before inflation). And it also assumes you plan to retire around 65 or later.

After I complete the fellowship and my travel experiences, I am planning on returning to the US and working for a few more years. I plan to max out my 403b (around $15000) and fully fund my IRA for those years, which puts me above the target savings level. I am doing this because there is a chance that I will consider going back to school for a PhD, and thus my income will drop again.

The important thing is to start early. If you are young, it doesn’t have to be a large amount, as long as it is something. I started young and am well on my way to a comfortable retirement (early, if I wanted such). And even as life circumstances change (as they will for me), adjustments in the plan need to be made as well.