Educating the Wheelers

I’m not sure why I’m the least bit surprised anymore when I find that some statistic that gets bandied around turns out to be, at best, misleading, and at worst, total junk.

Today’s example of this is the new much-fretted-about statistic that the U.S. savings rate has gone negative. And, yes, that’s bad. But less widely mentioned is the caveat that this statistic includes the ever burgeoning group of retirees, who report a savings draw down of about 12-14% a year. So, for working Americans, the rate is actually more like 6%.

Six percent is no great shakes, but it’s not the raining cats and dogs, fire and brimstone negative percentage that everyone is freaking out about.

I look forward to the total panic that comes when the savings rate drops even “lower” because more and more people are retiring.

Amazingly, Andrew and I have never actually put hard numbers to our retirement goal before last night — it’s always just been “save as much as we can.” He asked me what our goal should be and I thought 2 million. So we crunched the numbers.

We took our current savings [we’re leaving out home equity/mortgage for our calculations, but I’d estimate we’ve got about 100k equity in our house], our current rate of savings, estimated Social Security income [we estimate 0 dollars], and expected annual rate of return [we looked at 4, 5 and 6%]. This puts us at the 2 million mark around 19-24 years, depending on return.

We intentionally chose very conservative numbers because we’d rather be pleasantly surprised by market returns or Social Security than the alternative. This also assumes that we never up our yearly contribution, which I certainly hope/plan to do. On the other hand, it also doesn’t account for possible financial catastrophe such as long term job loss and, uh, our children’s college expenses. Heh. [That’s not entirely true. The plan is to invest/save any future bonuses, stock windfalls and raises, so that does help mitigate the college factor.]

Since Andrew is currently 35 and I am 32, I feel like we’re doing pretty good.

We got our first direct deposit of the year, and I was in a for a minor panic. It was about 30% less than I was expecting. I knew that the new benefits enrollment kicked in on this paycheck, so I went to log in to the site and see what was up. I mean, I didn’t recall things being that different…

The benefits site was not exactly intuitive to figure things out. In fact, it gave the impression that we had unenrolled from 401k! Well, if that was the case … wouldn’t we have more money coming in than less?

One crazy-pregnant-lady-panicked phone call to my husband later and with some work, he was able to dig out the details. [I miss getting paper statements. They were straightforward.]

As it turns out, last year our new ESPP deduction kicked in at exactly the same time as our 401k maxxed out, and they are for very similar amounts. And starting this paycheck, they were both in effect for the new year.

Mystery solved.

Though I’m beginning to wonder if we’re now being way too aggressive on our savings. I just did the calculation, and our actual take-home into-the-checking account amount is less than 28% of our pre-tax salary. So, taxes, 401k, ESPP, benefits, % that goes directly to Vanguard and % that goes directly to Emigrant now account for a little over 72% of our income. That doesn’t include extra for paying down mortgage. Hmm. Now, I can squeeze blood out of a rock, but can I squeeze that much blood out of our rock? I’m not sure yet. That’s my task for this weekend, to see if we can live on this, or if we’re going to have to scale back.

Looking ahead, these are my goals for 2006:

* Give birth at home to a healthy boy end of April/early May.
* Settle on a name for said boy with Andrew
* Read and exercise every day with Audrey
* Relax and enjoy parenting/my kids

* Drop our mortgage principle by at least an extra 10k
* Up our automatic monthly emergency fund contributions an additional 25%
* Continue maxxing out our 401k and Roths.
* Straighten out our life insurance/will situation.

I think I’m sandbagging a bit, so I might have to update these later. Heh.

Our house cost about 225k, our mortgage was for about 185k. [We actually refinanced our mortgage within a couple of months of buying the house, but the story of why on Earth we did that may make its own post some day. Heh.]

We’ve now had this mortgage for about two and a half years, and we’ve whittled the principal down to about 146k, as of this month. That’s pretty aggressive, and my goal is to have it paid off in less than 10 years. Even if we run into any financial trouble between now and then, I still hope to have it paid off before Audrey enters college — we have a good 15+ years for that.

I have friends who think it is foolish to pay down your mortgage early. Some because they think the mortgage deduction is so wonderful [though I don’t see why paying a dollar so you can get about 30 cents back is so great], and some because your mortgage loan is the cheapest money you can get. Then there’s the “put it somewhere else where you’ll get more return!” crowd. Well, we don’t have any other debt whatsoever, so that sort of wipes out #2. And #1 is kind of silly on its face. As far as #3 goes, we already max out our 401k and our IRAs, plus put an extra chunk every two weeks into Emigrant to bolster our emergency fund, so we’ve got all of our basics covered already. Plus we have another chunk just “in the market” that’s non-retirement. I guess what I’m saying is that we’re not exactly skimping on our other investments. And paying down the mortgage has a few add bonuses: First, the return is guaranteed. Second, the psychological advantage of having zero debt whatsoever is worth quite a bit to me. Third, the cash flow issue — that’s a pretty large check that I’m looking forward to no longer having to write every month.