Retirement Savings: How Much is Enough?

The following is a modified excerpt from my recently published book, “100 Tips for Having a Champagne Retirement on a Shoestring Budget”, which was a collaboration among all of my associates.

Tip #22: Incrementally Increase Your Savings Over Time

One of the best things you can do when starting out in the “real world” is to begin saving a percentage of your income. Most rules of thumb put this in the range of 10% to 15%. If you started out doing that, congratulations! However, if you’re like most Americans, something got in the way of disciplined savings…either a true money mistake or something out of your control. There may be “no way” to get to the 15% savings benchmark in one year. If you’re in this camp, I’d encourage you to set a goal to increase your savings by at least 1% every year. Below are three examples. All three involve Mike, a 25-year-old just out of school. His starting salary is $30,000, and for the sake of simplicity, we’ll assume this stays the same until retirement at age 67.

  • Example One: Mike starts saving 15% of his $30,000 annual income immediately ($4,500/year). Mike invests this money and earns an annual return of 6%. At his age 67, he will have accumulated over $800,000!
  • Example Two: Mike has some other obligations and can only save 3% the first year he works ($900/year). Mike is determined to save more and commits to increasing his savings, so he’ll save 4% of his income the next year ($1,200/year), and 5% the year after that (1,500/year). He’ll continue increasing his savings until he gets to 15% ($4,500/year), and he’ll continue with the 15% until age 67. Mike invests this money and earns an annual return of 6%. At his age 67, he will have accumulated close to $600,000!
  • Example Three: Mike wants to save something, so he commits to saving 3% of his income ($900/year) but never increases his savings. He invests the money and earns an annual return of 6%. At his age 67, he will have accumulated more than $160,000.

The main point of this tip is not to get discouraged if you can’t start saving the maximum recommended amount immediately. Obviously, Mike’s savings in example one produced the highest savings balance, but the small increases in example two have a huge impact compared to example three when Mike doesn’t make any changes.

Contributor: Beth Moody, CFP® 

BONUS TIP: How Much Should You Be Saving to Achieve Financial Freedom by Retirement?

Assuming you’re just starting to save:

In your 20’s: 10% of gross income

In your 30’s: 15% of gross income

In your 40’s: 20%-25% of gross income

In your 50’s:  Ok, you have a big problem.  You’ll need to figure out how to substantially cut expenses (downsize your home; spouse get a job; you get a second income, etc.) and save as much money as possible.

In your 60’s:  I hope you love what you do because you’ll need to continue doing it as long as you live!

Contributor: Stewart Welch, III, AEP, CFP®