How Much Should I Be Saving?

It’s no secret that starting to save early and often, no matter what the dollar amount, will give you a higher probability of financial success down the road.  One of the most common questions financial advisors are asked is, “How much should I be saving?” I’ve heard this question so many times that I put pen to paper to see if I could come up with a formula as to what percentage of your income you need to be saving at certain ages.  

The results are eye-opening!  First and foremost, it hits home the importance of the time value of money and compounding interest.  And second, there are some mathematical relationships that can be used no matter what your income levels are in order to determine what percentage of your income at certain ages that you need to be saving to feel good about your chances of a successful retirement. 

In order to come up with the results we needed to make some assumptions.  If you were to change them in any material way, please understand that the below results would not be valid.  The assumptions we used were:

  • 25-year retirement starting at age 65

  • Spending need of 70% of your current gross income (adjusted for inflation)

  • 7% investment rate of return

  • 3% inflation rate 

  • We ignored social security income and taxes

  • We solved for exactly how much would be needed to have money run out at the end of age 90; essentially, your last check bounces.

Using the table, if you are 40 years old and you make $100,000/year currently we assumed your after-tax living expense need is $70,000/year of which we increased by inflation.  If you happen to already have $200,000 saved up by your age 40, which is 2 x your annual income, then using the above table you will see that you should be saving approximately 13% of your gross income in order to accumulate enough funds for a 25-year retirement starting at age 65.  If you were 40 years old and had no savings whatsoever, you would need to save 25% of your gross income until age 65 to meet your retirement goal. 

Please keep in mind that this 25% can include any employer matching and/or profit-sharing contributions so if you were to receive a 4% employer match you could subtract this 4% from what you need to save.

As I mentioned earlier, because of mathematical relationships, the above percentages do not change based on how much money you make as they are simply a function of you being able to live off of 70% of your current gross income.   So, someone making $1MM at age 40 would need to save the same percentage of their gross income as someone making $50,000, as long as both are able to live off of 70% of their respective gross incomes.

In reality, creating your own retirement plan is complicated. You need to understand current and future tax rates, your true living and health expenses, the age you’ll retire, whether you expect a pension and/or social security, rates of return, and more. But hopefully this chart is motivation to start saving more if you aren’t already on track!