What percent of my income should I be saving in order to FIRE?

[nico08]

What percent of my income should I be saving in order to FIRE?

I was reading some T. Rowe Price literature that addresses the amount of annual income that needs to be saved to achieve a sound retirement income plan:

"Our research shows that you can build a sound retirement income plan if you follow some standard guidelines," Fahlund says. The rule of thumb is to plan on replacing 75% of your preretirement income. As much as 50% of that income may come from investments, 20% from Social Security benefits, and the rest from other sources such as a pension or part-time work. Most people need to save 15% of their annual income, including any employer contributions, to achieve those percentages. On the other hand, your savings percentage may ned to be higher if you're getting a late start.

I assume that this article assumes that person's retirement age would be 65. I want to retire before that age. But, I am trying to figure out if the 15% of annual income savings recommendation, based on their advice, is meant to include my employer's match on the 401k plan (4% in my case) or the defined contribution pension plan (5% in my case)? What percent of your annual income are you currently saving? Is there a recommended percent for someone who is trying to retire early? I suspect that the recommendation depends, in part, on one's current annual income, timeline to retirement and estimated retirement budget. But I am just looking for some ballpark estimated annual saving percentage recommendations. Thanks.

 

[2B]

I suggest you go to FireCalc and put in what your desired income would need to be to achieve a "safe" retirement. Input when you plan to retire. Trial and error a savings amount into FireCalc until you achieve a match with a reasonable success rate.

Nothing's perfect but that will give you an idea of where you should be and what is practical.

 

[MasterBlaster]

Well what kind of income in retirement do you want ? And at what age do you want to retire ?

Here's the bottom line.

For a modest retirement at age ~65 save 10 %

For income around what you make now retirement at age ~65 save 15 %

To live well in retirement, or to escape early save more than 15%

Some on this forum save more than half their income. They will have the option to escape early or to live very very well.

 

[MasterBlaster]

The MasterBlaster Official Retirement Calculator Description

To continue...Here are the steps to predict how much to save.

1) Decide what your lifestyle/expenses will be when you stop working and what age you will be. Add tax payments to the expenses proportional to income and or housing. Add medical expenses.

2) From those expenses subtract off any pensions or Social Security income you may receive.

3) Assume you'll need a nestegg of 25 times your (remaining) expenses to fund yourself until your demise. So calculate your needed nestegg.

4) Use one of the many online calculators to ballpark what you'll need to save every year to reach your nestegg. Divide that amount by your current income to get the percent to save.

5) If you wish add a little extra for a safety margin - Just in case.

 

[walkinwood]

If
a) you assume a rate of return from your portfolio - and keep that rate conservative.
b) you assume an SWR.
c) you assume a saving rate

you can build a spreadsheet to work it out.

It boils down to how much do you need to save to amass a portfolio in the time you have left (to ER age) that will support your expenses at a SWR. But, your annual expense is dictated by how much you save, so it is a recursive problem.

Here's my simple take. Once you take increases in salary, taxes etc., it becomes much more complex. I suggest going to ESPlanner.com to work it out.

See out Jacob's site at earlyretirementextreme where he explains the above in one of his early posts.

 

[DblDoc]

Our research shows that you can build a sound retirement income plan if you follow some standard guidelines," Fahlund says. The rule of thumb is to plan on replacing 75% of your preretirement income

This is BS and has been beaten to death here numerous times. As others have posted above it about your expected expenses, NOT your current income.

As an example we plan to live quite comfortably on ~20% of my current salary, and we save > 50% of my gross earnings. YMMV

DD

 

[clifp]

What percent of my income should I be saving in order to FIRE?

.

FWIW, when I was doing some calculation to as to the true cost of pension,I made a simple spreadsheet. My rule of thumb is that if you want to retire at say age ~55 with an income between 60-75% of your gross income, your combined savings needs to be between 25-35% of your salary. This includes matching contributions to your 401K and the true value of employer contributions to a pension.

This seems to be inline with saving that most members have self reported. 15% is fine for regular retirement not enough for early retirement, due to higher medical expenses (in most cases), longer life span, and shorter time to benefit from compound interest.

 

[W2R]

Save as much as you can. If you save too much, all that will mean is that you can retire a few years earlier than you had expected. (Oh, darn! )

I don't really have a numerical answer for you, but to me 15% doesn't sound like enough to retire early.

 

[Koolau]

This is BS and has been beaten to death here numerous times. As others have posted above it about your expected expenses, NOT your current income.

As an example we plan to live quite comfortably on ~20% of my current salary, and we save > 50% of my gross earnings. YMMV

DD

I have to second DblDoc's assertion. You have to START with what YOUR expected expenses will be and then work backwards. The 75% rule is simply an average. DblDoc needs 20% and we need more than 100% right now - even though we typically saved 20% to 50% of after-tax income (retired at 58). So, the difference between our available living funds prior to retirement and funds needed after retirement are dramatically different. Each case is different. You simply MUST do it based on your own expectations. Oh, and once you decide to use a calculator from the net, be sure to use relatively conservative assumptions (I wouldn't count on 10% returns for ANYTHING).

 

[growing_older]

You can make all kinds of assumptions and test scenarios as much as you like using FIRECalc and other tools, but everything you plan will be dependent on the many assumptions you had to make to do your calculations. And many of those assumptions will turn out to change or be different in real life. This cannot be reasonably fine-tuned, so just pick an approximate answer and go with it.

I think W2R has it right:

Save as much as you can. If you save too much, all that will mean is that you can retire a few years earlier than you had expected. (Oh, darn! )

 

[Surewhitey]

We are taking a couple years off (maybe for good if we like it). We put the nose to the grindstone the last 5 years and socked away 50-60% of our earnings. We currently live in an expensive part of the country and spend $6k monthly.

Now we will be moving to a budget of $2,500 monthly and should be bringing in $3-4k monthly from our savings assuming a 4% return. I'll leave the principle alone until 62-65 and then try to live primarily on a pension & SS (assuming reduced bene's)...

If you live simple, you can get by on much less; we hope for the best & expect the worst.

 

[flyfishnevada]

We are taking a couple years off (maybe for good if we like it).

If?

 

[obgyn65]

I agree with Dbldoc, expected expenses are key. You may wish to enter your numbers in this free online tool :
Merrill Edge| See Where You Stand

This is BS and has been beaten to death here numerous times. As others have posted above it about your expected expenses, NOT your current income.


DD

 

[Gumby]

. . .all that will mean is that you can retire a few years earlier than you had expected.

I hate it when that happens.

 

[LOL!]

How much to save to retire early? This is very easy to answer no matter what your income and expenses are.

You need to save 50% of your gross income. This means that you will be paying taxes and other expenses from the other 50% of your gross income. This also means you will be living well below your means.

This works if you make $10K a year or $50K a year or $500K a year or even $5 million a year.

It's also easy to do. If you are a two-income family, just invest the entire salary of the higher paid spouse.

 

[Nords]

What percent of my income should I be saving in order to FIRE?
I assume that this article assumes that person's retirement age would be 65. I want to retire before that age.
But, I am trying to figure out if the 15% of annual income savings recommendation, based on their advice, is meant to include my employer's match on the 401k plan (4% in my case) or the defined contribution pension plan (5% in my case)? What percent of your annual income are you currently saving? Is there a recommended percent for someone who is trying to retire early? I suspect that the recommendation depends, in part, on one's current annual income, timeline to retirement and estimated retirement budget. But I am just looking for some ballpark estimated annual saving percentage recommendations. Thanks.

Here's a post with the math and a couple tables developed from the math. It was written for military readers but the math works for civilian paychecks too.
How many years does it take to become financially independent? | Military Retirement & Financial Independence

The number you're saving is a percentage of is your gross income, which includes your employer's match and your contribution.

You'll also need to estimate your projected spending in ER, because you'll be trying to save a portfolio that's 25x your expenses.

 

[arebelspy]

Here's a post with the math and a couple tables developed from the math. It was written for military readers but the math works for civilian paychecks too.
How many years does it take to become financially independent? | Military Retirement & Financial Independence

The number you're saving is a percentage of is your gross income, which includes your employer's match and your contribution.

You'll also need to estimate your projected spending in ER, because you'll be trying to save a portfolio that's 25x your expenses.

I love that post of yours, btw. I've read it multiple times, and this time it inspired me to make a spreadsheet based on it so I can plug in different rates of return, savings/expense rates, and SWRs to see how the time changes.

Thanks for sharing that.

 

[ViciousTide]

Why not save 80% of income?

I have been fighting (myself to save above the normal. As much as i can, so that i may be FIRE by age 32. I am currently 24 years old and saving 80% of my income.

Making 65k a year, my monthly take home after taxes and 3% in my 401k for now, is $3468.

Currently I am paying off my remaining $3500 in student loans, and a 2010 Corolla on a 2.9% lease (about $9000 left). And then saving as much as I can to secure a shelter (preferably Less then $100k house), then to secure my investments(preferably over $100k).

I have $5000 in investments that makes a few hundred dollars every quarter on MREIT and stocks.

I always have $1734+ on hand as an emergency fund. My work currently gives me health insurance at $80 a month. I get no matching from my workplace. (this might change if i move to a bigger company)

What allows me to save 80% a month of my take home income is mostly contributed to a home rental at only $400, that I split the cost with my Fiancée.

Second, I live below my means, and have only bought a few high quality items that i knew i would use all the time and they will always make me happy where ever i may live. (55" LED at $1300 + FS + NT, a slick deal, a custom built computer at about $1000, Given two nice sofas and a used queen bed, a dining room table, and most kitchen appliances. My books and bookshelf are from College, as well as my gaming console with more then enough books and video games to last me for a great while, until i buy them used.

I have no children right now, however I plan on cooking more to lower grocery bills, and giving my time to my children instead of working 40 hours a week when F.I.R.E. A part time stay at home dad I guess.

After I secure a house which will take about 4 more years of work if i want a bigger house, I plan on saving about $140k which would take another 4 years of work at 80%. Along the way i would be investing and gaining compounded interest to make these goals work years shorter if i can. Though with Capital Gains Tax of about 25% for short term investing this will not help. Obama may lower this to increase US investing in the future.

So since i spend usually less then $9000 a year, a 10% yearly return on $140k is about $14k without working a single hour. Not to bad with a spare $5k, and some tax benefits now that US Government thinks I am poor making only $14k a year. When i have a house paid off, a nice car paid off (might last 10 years), and a big screen, a nice computer,(most electronics will out live a decade easily), nice sofas from the 80's, a nice almost new queen bed, and plenty of clothes for work and non work.

Now yes i will be Early Retired, but I may want to learn some new things and take a few part time jobs here and there. Any extra money i earn up to $16,500 will probably go into the 401k for when i turn 65. 33 years away from when i first start early retirement.

I could always down grade my house for extreme emergencies, but i can't see ever doing that as long as i live below my means. Which in may perspective is a very high standard of living. Netflix, no cable, movies out here and there with rentals rented for free at BBX with coupons. Plenty of free things to do (tennis, jogging, libraries, chatting/hanging out with friends at their houses), let alone learning new things, and building DIY projects with spare cash here and there which i then sell off anyways. I usually set aside about a 100$/month for travel to either friends/family and for vacations.

I have planted some tomatos, potatoes, and spices. Small for now. A bigger garden for when i am FIRE, like my grandfather who is now 70, and has only 3 years of retirement under him.

This all would be easier without a car, but this is budgeted with a new car, currently i spend $160 a month on Fuel alone driving to work everyday, and going out and about near home, and making a few trips to see family about 1.5 hours away. Another $30 a month for repairs, oil changes, tires, etc..

Either way I went to College and chose the a great major called Engineering that landed me a high paying job that will only increase in salary up to a decade unless i wish to become a Manager and make a lot more money but work a lot more stressful and longer hours job. (Probably not at all, especially if i have new borns before 32, and if i am earning any extra from investments, like I am doing now.)

Wish more people would live below their means, sacrifice, and learn some new things to free their Chains from money/working for others/ having to work everyday of their lives.

 

[Surewhitey]

If?

Never not w*rked...got to get used to it before saying we're done...for good.

 

[Independent]

I'll join the chorus. It's not what you earn, it's what you spend. If you currently spend 50% of your gross income, you don't need a plan to replace 75%. Some spending will change. Two very big items are mortgage and children. IF they are both gone when you retire, you can maintain your standard of living with much less spending than you have today.

The best approach is a simple spreadsheet. It doesn't have to be fancy with lots of tax complexities and Monte Carlo simulations. Just the basics.

Column headings would be Year, Age, Current Income, Taxes, Savings, and spending (probably a few categories, for example list mortgage payments separately so you can stop them at the appropriate time). Then retirement income sources (pension, Social Security) and desired retirement spending. Finally three columns for Annual Contributions to (Withdrawals from) savings, Savings Balance, and investment income.

Play with the spreadsheet, varying spending till you get the picture you want.

The most important element is to modify it at least once a year. As you get closer to retirement you'll get more accurate. Starting out, you can only make very approximate estimates, you'll get better with time.

 

[Nords]

I love that post of yours, btw. I've read it multiple times, and this time it inspired me to make a spreadsheet based on it so I can plug in different rates of return, savings/expense rates, and SWRs to see how the time changes.

Thanks! Let me know if you ever put it online, and I'll link to it.

 

[arebelspy]

Thanks! Let me know if you ever put it online, and I'll link to it.

Sure, I went ahead and threw it up on Google Docs. It's ugly, but it gets the job done.

https://spreadsheets.google.com/spr...j85XWdDlVZHpUUEkxd2xraFI3ekc0VlVEM3c&hl=en_US

To edit the numbers on there you have to "save" your own copy first (didn't want to make open editing rights in case someone was messing around and screwed up the single formula in the spreadsheet). I believe this requires a google account.

It'd be pretty trivial to set up another that lets you put in in how many years you want to retire and let it solve for what percent income you needed to save. Though that'd be a bit useless, unless you were starting with $0 (or subtracted off how many years worth of savings you already had).

Hope some of you have fun playing around with the SWR, compounding rate, and savings/expenses rate. I know I had some fun last night.

(HEY! I only need a 200% return for 3 and 1/2 years in a row to retire! lol)

Thanks again for the post Nords.

 

[Nords]

Sure, I went ahead and threw it up on Google Docs. It's ugly, but it gets the job done.

https://spreadsheets.google.com/spr...j85XWdDlVZHpUUEkxd2xraFI3ekc0VlVEM3c&hl=en_US

To edit the numbers on there you have to "save" your own copy first (didn't want to make open editing rights in case someone was messing around and screwed up the single formula in the spreadsheet). I believe this requires a google account.

It'd be pretty trivial to set up another that lets you put in in how many years you want to retire and let it solve for what percent income you needed to save. Though that'd be a bit useless, unless you were starting with $0 (or subtracted off how many years worth of savings you already had).

Hope some of you have fun playing around with the SWR, compounding rate, and savings/expenses rate. I know I had some fun last night.

(HEY! I only need a 200% return for 3 and 1/2 years in a row to retire! lol)

I linked it as an addendum to the post:
How many years does it take to become financially independent? | Military Retirement & Financial Independence

Coincidentally that post is the most popular one of the last week.

Whether you spell spreadsheet as one word or two, maybe some of you will enjoy modifying and upgrading this one. If you do, please post here and I'll link the improvements.

 

[youbet]

If you currently spend 50% of your gross income, you don't need a plan to replace 75%.

But it's important to understand that in retirement you may spend less or you may spend more, as a percentage of your working gross income.

The "less" part is fairly obvious and your examples are good. But folks who are able to RE due to a windfall, such as stock options, selling a business or receiving an inheritance, may find they're spending more, as a percentage of working gross income, in retirement.

This simply points back to the common axiom on this board that says it's anticipated retirement expenses, not working income, that dictate your retirement income needs/wants.