Percentage of Salary to Save Based on Age You Start

[EvrClrx311]

Everyone knows that the earlier you start the better off you'll be. But just how much of a difference it can make seems to confuse many people. This chart makes a few assumptions that may or may not jive with your situation (you'll need 75% of income starting at age 65; ignoring SS and pension), however it does a great job of showing just how much of a difference a few decades and even a few years earlier can make. No better time to start than now.

Assuming the middle ROI of 5% (that means 5% average return above inflation) over your lifespan here is how much you should expect to sock away the rest of your life to get to a 75% income off of 4 WR when hitting 65:
age 20 start = 12% of salary till 65
age 25 start = 16% of salary till 65
age 30 start = 21% of salary till 65
age 35 start = 28% of salary till 65
age 40 start = 40% of salary till 65
age 45 start = 57% of salary till 65

Note: Starting at 25 instead of 35 can mean you'll only need to save half as much for the rest of your career to hit that comfortable retirement mark.

Disclaimer: Life won't make a pretty graph like this for you however picking a ROI of 5% (which is pretty conservative for the majority of your investing career compared to historical equity returns) can give you a good idea of the line your retirement account might straddle along the bumpy ride towards retirement. If you are the type to move heavily towards Bonds earlier on... looking at the 3% ROI is probably a safer bet.

The article that this graph comes from is also interesting: Observations: What Percent of Your Salary Should You Save for Retirement? (by Starting Age)

In fact, this site has become one of my favorite in trying to figure out where the overall market is headed. Very statistical... and I'm sure it'll also appeal to many others on this board

 

[longinvest]

Let say that you're 40 and you start saving 40% of your gross salary. If your tax rate is 25%, then you're actually living on 100 - 40 - 25 = 35% of your gross salary. Why would you need 75% (live on 75-20 = 55%) of your gross salary at 65?

I think that this kind of graph is too simplistic.

 

[jerome len]

Save more.....work longer.......spend less......start young......retire later......keep/improve your standard of living in retirement......travel, spend.......buy the latest "toys".........eat out often........we have a lot of choices........my parents really saved, got me in the habit......and, my kids probably will enjoy it! But, I'm secure, and as long as I have my health, I'm really happy.......lucky? I guess so. Everyone makes their choice.......one of my favorit sayings...."if it's to be, it's up to me" Guess that makes me a little conservative. Oh, yes, I saved nearly half of my take home income and invested it conservatively.....worked good for me.

 

[lrak]

Note: Starting at 25 instead of 35 can mean you'll only need to save half as much for the rest of your career to hit that comfortable retirement mark.

Disclaimer: Life won't make a pretty graph like this for you however picking a ROI of 5% (which is pretty conservative for the majority of your investing career compared to historical equity returns) can give you a good idea of the line your retirement account might straddle along the bumpy ride towards retirement. If you are the type to move heavily towards Bonds earlier on... looking at the 3% ROI is probably a safer bet.

I'd say I haven't been straddling those lines so far and I'm probably not atypical for the young dreamers crowd ... "Past performance is no guarantee of future results."

I entered the workforce full time at the age of 21 in January of 1999 and my retirement accounts have been invested in 90% stocks.

If food, energy, and transportation counts in inflation (or I won't need any of those in retirement)... and if mutual fund fees don't count as returns... I haven't come close to a 5% real return over that time.

If I was heavily in bonds since the start of my career I believe I would have done better.

Returns before I started saving for retirement don't matter to ME nearly as much as returns since. The way congress has been spending money over the last decade, hedge funds have been manipulating the energy markets over the last decade, and the fed has been printing money over the last half decade, I don't see low inflation likely over the next decade. That means returns will likely need to be larger to get a 5% real return.

Maybe my past performance has no relationship to my future results. Maybe the economy will turn around and the federal government will decide to become fiscally responsible in the next year. Maybe we're going through the flat growth and then stagflation of the 60s & 70s and we're about to experience the booms of the 80s & 90s again. Or maybe the young dreamers are averaging down the abnormally high growth many of you were lucky to get in the 80s and 90s.

I don't know what the future will bring, but I'm pretty sure it won't be anything nearly as predictable as the smooth curves shown. As you suggested, it will be more like a bumpy road.

@ 21 I was saving 14% traditional and 35% house fund. The long term financial future looked bright to me.
@ 35 I'm saving 17% Roth(s), 2% traditional, 7% car/rainy day fund, and spending the rest while its worth something... just in case its not later ...

In the last 14 years my salary has more than doubled. My house is paid off. But I'm less confident over the long term. Probably because after my personal rate of inflation and personal investment growth is taken into account, the ROI has been 0-2%. The line for that would probably show I should have been saving 30% from age 21.

 

[RetireBy90]

Let say that you're 40 and you start saving 40% of your gross salary. If your tax rate is 25%, then you're actually living on 100 - 40 - 25 = 35% of your gross salary. Why would you need 75% (live on 75-20 = 55%) of your gross salary at 65?

I think that this kind of graph is too simplistic.

We pay 28% in taxes, put 15% in 401K and another 10% in non-tax-advantaged accounts and 5% to charity, so add it up and we live off about 40%. Not sure I'm that different than others.

While the assumptions are simplistic as the graph is, you have to start with some assumptions that can then be tailored to your unique situation. Good to have a picture to show my sons what starting early can do, but no guarantee. Of course, even if you get 0% after tax return, you still have 10% of your income saved for each year of savings.

 

[jerome len]

I'd say I haven't been straddling those lines so far and I'm probably not atypical for the young dreamers crowd ... "Past performance is no guarantee of future results."

I entered the workforce full time at the age of 21 in January of 1999 and my retirement accounts have been invested in 90% stocks.

If food, energy, and transportation counts in inflation (or I won't need any of those in retirement)... and if mutual fund fees don't count as returns... I haven't come close to a 5% real return over that time.

If I was heavily in bonds since the start of my career I believe I would have done better.

Returns before I started saving for retirement don't matter to ME nearly as much as returns since. The way congress has been spending money over the last decade, hedge funds have been manipulating the energy markets over the last decade, and the fed has been printing money over the last half decade, I don't see low inflation likely over the next decade. That means returns will likely need to be larger to get a 5% real return.

Maybe my past performance has no relationship to my future results. Maybe the economy will turn around and the federal government will decide to become fiscally responsible in the next year. Maybe we're going through the flat growth and then stagflation of the 60s & 70s and we're about to experience the booms of the 80s & 90s again. Or maybe the young dreamers are averaging down the abnormally high growth many of you were lucky to get in the 80s and 90s.

I don't know what the future will bring, but I'm pretty sure it won't be anything nearly as predictable as the smooth curves shown. As you suggested, it will be more like a bumpy road.

@ 21 I was saving 14% traditional and 35% house fund. The long term financial future looked bright to me.
@ 35 I'm saving 17% Roth(s), 2% traditional, 7% car/rainy day fund, and spending the rest while its worth something... just in case its not later ...

In the last 14 years my salary has more than doubled. My house is paid off. But I'm less confident over the long term. Probably because after my personal rate of inflation and personal investment growth is taken into account, the ROI has been 0-2%. The line for that would probably show I should have been saving 30% from age 21.

You've really done a nice job of laying out the past, future possibilities and the problem we have trying to use the past to anticipate a rate of return in the future. thanks. I've been heavily in bonds....they've done well. I also buy a couple of ounces of gold each Christmas for my DW and myself....over the years it adds up and protects against inflation....Gold is just a little more diversification. Again, you said it well. Everyone should read your post a couple of times.

 

[EvrClrx311]

Irak, I have a similar time frame as you but a different mindset about the markets. The longer the economy is down the better I feel (glass half full mindset I guess). In terms of long term investing... the lower the market is the cheaper you are buying stocks at. There is no doubt a bubble will happen in our lifetimes, and probably when we're in our 40's...

That is the time to move over to bonds... not now. For now my goal is to put away as much as I possible can during this golden opportunity when the stock market is less overpriced (fwiw, I actually wish the market were at 10K right now, P/E still a little steep)

Long term future returns is another topic. You may be right that this century we won't see an average Real stock return in the 7.5% (10.5% with inflation) range... but I'm guessing it'll be at least 5.5% at worst over our working careers. Those who think our country is on the verge of collapse really don't understand that we're doing what we've done for the last 100 years. We've been in ruts like this before and people then also made the same claims that "this time its different... the markets are not coming back - flat returns forever..."

This may shock you, but the last decade Oct 2002 through Oct 2012 has seen the DOW at an average annual return rate of about 9% (dividends included). Of course, you can also pinpoint periods of time showing a flat and lackluster performance but that return is real today and what we've actually seen for the last 10 years (certainly a wild ride achieving it). I think many people focus too much on the peaks and compare today's market to the summer of 2007, saying "where did the last 5 years go?" (bad mindset, IMO)

Fwiw:
I started working 7 years ago at the age of 23. The first 5 years I set aside 20%, the 6th and 7th years 25.5%. I am 100% in stocks (index funds). My salary is 48% higher than I started in 2005 and my 401K account is 1.6 times my current salary. I've invested a total of $136,149 into my Roth/401K accounts (including matches) and they are worth about $175,000 today.

My overall rate of return is 6.3% (ROI 3.2%) - I'm happy with that considering.

If the market helps me out I'll be set way earlier than 65... if not, I've at least put myself in a good position through brute force by setting aside a quarter of what I make. Many here are piling away even more than that.

The point of this thread is to show the power of starting early. All the other variables are relevant, but outside your control. Regardless of what the return is for our working careers... the person who set aside 15% at age 20 is going do be doing a heck of a lot better than the majority of others who started at 5%... or those who didn't start until 40.

 

[EvrClrx311]

Another way to put it... regardless of the overall rate of return you end up with for your lifetime: 2% or 10%. If you saved 15% instead of 7.5% you'll end up with twice as much money in your 401K at... (insert an age here)

Whether that is 1 mil vs 500K... or 10mil vs. 5mil depends on the return rate the market gives you. Something you can't really control (beyond just trying to be an intelligent investor). The dangerous mindset I see many around me falling into is that they see bad returns and doom and gloom in the news and use that as a reason to justify not setting aside any money, despite having the means to.

I could have easily found other ways to spend that $15,000-$25,000 a year (leasing a new car and getting a slightly bigger house). Maybe I'd be a little happier in the now... probably not. I know I'd definitely feel a lot less secure about my future.

 

[lrak]

Irak, I have a similar time frame as you but a different mindset about the markets. The longer the economy is down the better I feel (glass half full mindset I guess). In terms of long term investing... the lower the market is the cheaper you are buying stocks at. There is no doubt a bubble will happen in our lifetimes, and probably when we're in our 40's...

Its going to take a big bubble to overcome decades of low returns, but there certainly is historical precedence for it.

This may shock you, but the last decade Oct 2002 through Oct 2012 has seen the DOW at an average annual return rate of about 9% (dividends included).

It doesn't shock me. But I understand compounding in a volatile market, so I know why my investment have performed as they did while the "average annual returns" were much better.

Overcoming Compounding's Dark Side

Ten years also misses the 2000-2002 dips leading up to a nice low start in Oct 2002.

The point of this thread is to show the power of starting early. All the other variables are relevant, but outside your control. Regardless of what the return is for our working careers... the person who set aside 15% at age 20 is going do be doing a heck of a lot better than the majority of others who started at 5%... or those who didn't start until 40.

With steady compounding growth, starting early is clearly the winning strategy. Just wanted to point out that I've yet to see steady compounding growth in my working years.

If we are headed for a huge crash with slow recovery those who spend in their early years and invest more later in life will come out ahead. That scenario is a (remote) possibility.

 

[obgyn65]

I agree with this. Everyone's circumstances, including incomes, saving rates, etc are very different and calculating aggregate numbers like these ones becomes meaningless. My view only.

I think that this kind of graph is too simplistic.

 

[EvrClrx311]

I agree with this. Everyone's circumstances, including incomes, saving rates, etc are very different and calculating aggregate numbers like these ones becomes meaningless. My view only.

As I said...

This chart makes a few assumptions that may or may not jive with your situation (you'll need 75% of income starting at age 65; ignoring SS and pension), however it does a great job of showing just how much of a difference a few decades and even a few years earlier can make.

Doubt anyone would pick the actual savings rate based on a graph as simplistic as this... my guess is this was created to kick younger investors in the butt to get them to start asap

 

[uc_brian]

I think saving 40+ percent per year after taxes is a very viable option if you make six figures or more and life a simple life. But there are a lot of variables to consider.... As always.

I had the Mercedes, but now I'm happier in the Honda.

 

[rescueme]

I had the Mercedes, but now I'm happier in the Honda.

And then there are folks like me/DW who saved an excessive amount during our accumulation years and drove a Vega then vs. a Cadillac today ...

The only thing is, that they were both used vehicles when I purchased them (can't get the "cheapness" out of me, regardless of age nor assets).

As one (along with DW) who "sacrificed" in pre-retirement, and now enjoying our post-retirement lifestyle, I/we have no regrets in the decisions made, many decades ago.

Just our situation and POV...

 

[EvrClrx311]

So true... in my early 20's I justified driving a Honda by telling myself "the money I'm saving by driving this now will allow me to buy <insert exotic $50,000-$75,000 car here> when I'm 35"

Now that I'm 30, I don't think I'll ever drive anything other than the reliable used car that I can put some work in to drive it till it dies...

A car to me now is just a means to get from A to B...

 

[ziggy29]

So true... in my early 20's I justified driving a Honda by telling myself "the money I'm saving by driving this now will allow me to buy <insert exotic $50,000-$75,000 car here> when I'm 35"

Now that I'm 30, I don't think I'll ever drive anything other than the reliable used car that I can put some work in to drive it till it dies...

A car to me now is just a means to get from A to B...

Usually, before a major purchase I ask myself how badly I want something, and figure out how much longer I'd have to work in order to buy it. That reminds me that maybe I didn't want it as much as I thought...

 

[bo_knows]

I think saving 40+ percent per year after taxes is a very viable option if you make six figures or more and life a simple life. But there are a lot of variables to consider.... As always.

I had the Mercedes, but now I'm happier in the Honda.

Very true. Pretty much exactly describes our lifestyle.

FWIW, I drive a Mini Cooper S. The "pedigree" of a luxury company (BMW owns and operates them) but for a smaller price (you know, because of 1/2 the size haha).

 

[Texas Proud]

Usually, before a major purchase I ask myself how badly I want something, and figure out how much longer I'd have to work in order to buy it. That reminds me that maybe I didn't want it as much as I thought...

Yesterday when I was home after eye surgery I was watching some TV show.... and there was a couple that were LBYM.... I think they are on some cheap living show.... it was funny when they showed them dumpster diving....


BUT, to get back on topic, the one statement that the guy made that made a LOT of sense was something like this...

"It has been determined that 80% of what people buy they have regrets within a year. We just try and determine what that 80% is and not buy it"...

I am sure I am really butchering his quote, but you get the idea.... so yea, this is a good process to not waste money....

 

[19xxdinosaur]

I'm the author of the Observations blog post that is the subject of this thread. I just happened to run across the thread and, frankly, was a little confused.

My post was the first of a series of posts that address the question "How much should I save for retirement?" The graph in this thread is designed for those who don't expect to receive a pension or Social Security. Two later posts target those with Social Security -- one for average salaries, one for higher salaries. All three graphs are based upon my "SIMPLE Retirement Calculator/Spreadsheet."

I'm especially confused by the "simplistic" comments. I would appreciate it if someone could help me understand in what ways you think this approach is simplistic. To my way of thinking, all I'm doing is just following the "4% withdrawal" approach to its logical conclusions. What you would recommend instead that would be more useful?

I'm not being defensive -- just trying to understand. I'd appreciate any input on what your group sees as the major deficiencies in my approach, and I will try to address them in one of the upcoming posts in this series.

Thanks.

p.s. EvrClrx311: Thanks for the compliment. Glad you're enjoying my blog.

Note: I don't want to be accused of spamming your site, so I've not provided links to the other posts. However, you can find links to the other two graphs, and to the base spreadsheet, near the bottom of the post that EvrClrx311 references at the start of this thread.

 

[Lazarus]

I would not accept that the way to calculate retirement expenses is to take a percent of working income to determine your retirement income needs. As in the article 75%. You do not need a percentage of your working income. You need 100% of your retirement expenses. You need to first calculate your expenses to determine how much money you need to support them. The 4% rule is as good as any for determining how much you need if you are withdrawing from an investment pile. If you are young it may be a bit high.

My income in retirement is about 40% of my working income. I have no trouble paying my bills. High income earners could need a smaller percentage of income than average earners. Depends on how frugal you are also. The 75% estimate would be closer for median earners. Still you need to start with expenses not income.

 

[rescueme]

..(snip)...Still you need to start with expenses not income.

Exactly.

Our retirement income plan was for 100% of our current net income during our w*rking years, adding in an additional amount for taxes due on withdrawls (of non-Roth IRA funds).

For us, it was easy to compute since we had no additional "retirement desires" to add in the forecast, beyond current net income. We had already built/paid for our retirement home, and we've traveled - for many decades, before retirement, and planned to continue to do so.

There were no financial surprises along the way, as related to being able to live financially well in retirement. The only surprise we've had is that our total joint retirement portfolio has grown to a bit more than when each of us retired, even though we have no pension nor SS income at the current time (for me, over 5.5 years). Just a bit of luck, along with a bit of planning.

 

[19xxdinosaur]

Lazarus, rescueme,

Sorry it took so long to get back to you, but Sunday is my football day....

Ok, we're pretty much on the same wavelength. I agree that starting with your expected expenses in retirement will give you a more accurate estimate. And, in fact, if you've had a chance to look at the spreadsheet upon which the graphs are based, you've seen that's where the spreadsheet starts.

However, most 20-45 year-olds have no clue what their retirement expenses are going to be at age 65 -- 20-45 years from now! (remember, the graph is designed for those ages 20-45). For people who can't estimate their expenses, assuming their expenses will be approximately 75% of their current (real) salary gives them the benefit of lots of other peoples' experience, and will typically get them in the right ballpark.

Those who do feel comfortable calculating their retirement expenses 20 to 45 years from now can always use the spreadsheet. Actually, in the post, I encourage all readers to put their data into the spreadsheet -- and specifically mention expected spending level as something they could change. Not sure what more to do.

So, again I don't see any real differences in philosophy here.

Thanks for the feedback. I expect retirement planning posts will be a significant focus of my blog for the next 6 months or so. As a result, I'll probably be stopping by Early Retirement more frequently.

 

[Lazarus]

I calculated my expected expenses about 15 years ahead of retirement. They are a little lower than calculated back then. My required net worth to generate that amount was calculated also. I ended up within 10% of that on the high side.

Young people should save as early as possible. But they need to get a handle on their expenses as early as possible also. First thing is to find out exactly what you are spending. Then look for ways to optimize it. You have to know what you are spending now to have an idea of what you will be spending after stopping work.

For example my gas consumption is much lower.

 

[19xxdinosaur]

Congratulations. You did a great job of planning! Would that everyone could be so successful.

As for the rest of your reply... you're "preaching to the choir." I agree completely! I developed my first retirement model/spreadsheet around 1980 -- about 20 years before I retired. I remember being shocked at how far ahead I needed to plan. I called it my 100-year plan -- even though it actually "only" covered less than 60 years. Developed my first "budget" when I started my first job (cleaning my father's office everyday for $1 a week); it wasn't very formal, but it did include savings for my piggy bank. I was about 6 years old. Unfortunately, our experiences are not the norm -- especially these days.

Not surprisingly, my goal in my retirement plan was to maintain my same standard of living once I had retired. I assume that most people will want the same. They'll probably want to be able to afford roughly equivalent expenses once they've retired. They'll no longer need to save for retirement, but will still have living expenses and taxes. Based on my experience, and most research I have seen, that means most will want 70-80% of their ending salary.

I haven't posted much on budgeting yet on my blog, but intend to. I spent a significant portion of my career developing and/or having responsibility for financial systems for Fortune 500 companies. So, I'm well aware that the foundation for a good financial plan is generally a solid understanding of what your current actual expenses are. Sadly, many people don't really know how they are spending their money. In my opinion, this is the result of a significant shortcoming in how we currently raise & educate our kids....

 

[Lazarus]

There is a danger of sticking with the rule of thumb 70 to 80 percent of income.

I would have needed roughly twice my net worth that I have to support that. It may have taken a decade to get there. I would call that a pretty serious issue. Working for longer than you need to. This is the Early Retirement Board after all.

Overestimating the amount needed will needlessly discourage many from starting at all. Most of them won't anyway.

Interesting though, my expenses in retirement are about 75% of my expenses before retirement.

 

[Bimmerbill]

My guestimate is my take home (net) pay right now. Now I am trying to backward plan how much $ I need 10+ years in the future based off of my guestimate.