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How Much Should I Save For Retirement? 

How much should you be setting aside from each paycheck for your retirement? There’s a lot of different guidance out there which can make it challenging to choose the right savings rate for your situation. Furthermore, each person has their own unique situation where timeline income, expenses, goals, and risk tolerance will all come into play. This post will look at a couple of studies on the proper savings rate and look at the advice of the most popular financial planning experts. 

After studying the issue, my personal opinion is to target 15%. If you’re able to save for at least 30 years at that rate, you’d likely have a reasonable retirement in most historical scenarios. Of course, I love it when people can save more, especially early, to set themselves up for a richer life in retirement. 

Studies:

Save Savings Rates: A New Approach to Retirement Planning over the Life Cycle – Wade Pfau, PHD

One of the most comprehensive studies on retirement savings rates was conducted by Wade  Pfau, PhD, CFA, the founder of Retirement Researcher. His research paper, titled “Save Savings Rates: A New Approach to Retirement Planning over the Life Cycle”, presents the minimum savings rate needed to fund 50% of preretirement income through portfolio withdrawals.

Using historical data on stocks, bonds, and inflation, the study found that a savings rate between 10-16% would fund 30 years of withdrawals historically, depending on when the retiree lived. The savings rate is shown by the bold black line in the chart below:

Some key assumptions behind those numbers are: 

  • 30 years of savings during a person’s career
  • 60/40 investment allocation throughout life, with the 40% conservatively in 6-month commercial paper. 
  • 30-year retirement
  • No investment fees or taxes
  • Income is a constant real number throughout a career

It’s worth noting you may need to adjust your savings rate based on some of these assumptions. For example, if you are saving for less than 30 years, or if your income is lower at the beginning of your career than at the end, you may need to save more. You won’t need to save as much if you have a shorter life expectancy and won’t live 30 years into retirement. 

How much should I save for retirement? – Fidelity

Another study on retirement savings rates comes from Fidelity. According to Fidelity, you should save between 15%-23% of your pre-tax income, depending on when you start saving:

  • Start at age 25: Save 15%
  • Start at age 30: Save 18%
  • Start at age 35: Save 23%

The savings rate includes an employer match. Some of the assumptions from the Fidelity survey to keep in mind are: 

  • Retirement starts at age 67
  • Retirement Spending = 55%-80% of preretirement income. 
  • 45% of income to be replaced by retirement savings (balance from Social Security)
    • Most applicable to those with income between $50K-$300K
      • Higher Income levels would need to save more

The range in the two studies here is wide: 10%-23%. That shows just how variable the ideal savings rate is depending on your individual situation. 

What Popular “Gurus” Suggest:

Let’s take a look at the savings rate some of the most popular personal finance ‘gurus’ suggest:

  • Dave Ramsey: “Invest 15% of your gross income into tax-favored retirement accounts—like your 401(k) and IRA—every month.”
  • US Senator Elizabeth Warren helped popularize the 50/30/20 budgeting tool in her book All Your Worth: The Ultimate Lifetime Money Plan. 50% of your money goes to needs, 30% to wants, and 20% to savings. Ramit Sethi also recommended the 50/30/20 rule in his book I Will Teach You To Be Rich. 
  • David Bach, author of The Automatic Millionaire, puts savings into the following profiles:
    • Poor: spend everything and save nothing.
    • Middle Class: pay myself first 5 to 10% of my gross income
    • Upper Middle Class: may myself first 10-15% of my gross income
    • Rich: Pay myself 15-20% of my gross income
  • Suze Orman says, “At a minimum, you want to save 10% of your salary in your 401(k). That’s the minimum. I think 15% is a smarter target. (These percentages are the combined total from your salary contributions and your employer match.)” 
  • Tony Robbins Says, “Put aside at least 10% of your paycheck toward savings by investing it into a 401(k) or a Roth IRA.”

Conclusion

As you can see, there is no one-size-fits-all answer to how much you should save for retirement. The optimal savings rate for you should take into account how many years you plan to save, expected longevity, risk tolerance, and goals.

A couple of tips to help you towards retirement: 

Start saving as early as possible. The power of compound interest will make a huge difference over time.

Aim for at least 15% of your pre-tax income, including any employer match. With an adequate savings timeline, this savings rate has provided for a comfortable retirement in the vast majority of historical circumstances. 

Adjust your savings rate based on your income, expenses, lifestyle, goals, and risk tolerance. If you want to retire earlier, spend more in retirement, or have a lower income, you may need to save more. If you have a higher income, lower expenses, or a longer working career, you may be able to save less.

Review your savings rate regularly and make changes as needed. Your circumstances and goals may change over time, so you should monitor your progress and adjust accordingly.

Remember that these are only general recommendations and not specific advice for your situation. The best way to find your optimal savings rate is to consult a financial advisor who can tailor a plan for you.

I hope this article has given you some insight and inspiration on how to save for retirement. If you have any questions or comments, please feel free to contact us at info@sophoswm.com. 

Scott Caufield, CFA, CPA