What Should Your Savings Rate Be?

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Reading Time: 4 Minutes

Standard financial advice will tell you that you should aim for 10% savings each year. And if you wanted an average outcome – stressed out about money, working till you’re 65+, and leaning your ladder on the rickety promise of social security – that would be perfectly fine advice to follow.

I think you’re better than that. And you do, too, or you wouldn’t be here.

So let’s say you want to do better than average.

You are done with this turtle-paced crawl toward retirement! You want to feel the wind in your hair as you cruise toward the finish line. Maybe in a car. Fine, a scooter. At least you merit a pogo stick.

So what savings rate should you target?

Here are my recommendations. Savings rate is defined as the percentage of all total dollars you could have potentially saved. That means any tax advantaged account contributions plus total post-tax income.

Recommended Savings Rates:

$50-70k $70k-$120k $120k+
Individual 40%+ 50%+ 70%+
Family 25%+ 40%+ 60%+

 

At a 50% savings rate, you will be keeping your career under 19 years, leaving you plenty of time to check out the world while you are still young and healthy. At that savings rate, you’re in a convertible cruising down the highway at high speed toward retirement! A used convertible, of course, because this is a blog focused on spending.The answer is a 30% minimum, with a juicy 50%+ being the holy grail.

Read on for a more detailed explanation.

 

Savings Rate and Retirement Age

A rule of thumb to estimate your countdown to retirement is to ask what it would take to maintain the status quo: you assume what you make now gets extrapolated at a flat amount through the future, and that you will spend in retirement exactly what you spend now. In doing so, you can boil down how long it will take you to get to retirement based entirely on your savings rate.

This grid will tell you how long it will take you to hoard a nest egg large enough to last you forever, where you only live off the interest it throws off each year rather than touching the principal. Basic assumptions are shared in the footnotes.

A word repeated here: Your savings rate is defined as the percentage of all total dollars you could have potentially saved. That means any tax advantaged account contributions plus total post-tax income.

Savings Rate (Post Tax & Tax Deferred Account Contributions) Years Until Retirement
5% 63
10% 51
15% 43
20% 38
25% 33
30% 30
35% 27
40% 24
45% 21
50% 19
55% 17
60% 15
65% 13
70% 11
75% 9
80% 7
85% 5
90% 3

Takeaways

If you were to save only 10% of your income as pundits suggest, it would take you 51 years to retire!!!

How is this acceptable advice to share with the public?

Hope you enjoy your golden years when you finally hang up those working shoes at 73. That is, if you’re able to find work through that age…

By contrast, a 20-30 year career is plenty long to give you career fulfillment while giving you room to explore other things in life. Traveling without kids, embarrassing yourself salsa dancing, developing eccentric hobbies you can take into old age, and practicing terrible impressions for your next dinner party. To accomplish that, you must achieve that 30-50+% savings rate.

A lot of people will look at these numbers and think it’s impossible to cut spending that low. They will let their dreams shrink smaller and smaller.

They’ll need to cut their artisanally foamed mocha choco coffees? Maybe they don’t want to speed toward retirement in a convertible. Maybe scooter speed is okay.

Eliminate their monthly Tommy Hilfiger Coco Chanel purse-handbag-backpack purchases? We’ll have to downgrade past scooter to 70-year-old grandma walker pace, which is conveniently how old you will still be while working if you follow conventional savings advice.

But maybe you feel trapped between a rock and a hard place looking at these numbers. How is it even possible to live a full life at that level of spending, you might ask?

The answers is that it is possible, and people are doing it from all different walks of life. Check out this guy. And this one. And this couple. They are all doing it on normal salaries, and you can too. We will be exploring how in future articles.

At the end of the day, if you are happy with an average outcome, you can go ahead and do average things. But you if you want an above-average outcome, you will have to do suck it up and do above-average things. That means learning new techniques, and changing old habits.

It’s a hard choice, but it is your choice to make. And the beautiful thing is that the outcome is entirely in your hands. No one is putting a gun to your head at the Amazon checkout cart.

So get on the pogo stick, man. Feel the wind in your hair.

Footnotes:

  1. This savings grid was done with the help of the calculator at NetWorthify and was inspired by Mr. Money Mustache, one of the most interesting bloggers in personal finance. I argue for a more conservative withdrawal rate but a more aggressive growth rate given historical data which is reflected in my chart above.
  2. Assumptions:
    • Assets grow on average at 6% CAGR until you retire – with Muni bonds in many states yielding 5% and the stock market averaging a 10% CAGR since 1970, this is reasonable
    • Safe withdrawal rate of 3% (many retirement experts cite 4%, see here for more detail on why that’s outdated)

 

 

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