How Much Should You Be Saving?

Have you ever wonder how much you should be saving? There has been a lot of research about what the best withdrawal rate is in retirement. The opposite side of that equation is how much you should be saving at various ages. This post is about how much you should be saving.

Personal Savings Rate

When this post originally came out, it was inspired by a 2009 Vanguard podcast on “Can thrift make a comeback” and after revisiting “The Millionaire Next Door“. It was apparent to me that many people didn’t know how much they should be saving, especially after I looked at the Personal Savings Rate in the US from 2000 to 2009. At one point in 2005, the savings rate actually was negative. It wasn’t until after the 2008 recession that the savings rate started to rise.

The Millionaire Next Door

At that time, 2009 economists were saying that the recession recovery could take longer than expected because Americans were saving too much money! This was odd to me because the savings rate in 2009 was only about 5%, which isn’t even close to the amount Thomas J. Stanley and William Danko of The Millionaire Next Door say most affluent households save. Dr. Stanley said that most millionaires save 15 % to 20% of their income.

Savings Rate Research

Since the original 2009 blog post, the Center for Retirement Research of Boston College has published how much to save for a secure retirement.  Using research from the Retire Project at Georgia State University, the retirement income need is 80% for those earning $50,000 or more. For lower earners that make less than $50,000, the retirement income need tends to be higher. This is called a replacement ratio, or how much income you need to replace.

Twenty-five-year-olds that make $50,000, could save as little as 7% if they plan on retiring at age 70. If they’d like to retire at age 62, they should save 22% starting at age 25. But if they wait until they are 35 to start saving, and want to retire at 62, they should save 35% of their income. If they can’t save 35% of their income, they’ll need to lower the amount of income they’ll need in retirement or retire later. They can retire at 70 if  they can only save 11% of their income.

In general, retiring at 62 required 22% savings starting at 25, 35% savings if you start at 35, and 65% savings if you start at 45. If you retire later, at age 70, you need to save 7% if you start at 25, 11% if you start at 35, and 15% savings if you start at 45.

High Earners

Interestingly, high earners that need to replace their income at 80% in retirement, and want to retire at age 62, need to save between 26% and 77% of their income depending on whether they start saving at 25 or age 45.

Of course, this research depends on how much rate of return you’re getting on your money. The figures mentioned above estimate a 4% rate of return. Most of the research done at the time of this paper was post-2008 recession when slow growth was the mantra. With today’s double-digit return markets, we’re seeing millennials retiring and starting their I’m a millionaire YouTube channel every day it seems. But are they staying retired?

The Question

The real question is – What if you don’t need to replace 80% of your income? Meaning, what if you don’t have car (17% of income) and mortgage payments (25% of income), and you’ve been saving 15% all along and you only need to replace 43% of your income?  Maybe you’ve been getting better than 4%.

Takeaway

There are a lot of variables when it comes to retirement. How much you save is just one of them. If you want to retire at 62 or earlier, you need to save a much higher percentage of your income than if you retire at 67 or 70. The higher your return, the lower your required savings rate. But living debt-free might just be the biggest variable to the equation in answering the question – how much should you be saving?

You can find a copy of the report here.

Editor’s Note: This post was originally published on October 27th, 2009, and has been revamped and updated for accuracy and completeness.