October 13, 2015

Percent of Income You Should Save If You Start Saving For Retirement At Various Ages

The general rule of thumb I've seen quoted for how much you should save for retirement is usually around 10% or 15% depending on who you ask.   This kind of rule of thumb is based on some assumptions and one of those assumptions is how long you save.    I would expect that the number of years its assumed you work and save into retirement is probably around 30-40 years based on someone working most all of their adult life.   In other words the rule of thumb takes it for granted that you start working at some age like 25 years old and you save the 10-15% your entire working life until you retire around 65.    So it assumes you work 40 years and save 10-15% that whole time and then benefit from the growth of your retirement account over that same 40 year period.   Now this is fine for figuring general retirement plans.    But hey, we all know that a lot of people don't start saving the first day they start working.   Some people end up changing careers, etc and may have to play catch up with retirement savings at a later date.

If you start saving at varying ages then how much of your income should you save towards retirement?

He is the short answer :

age target %
22 10%
25 12%
30 15%
35 19%
40 24%
45 29%
50 37%
55 46%

So simply put if you start saving from $0 on the age in the left column then you ought to try and save the % of your income in the right column.    A 22 year old could target retirement savings of 10% but a 50 year old ought to save 37%.

I figured the table above based on the following assumptions.   a) your income will increase 3% a year, b) your investments will grow at 8% annually, c) you'll use the 4% withdrawal rate at retirement, d) you'll receive social security payments enough to replace 20% of your working income, e) you won't need to replace ~7% of your working income due to lack of social security/medicare taxes during retirement, f) you also wont' need to replace the % of income towards retirement savings

So working through an example.   Say you start your retirement savings at age 35.   If you save 19% of your income then that will grow over 30 years to be enough to replace about 53% of your working income.   Your working income less 7% for SS/medicare, less the 19% savings gives you about 74% of your income to live off during the working years.  If your social security replaces 20% of your working income then replacing 53% of your working income with your retirement savings will give you the same money post retirement that you lived off during working years.


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