How Much Of Your Salary Should You Save For Retirement?

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This is a difficult question to ask, but this paper I ran across entitled ‘Savings Rates and “Economic Security” in Retirement’ tries to take a stab at it. Here is the abstract:

Some simple number crunching using historical market return data for retirement planning. How much do we need to save to provide for a comfortable and secure retirement?

Here are some of his initial assumptions:

– Start at age 25, retire at 65
– Portfolio is 70% S&P 500 / 30% Long-Term Bonds, rebalanced annually
– “All savings are tax-deferred and are taxed upon withdrawal in retirement at the regular income tax rate. For simplicity, we assume that our tax rate is the same before and after retirement.”
– Social Security still exists when we retire
– In retirement, you want the same net income after taxes and retirement savings.

After carefully outlining these and other simplifications, and then using historical investment data to create a statistical analysis, he ends up with a conclusion that saving 15% of gross salary each year works well for this scenario. You should really read the entire thing to understand the context of this conclusion, it’s only a few pages long.

Up to now, I?ve pretty much tried to do things bottom-up – that is, live a simple but comfortable lifestyle and save what?s left over. It?s worked well for me, we?ve saved over 30% of our salaries in past years. (I haven’t spent the time to pin down an exact number.) But with a new house and a family, I may have to scrutinize more.

The paper is part of an interesting finance site by a John Norstad. His site is exactly what I would imagine would happen if my grad school professors grew fond of finance. He even publishes his papers in LaTeX, which gives me flashbacks. If you are a bit of a math geek, I would recommend checking out some of his more theoretical papers on Modern Portfolio Theory. I’m still digesting much of it.

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  1. It depends on how old you are, when you want to retire, how much debt you have, how much you have already saved for retirement, etc.

    Nevertheless, that number is good for a typical young professional in the 20s. I’ll say a real good number lies between 10-20%.

    Afterall, you can only contribute so much a year in retirement accounts (401k limit + IRA limit)…

  2. I read a book a few years ago called all your worth. The authors are a mother and daughter that have appeared at least once on Dr. Phil and once on Opera. They have a formula that I like, but it might not work for everybody. Their formula is
    20% savings for retirement and other things
    30% is fun money (cell phone, cable internet, all other stuff)
    50% is for must haves (mortgage, food, insurance..)

    The book explains that if you are spending too much on your must haves, you are not enjoying your life (30%) and most likely taking away from your savings (20%). The authors explain how there really needs to be a balance between 20/30/50.

    I’ve read two of their books and really enjoyed their books, but the formula isn’t perfect. If you are a believer in a 15 year mortgage, then your 50% must haves will increase yet a 15 year mortgage you’ll have more applied towards equity as one example of a possible flaw in the formula.

    One of the authors works at Hardvard and I emailed her once asking a question about her formula and she wrote me back right away, which was very nice of her. The data they have collected shows that most people who claim bankruptcy is generally from having must haves above 65% of their balance. The reason the balance of the 3 is important is that even if you increase your savings to say 30%, then you are taking away from your must haves and your fun money, so the authors belief is that there needs to be a balance and 20/30/50 is what they believe.

    skimming through the article you posted the 15% should be taken lightly as if you want to retire earlier than their data suggests then 20% or 25% might be the minimum.

  3. Too many assumptions. It’s interesting, but pointless. And his 5% withdrawal rate is very high.

  4. ACK. LaTeX. I was lucky to escape it!

  5. Wow, 15% of gross is quite a bit to dedicate to retirement. We do manage this, but it is only because we are both working. It is very tough while we are paying for daycare for two kids and saving for their college. When I was out of work for a year we were only able to save 6%, even though we were not paying for daycare. We did not save any other money at the time.

    I bet most young families do not come close to 15% of gross. Many people I know say they are not worried about it, and they will save more later. I do not think they realize they will have to save much, much, more later because they are missing out on years of compounding.

  6. (Moved comment up into original post)

  7. I have always had this question! I guessed it would have been 20-25% since it adds the word “comfortable” in there. I think I save about 25% right now. What is your number Jonathan?

  8. Bigmouth says:

    I think this question is very paradoxically confusing. On one hand, we do need a “formula” so that we can keep our spending habit at bay, on the other hand, everyone’s situation is different, the percentage game really is meaningless when you look into individual cases. In other words, there are too many variables that will make this “15%” irrelevant.

    For instance, statistically, some 5% of us will die even before we reach retirement. 10-15% of us will develop cancer and other long-term diseases before reaching of retirement age. In additional, about 30-35% of us will divorce, and most of us will stay married or remarry. Do you actually factor these in when we are doing the formula? Or you just presume that you are going to be healthy all the way till 65 and then remain healthy all the way till 99?

    Next, how do you define “a comfortable retirement”? Is avoiding financial hardship your bare minimum goal or you actually want to buy an RV and travel around the world? Again, with the mortality rate going up like a sharp curve after 65, retirement really means “end of productive life and waiting to die”.

    At last, the income gap level of Americans is wider than ever. For a family with one parent working full time and the other parent taking care of 2 children (our current typical nuclear family model), 15% is both hard to come up and not enough for a “comfortable retirement”. On the other hand, if a successful small business owner makes about $200k-$300k a year, 15% is piece of cake and that?s after he was able to buy a boat, a Porsche 911, a 2nd vacation home later. Maybe he can even contribute up to 20% of his gross income by not buying the Porsche 911 and the house boat, a Lexus will do?

  9. Bigmouth: I think a large number of your arguments don’t make much sense.

    You mention that people might die before we reach retirement, or we might develop cancer / etc and die early. The fact you “might” die early shouldn’t factor into your planning at all. Can you say “I have a 50% chance of dying early, so I’ll only save 50% of what I need”? No, you need to either plan for retirement, or not. So you need to save what you’ll need, and you’ll need to plan conservatively. In this case, a conservative plan will usually mean planning to live until you’re 95 (at least).

    A comfortable retirement generally means that you’re living at around the same level you were before you retired. If you’ll be willing to eat out less often, then you don’t need to save as much. If you want to go on a lot of vacations, save more.

    For families with one parent working full time while the other parent takes care of the kid, it’s still only 15% of their salary. The magic of percents is that they’re the same percentage of someone’s income. In this case, the 15% may only be $4,500 per year. If you can live on 50% of your income, then you can spare 15% of your income. If you’re living on more, then you need to make more, or spend less.. not save less.

    When talking about this poor family, you said “not enough for a comfortable retirement”.. you’re not getting the point of 15%.. 15% of someone’s salary that they’re living on will be plenty. 15% of someone’s salary who is making 1 million is also plenty. The point of 15% is that 15% will grow to be enough to provide you with the same standards you were used to before retirement.

    A person making 200k-300k per year who can only save 15% will be in the exact same boat as the person making 30k per year who saves 15%. They’ll both be able to make ends meet when they retire, and maintain their lifestyle. Just one person’s lifestyle is a bit more.. expensive than anothers.

  10. Obviously, there is no ‘one number’ for everyone. This is just one sample scenario with explicit and detailed assumptions. The limitations of this paper are very clearly laid out by the author.

    Like I said, you have to read the whole paper to understand the context. I think it’s a fun exercise – I would have done it myself, but (a) it sounds like a lot of work to input and process all that historical data and (b) I don’t know how 😛

  11. This is interesting – thanks for the link!

    It seems worth highlighting that his estimate assumes a substantial contribution from social security – he points out that if you instead assume that social security may not exist, that the results are “very, very different.” I’m sure it’s partly because I’m at the young end of people thinking about these things, and partly because I’m pretty cynical these days, but I’m pretty skeptical about the potential for a real income from social security by the time I’ll need it.

  12. LordOfTheManor says:

    Luckily my 401k has a generous match rate so including that “free” money that’s about 17% right there.
    Pretty much anything else we put in Roth IRAs is gravy

    I’d like to get, and keep, it in the 25-30% range if possible

  13. I would say the MINIMUM should be 10%. But, it should be a consistent 10% throughout a person’s career. If a person waits until they are 30 to start saving, then 15 – 20% is probably going to be required in order for a person to keep their current standard of living during retirement.

  14. AA says:

    Afterall, you can only contribute so much a year in retirement accounts (401k limit + IRA limit)?

    I hear that so often. Am I the only one on the planet that, after maxing out pretax vehicles, puts money into a taxable “retirement” accounts?


  15. And Wes makes a good point that its good to have a non-retirement “retirement” account that can be accessed early if you retire early. You might need a bridge account to last you before you start withdrawing from an IRA/401k or even SS.

  16. I hear that so often. Am I the only one on the planet that, after maxing out pretax vehicles, puts money into a taxable ?retirement? accounts? -Wes

    I do right now, but with the advent of the Solo 401k, I can put over $40,000 away a year! I’m liking the flexilibity of it, and also the new Roth 401k that’s now in limited availability. I’m sure I will have some money in taxable too for that bridge account.

  17. Interesting post and article. The comment about putting money into taxable retirement accounts is so important. If all of us PF bloggers and readers are diligently putting away 15-20% and more of our income into 401(k)’s, IRA’s and other tax deferred vehicles then chances are many will accumulate enough to retire on before the 59 1/2 non-penalty withdrawal age. What happens if you are ready to retire at 55, 50 or Yipes, 45? It is so important to have a chunk of your money in taxable accounts such as mutual funds, money market accounts, CD’s cash in a safety deposit box, oh wait that is blasphemy. You don’t want to get caught peering over an unfinished bridge to the other glorious side of retirement.

  18. Andrew has a great point re: taxable savings as well. Though I think you can make roth withdrawels (principal) early without penalty. That’s a boon to the Roth 401k concept.
    Dave, I agree with you re: Bigmouth’s comment’s on planning for death. Very few people can predict when/if death or cancer will occur – it’s best to buy life insurance to protect your family and not let remote possibility effect your savings plan.
    Wes, after I max out our 401ks, I put money into IRAs – non-deductable and then save additional money into ETFs in our low commission brokerage account.
    Jonathan, you make an excellent point about the ability to save larger amounts with an individual 401k. I love it.
    Most recently I’ve been exploring the idea of a DBDC plan – it’s a combination of a solo 401k combined with a traditional pension plan. It can help you save even more money – depending upon age – anywhere from 15k – 120k extra tax free.
    I may create a post on it at my blog this month.
    Have a wonderful day,

  19. BTW, I’m a bit skeptical of two things:

    1. social security actually paying us anything when we retire – for me that’ll be in 30 years
    2. being able to withdraw from my roth tax free (i think congress will tax it in the future)

  20. Makingourway:
    I don’t do non-deductable IRA’s because I plan to retire fairly early, which would make an IRA type account off limits. My post 59.5 funds are in tax deferred, my pre 59.5 funds are in taxable brokerage accounts.

    As for Soc Sec, I believe people like you and I, i.e. those who plan, will not see much of it. I see a high income limit being put in place, so that Soc Sec will go back to being a safety net for those that didn’t plan or fell on hard times.

    As for Roth’s being taxable in the future – I can see that happening, too, although not for dollars you are putting today. I can see a Roth “B” coming out in a few years that has some tax on – either a reduced cap gain or high threshold income tax.


  21. Wow!! I thought I was doing so well at my piddly 7-8%. Although, I do have some real estate, rental property, that will definitely help. one interesting thing, if most Americans started saving instead of spending more than they have… recession in a consumer society?

  22. How Can I Withdraw Money from My Roth IRA?
    Money contributed to your Roth IRA may be withdrawn tax-free at any time. In addition, you can withdraw investment earnings tax-free if they are a “qualified distribution.”

    A qualified distribution meets the following requirements:

    You have reached age 59 ?.
    You are disabled.
    You are the beneficiary of a deceased IRA owner.
    You use the distribution to pay certain qualified first-time homebuyer amounts.
    You have significant unreimbursed medical expenses.
    You are paying medical insurance premiums after losing your job.
    The distributions are not more than your qualified higher education expenses.
    The distribution is due to an IRS levy of the qualified plan.
    You withdraw money in a series of ?substantially equal period payments? based on your life expectancy. Please consult your tax advisor or visit the IRS website at for details on this method.

  23. 20/30/50

    uhhh….what about taxes? if you pay taxes, that leaves you with 10/15/25% approximately, prob not so smart. social security doesn’t exist for those of us born significantly after woodstock.

  24. This is all smoke and mirrors. So many variables not in consideration. There will likely be a handful or more financial recessions and a couple of meltdowns over the next two or three decades. Global economy, political unrest everywhere, real estate bubbles, etc. Putting that money away in a retirement account doesn’t guarantee anything. One big terrorist attack, a few large natural disasters, a financial crisis on Wall Street, etc. could wipe you out in a day. That doesn’t even include a personal crisis. I had a friend who lost over half of his huge nest egg to a divorce which resulted in him losing his business and a big alimony on top of that.

    So don’t save or plan? No, that’s not what I’m saying. Just be aware that you are putting your money in the hands of people you don’t know and once it’s in the hands of the banks it’s completely vulnerable to the stability of the world around you. So live a little along the way, ya know?

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