What Percent of My Salary Should I Save for Retirement? ?(Without a Pension or Social Security): Some Benchmarks by Starting Age
Start Saving & Investing When You Are Young, And Don't Invest Overly Conservatively
This graph (click to enlarge) proposes some benchmarks for those planning to retire without a pension or Social Security. While your specific circumstances may differ from what I have assumed (see "Key Assumptions" below), they won't change the basic messages that I think this chart sends, namely:- The earlier you start saving for retirement, the better off you are (i.e., the less you will need to save each year)
- The lower your return on investment, the more you will have to save each year
- If you will not have a pension or Social Security, you very likely need to save at least 10% of your salary each year, regardless of when you start, or how much money you make.
- If you wait until age 30-35 to start saving, you could easily need to save 20-40% of your salary each year in order to fund a comfortable retirement (given the assumption of no pension or Social Security)
- Waiting until age 35 can mean that you will need to save nearly twice as much per month as would have been required if you had started at age 25
- If you wait until age 40-45 you'll probably need to change some of the assumptions....
While you're probably not surprised that you're better off starting early and earning a high return, you may be surprised at how quickly the savings burden can become unmanageable if you do not.
The Impact of Starting Age on Annual Retirement Savings Needed, in Dollars
The chart suggests that, without a pension or Social Security, if you start your retirement savings at age 25 and earn the 8% nominal return typically assumed by many retirement planners, you'll need to save about 16% of your annual salary each year.?This means that if you earn $50,000 a year, you will need to save about $667/month or $8,000 your first year -- $16,000 if you're earning $100,000. Wait 10 years, and the yearly numbers jump to $14,000 and $28,000 (in today's dollars). Future years' contributions will need to be the appropriate percentage of that year's salary.Note: If long-term inflation is about 3%, then 8% nominal return corresponds to the 5% "real" - after inflation - return line on the chart. (If you're not familiar with real returns, see?About Nominal & Real Rates of Return.)
The Impact of Rate of Return on Annual Retirement Savings Needed, in Dollars
Similarly, if you earn $50,000/year, start saving at age 25, and earn 6% nominal (3% real) return instead of the 8% assumed in the previous section, your contribution will need to increase from $667/month to about $1042/month or $12,500/year in the first year. With a $100,000 salary, that translates to $2084/month or $25,000/year.The 7% real (10% nominal) return line is included as an upper limit. Over very long periods of time, 50 years or more, a theoretical 100% stock portfolio has returned about 10%. However, few planners would recommend a 100% stock allocation.
These results are based upon your actual returns, not on what you planned to earn. So, be realistic; choose expected returns that are consistent with historical returns for asset allocations similar to yours.
The Key Assumptions
This post illustrates the impact of two important factors in retirement planning: when you begin saving for retirement, and how much you earn on your investments -- assuming you won't have a pension or Social Security. To provide a quick overview of the impact, I've assumed some typical values for some of the other critical factors. I've assumed you will retire at age 65, and spend about 75% of your current annual income (adjusted for inflation) each year in retirement. In addition, I've assumed that you plan to withdraw 4% of your retirement portfolio to fund your first year of retirement expenses, and increase that amount by inflation each year thereafter (see "Related Materials" below for more on the 4% withdrawal approach).What If My Situation is Different??
Even if my assumptions are a little off in your case, they'll likely at least put you in the right ballpark (unless you will have a?pension or Social Security). For a more accurate estimate, and to get a better feel for the impact of some of the variables, I encourage you to enter your own data into?my simple retirement savings calculator/spreadsheet. The big picture will probably remain the same. However, specifics of your situation, such as your expected spending level in retirement, can change some of the details.Adding Social Security
Having a pension or Social Security makes a big difference. ?We'll deal with that in the next post in this series.Related Materials:
About Nominal & Real Rates of Return?discusses the difference between the two.My SIMPLE Retirement Savings Calculator/Spreadsheet?the spreadsheet used to generate these results
Start Retirement With a 4% Withdrawal Rate?A discussion of the 4% withdrawal concept, from Time Magazine.
Start Saving For Retirement When You're Young: Some startling charts showing the difference between starting early and starting later. Note: the results in that chart are slightly different since they are not adjusted for inflation.
Average Stock Market Returns Since 19xx: A review of historical stock market returns for reference
100 Years of Treasury Bond Interest Rate History : A review of historical Treasury bond returns
A Retirement Planning Calculator/Spreadsheet: a more complete retirement planning spreadsheet.
For lists of other popular posts and an index of stock market posts, by subject area, see the sidebar to the left or the blog header at the top of the page.
Copyright ? 2012 Last modified: n/a
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