Do You Know How Much You Should Be Saving For Retirement?

Key Takeaways

  • Down the road, in retirement, you may want to abide by a safe withdrawal rate to ensure you don’t run out of money.
  • A safe savings rate might be more relevant to you if you’re decades away from retirement.
  • If you’re delaying saving for retirement, you might be surprised how much more you’ll have to save to catch up.

Over the past several decades, automobile manufacturers have come up with all sorts of safety features to help keep us safe on the roads. Fifty years ago, you could set a baby in a basket on the floor of a car and be on your way! Airbags didn’t exist, and seat belts weren’t required by law until 1968.

 

Safety features in cars have certainly changed dramatically over the years, but another area where safety has become a real consideration is retirement savings.

In 1994, financial adviser William Bengen’s research was published regarding how much retirees could safely withdraw from their savings without running out. He concluded that 4% was a safe withdrawal rate.

 

Now, you may be decades away from retirement, so perhaps “safe withdrawal rate” doesn’t resonate with you. Instead, you may want to consider what a safe savings rate would be at this point in your life.

Perhaps you’ve heard of the 15% rule, which recommends you save 15% of your pretax income for retirement. Well, depending on when you start saving for retirement, that 15% may or may not work for you. Let’s consider some examples.

Say you end up at $100,000 in income and want a 50% replacement rate and a safe withdrawal rate of 4%. If you’re 25 years old and planning to retire at 60, you have 35 years to save. You would need to save about 14%, at an earnings rate of 5%.

Now, say you wait five years to start saving and you have 30 years until retirement. You’d need to up that savings rate to 19%.

And if you wait until you’re 40 to start saving? That savings rate goes up to 38%.

 

As you can see, that 15% recommendation can really vary. Generally, younger generations are delaying the start of their retirement savings by about five years, as compared to their parents’ generation. This is occurring for a variety of reasons – student debt is a big one, but so is the prevalence of part-time or gig-economy jobs where employees don’t qualify for company-sponsored plans (not that you need one to save for retirement!).

If you’re delaying your retirement savings, take some time to calculate what your safe savings rate will be, making sure to plug in your income numbers if they differ from our example. For more information on this topic, check out our blog post Balanced Cash Flow – Enjoyment Now or Later? Until next time, enjoy.

Gary

Copyright © 2019 Protinus. All rights reserved.

Gary has provided wealth management services to clients for over 30 years. He is credentialed in financial services with practical experience in all areas of finances and money. He is the author of Changing the Conversation, Wealth of Everything, and co-author of The Business Battlefield.

He is genuinely interested in getting to know the person in front of him. Who are they? What’s most important to them? Where do they want to go in life? Whether he’s advising clients, mentoring his team, or coaching entrepreneurs, Gary is always simplifying complexity and motivating others to take the next action that’s right for them.

Copyright © 2022 Protinus. All rights reserved. 

Did you enjoy "Do You Know How Much You Should Be Saving For Retirement?"?

Sign up for our blog to receive notifications the second a new article is posted.