How much should I be saving? Am I on track?
Savings Rate (Elements Sr) is the percentage of your annual gross income being saved for future use.
Your savings rate tells an important story about your current financial wellness and preparation for long-term financial security. Setting a reasonable savings goal and sticking with it is highly correlated with financial independence. Savings also functions as a cushion in your budget against unexpected liquidity needs (losing a job or a large expense out of the blue) and hence reduce stress and lead to sleeping better at night. Finally, it’s one of the main levers we have to grow wealth over time to reach financial independence.
Yet, most of us struggle to save money for the future because humans, by nature, have a tendency to value near-term payouts more than longer-term (i.e. “Present Bias”, see: The Marshmallow Experiment - Instant Gratification - YouTube). This often results in us spending before saving instead of the other way around. Lifestyle and consumption tend to dictate how much we save, and the savings rate usually gets squeezed.
Rather than give the classic financial advisor answer of, “Well, it depends,” or take the easy way out and just say, “Save as much as you can,” I want to try to clearly communicate a straightforward answer to the question of how much to save. It’s true that there are a number of variables on which a mathematical answer to how much you should save depends. There are also a range of other considerations like your personal values and attitudes toward money and risk that can create a range of reasonable answers for you that may differ from someone else. And, of course, if you’re living paycheck to paycheck on a low income, just saving a little bit can be a challenge.
Nonetheless, here’s my attempt at a straightforward answer, with the caveat that none of us knows what the future holds. All we can do is make a guess, which is usually based on historical trends (that may or may not continue) and our own comfort level with uncertainty.
How much you need to save depends chiefly on when you start
We all know that we should be saving as much as we can as young as we can. The power of compounding investment earnings on those early savings has a profound effect on the end result. It’s a simple mathematical fact that the younger you are when you start saving, the longer you have for those savings to grow (and the longer you have for that growth to grow). Sure, you may not be making much money in your 20s, but those early savings have the longest to grow. Even more, these are the years that we form the long-term habits that tend to persist (for better or for worse) once the paychecks start to grow.
How much to save in order to retire by 65:
If your goal is to retire at age 65 without needing to step down your living standard in retirement, the below table shows the required savings rate based on the age when you begin regular and recurring savings and assuming you continue saving at that same rate. These benchmark savings rates assume that you are invested in a balanced investment fund that produces reasonable returns, and also accounts for the impact of inflation and pay raises throughout your career.
Source: Fundamentals of Financial Planning 7th Edition, Dalton, Michael et al., 2021
Say you start saving 13% of your salary in your late 20s, if you maintain that savings rate throughout your career, you should be on track to retire by age 65. However, if you wait to start saving for retirement until age 45, you’ll need to save 20% or more of your salary to end up with the same balance once you reach age 65. You may say, “But that’s only 7% more,” but you and your family have already grown accustomed to spending that money. Delaying your retirement savings for just a decade not only increases the required savings rate you’ll need (which nearly doubles for each decade) but attaining that higher savings rate will likely necessitate more significant changes to your budget and lifestyle.
On the plus side, any employer match you’re getting to your retirement plan counts toward these percentages (i.e. say your employer matches your 4% retirement plan contribution dollar for dollar, you’re already at an 8% savings rate).
Am I on track?
Maybe you were still in graduate school into your mid-30s, you focused on paying off debt first, you experienced a major setback, you pursued other interests, or took a little longer to settle into a steady career path where you felt able to start putting money away. You’re not alone, and you may not be as far behind as you think.
The below benchmarks show the amount of investable assets (i.e. not including your primary residence) you should have as a multiple of your gross income at various ages to fall into the lower required savings rate of 10-13% of gross pay needed to be on track to retire by age 65 and maintain your lifestyle.
Source: Fundamentals of Financial Planning 7th Edition, Dalton, Michael et al., 2021
The first thing to notice is how slowly the benchmark ramps in the early years when your earnings are lower and your invested savings (and therefore earnings) are smaller. You’re considered “on track” if you have just 0.6-0.8x your annual gross income in savings at age 30. This only increases to 1.6-1.8x at age 35. Whereas you should have 8-10x your gross income at age 55, and that should double to 16-20x by age 65. People are often shocked by how much their net worth grows in their late 40s and 50s, all by saving just 10-13% of their income. Behold, the power of compound earnings!
How much should I be saving overall?
If you’re saving for other goals like a downpayment on a house, or college tuition or you’re looking to make work optional before age 65, you’ll need to save more than the ranges above. These benchmark savings rates, therefore, function as a floor, and your actual overall savings rate should probably be higher depending on your goals. The range of “healthy” savings rates is quite wide, but generally, 15-20% is appropriate for most situations, while higher savings rates may be required temporarily for specific goals (like building up a downpayment), or over a longer term if reaching financial independence sooner or early retirement is your aim.
Where do you currently fall in the range of healthy savings rates? Where do you need to be to achieve your goals?
Start with what you can do, but get started:
If you find yourself behind the benchmark, it’s ok, you’re not alone. But you may need to save a higher percentage of your income to catch back up by traditional retirement age. You don’t need to close the gap in one year either, but you do need to get started. Here are a few tips for increasing your savings rate.
Start by building an emergency fund: Plan for unexpected expenses, they happen… unexpectedly. Without a healthy emergency fund, you may end up going into costly debt to handle unexpected expenses, which can hobble your ability to save. Your emergency fund should be 3-6 months’ worth of expenses invested fairly conservatively in a brokerage or money market account that’s easy to access.
Get the match! Make sure you’re taking advantage of any employer match (that’s the closest thing to free money there is).
Automate your savings. Figure out how much you want to save from each paycheck, and set up an automatic transfer to a brokerage account each payday. Eventually, you won't even notice, and you should be able to increase it over time.
Avoid lifestyle creep: Lifestyle creep comes in many forms and we’re inundated with marketing and social pressures that tell us we need/deserve X, Y, or Z. As your income rises, allocate those raises to your automated savings program first.
Bank any windfalls: If you receive a windfall (a bonus, inheritance, tax refund), treat yourself to a little something special, but put the bulk of it into savings and continue living as if you didn’t get that money.
Taxes matter, especially over the long run. Check out our article on the savings waterfall to prioritize where you’re stashing and growing your savings to decrease the tax burden: Retirement Savings Waterfall — Oakleigh Wealth Services Often, paying choosing to pay taxes now is better in the long run than deferring them until later.
Avoid “fad” budget diets: Don’t cut things in your budget that make your life easier or bring you joy. Of course, you may need to make tradeoffs, but that afternoon latte you look forward to each day, cocktails with friends after work, your house cleaner, and the weekly babysitter, should not be the first to go. Find a budget that works for you, and that is sustainable over the long run.
Ask for help: Find a fee-only financial planner who can dig into the numbers, but more importantly who gets to know you, your family, your values, and your pain points. To create peace of mind and outcomes that are meaningful to you, it often takes help from the outside. Find an advisor who is a fiduciary and can help you craft a holistic financial plan, hold you accountable without passing judgment, and help you adapt your plan as life changes. Real financial planning is not one-time, one-size-fits-all.
How much should I be saving? Am I on track?
Want to see if you’re on track?
At Oakleigh, we use a tool called Elements, an easy-to-use mobile app that helps you measure and monitor how financially healthy you are. Just like a physician measures your vital signs, we use the Elements scorecard to gauge how well you’re doing in each area of your financial life. From there we can help you decide where to focus your efforts and how to better align your time, money, and energy with what really matters to you.
