Written by: Corey Janoff
This post was originally published on our previous blog website on May 17, 2018 and has since not been revised and/or updated.
Guidance on saving for retirement isn’t as simple as “everyone should do this”. We’ll cover some general rules of thumb that will apply well to most people, but each person or household has a unique set of circumstances that will dictate how much they should actually save – whether it be more or less than the general rules of thumb.
Some of those Variables Include:
When will you start saving (or when will you start working – some people are in school longer than others).
How long will you save for (how long will you work for). People have different goals for how long they want to work.
When will you retire? What age? This will dictate how long of a retirement you must plan for. Which leads us into the next variable:
How long will you live? This is very unpredictable. You or your spouse may live to be 100. Or you might die in your 80’s or 70’s (or earlier). Obviously the longer you live in retirement, the more you need to have saved up. And finally…
What do you want your lifestyle to be like in retirement? Do you envision a retirement of enjoying the simple things, like reading books on your porch and working in the garden? Or do you want to travel the world and dine at fine restaurants? The more expensive the lifestyle, the more you will need to save.
How Much to Save for Retirement
A lot of the retirement savings guidance you see online or in the news suggests people should save between 10-15% of their gross income for retirement. I’m going to recommend you save at least 20% of your gross income for retirement, and here’s why.
Length of Time Spent Saving
If you start working and saving 10-15% of your income in your early 20’s and consistently do that until your late 60’s, then yes, 10-15% will probably be enough. However, most people don’t truly start their careers and really start saving for retirement in their early 20’s. And they may not want to work until they are close to 70 years old.
Physicians, for example, don’t get their first “real” job until they are in their early to mid 30’s in most cases. And the stresses and demands of the profession make it challenging to work into their 70’s. So if you don’t really start saving until your late 20’s to mid 30’s and you want to retire by your early to mid 60’s, then you need to save more than 10-15% of your income.
The average person in America retires around age 62-63 – sometimes this is a forced retirement due to health reasons.
If you start saving for retirement at age 40 and want to stop working in your early 60’s, you need to save more than 20% of your income for retirement! Again, everyone has a different set of circumstances.
Living Expenses
Saving 20% of your income gets you accustomed to living on 80% of your income. This is a big deal. When you retire, you will likely be able to transition into retirement and continue living the same lifestyle – maybe even increase your lifestyle and have more fun! It will make the transition into retirement smother and much more exciting than it is for most. Most Americans have to scale back and really budget when they get to retirement, because they were used to living on about 95% (or more) of their income while working.
If you make retirement savings a priority before doing anything else, your other expenses will naturally fit into the budget. Humans are very adaptable to the environment and that goes for our spending, as well. If the money is available, we will find a way to spend it. But if it is socked away for retirement before the brain even has a chance to register it, it’s as if you never even had it in the first place.
Future Expenses
Many people suspect their expenses will decrease in retirement compared to their current spending. Once children are out of the house, student loans are paid off, mortgage is paid off, maybe move into a smaller house, spend less on gas due to no longer commuting for work, etc.
However, some expenses may increase, or new expenses will come into play. You might spend more money on travel, or going out on date nights. You may do more charitable work and donate more money to causes you believe in that you didn’t really have time to look into while working.
Maybe you end up partially supporting adult children. Some studies show upwards of 70% of parents still provide some financial assistance to their adult children.
Healthcare costs will likely increase when you are in retirement. Especially with how underfunded Medicare is, there is a decent chance we will be responsible for a larger portion of our healthcare costs in the future.
Speaking of Medicare and other social programs, such as Medicaid and Social Security, all of those programs are massively underfunded. There are two solutions to that problem. Cut spending, or increase taxes to provide more funding to the programs. While those programs will likely still be in existence in the future, the payouts could be slimmer than what our parents or grandparents received. Also, taxes could rise, which means a greater portion of your retirement savings could go to taxes in the future.
Time will tell, but spending in retirement could actually be a similar amount to spending while working.
Does Employer Money Count Towards the 20%?
Saving 20% of your income does not include the money your employer may be contributing to your retirement account. The reason we ignore what our employer does for us is because we cannot control what they do. I have seen employers completely stop funding employee retirement accounts. Also, there is a good chance you will change jobs multiple times throughout your career. Depending on the vesting schedule, you may not even get to keep the money your employer put in your account unless you stay for a certain number of years. If you do change jobs, who knows how generous future employers may be when it comes to funding retirement plans. Whatever the employer does on your behalf, treat that as icing on top of the cake.
20% Seems Unreasonable
Now, you may be saying to yourself, “Corey, 20% is too much. I can’t save 20% of my income.” If that is the case, some adjustments should be made so you can save 20% of your income for retirement. Especially if you earn over $100,000 per year. If you earn a six-figure income and are unable to save 20% of that for retirement, you need to change your spending habits. Earning over $130,000/year puts you in the top 10% of income earners in America. Stop making excuses. Reign in your spending. That could mean finding less expensive housing, driving a less expensive car, cutting down on travel or dining out, or all of the above.
Or you could earn more income and save all of those additional earnings. If you are paid hourly or per shift, there are often opportunities to pick up extra work and earn extra income. You could also moonlight on the side. Our economy is booming right now and employers are struggling to find enough workers to meet the demand. You could boost your annual earnings by 10% by simply working 1-2 extra days per month.
“I’ll Save More When…”
I hear this all the time. “Once the kids are out of daycare and in school, I’ll be able to save more.” Or, “Once the student loans are paid off, I’ll be able to save more.” In theory, statements like these can be true. However, in practice, they are harder to execute.
Kids generally get more expensive as they get older. Daycare costs are replaced with school related expenses (not even talking about private school), and after school activities, like sports, music lessons, etc. Also, kids eat more as they get older (a lot more) and have more expensive hobbies and interests. Soccer cleats, shin guards, lacrosse sticks, football pads. None of that stuff is cheap. New video games and cell phones cost a lot more than a Barbie doll and a box of crayons.
When a major expense, such as student loans, is eliminated, you have a choice to make. You could immediately direct the amount that was going towards the student loans into retirement. Or, you could find another use for it. Maybe your old car could be replaced and a new car payment would conveniently be the same amount as your student loan payment. Or, as your family has grown you would really like to move into a bigger house and no longer having that student loan payment would enable you to afford the bigger mortgage payment.
Again, make some adjustments so you can save 20% of your income now (or at least get close to it). Planning to save more tomorrow is easier said than done.
Just do It
The hardest part is getting it started. After a few months of doing it, you will find it to be much easier than you initially thought. Your budget will adapt. You may not be able to spend as much on new clothes, or buy as many bottles of nice wine or bourbon, or scotch. But you’ll be fine.
So, if you want to be able to retire at a reasonable age and have an enjoyable retirement, start saving 20% or more of your gross income. You’ll be glad you did it.
