Written by: Corey Janoff
This post was originally published on our previous blog website on December 20, 2017 and has since not been revised and/or updated.
Last post of 2017! When asked about saving for retirement, there are different guidelines floating around. The most common ones I see recommend saving between 10-15% of your income for retirement. I typically advise clients to invest at least 20% of their income for retirement. Why, do you ask?
The 10-15% guideline is great if you start working and investing for retirement in your early 20’s and work until your late 60’s. However, most people I speak with don’t really get started on investing for retirement until their late 20’s or early to mid 30’s and they want to retire before they are in their late 60’s.
In playing around with various retirement projections, these figures hold true. If you start investing 10% of your income at age 22, work until age 67, and plan to maintain the same spending level in retirement, the numbers look promising. If you can average a long-term rate of return between six and eight percent on your investments, retirement should work out well for you. The odds of success are even more promising if your employer puts money into your retirement account and if there is any form of social security in 50 years.
If you start investing 15% of your income for retirement at age 27 and work until you are 65, the numbers look promising as well.
If you start investing 20% of your income at age 30 and work until you are 62, and your employer puts some money away for you, the numbers appear to pan out with similar success. If you start investing later than age 30 and want to retire before age 60, you should probably save more than 20% of your income for retirement.
So, we can start to see a trend here, the sooner you start investing and the longer you plan on working, the less you need to invest in order to reach your goals. The later you start investing and the less you plan on working, the more you need to invest. There is no one-size-fits-all approach.
Overcoming the Initial Hurdle
When I talk with people about investing for retirement and tell them they should invest at least 20% of their income for retirement, sometimes they get a little uncomfortable. 20% of gross income is a lot of money! If you earn $100,000 per year, 20% of that is $20,000 (thank you captain obvious). That $80,000 turns into about $55-60k after taxes, which is about $4,500 to $5,000 per month. That is what you have to budget for housing, food, student loans, car payments, insurance, clothing, child-related expenses, entertainment, vacations, charity, and the money you lose in your fantasy football league every year (my team was eliminated in the first round of the playoffs for anyone wondering).
When looking at retirement savings figures in annual, or even monthly amounts, it can be intimidating. If you aren’t investing anything, it is hard to go from zero to twenty percent instantly. Any savings increase is a productive one and you can build on it. So where should you start? If you didn’t ready my blog from the beginning of the year, check out the Save More Tomorrow post I wrote in January.
Instead of carving out a percentage of your annual or monthly income, let’s look at it from a different angle. What if we save one hour of our wages every day?
Many people are paid hourly, so this is an easy calculation. Every day, go home and stick that much in a piggy bank. Or better yet, transfer it from your checking account to an investment account every day (5 days a week). If you make $20/hour, transfer $20 per day into an investment account. If you earn $40/hour, invest $40 per day into an investment account. If you earn $100/hour, deposit $100 per day into an investment account.
If you are paid a salary instead of an hourly wage, divide your salary by 2,000 (the approximate number of work hours in a year) to get your hourly rate. So if you are a physician working at a hospital with an annual salary of $250,000, your hourly rate is $250k divided by 2,000, or $125. So invest $125/day into an investment account.
If you do the math, one hour of daily income equates to 12.5% of your total income (assuming a standard eight-hour work day). Not quite the 20% mark, but better than nothing. If you are just getting started in your career, this would be a great starting point. Get in the habit of automatically transferring one hour worth of wages per day into an investment account and we can build on that.
How simple does that sound? You work for one hour and that covers your retirement savings. Your earnings from the remaining seven hours of the workday can go towards whatever else you want.
So there you have it. It doesn’t take much. Just one hour per day, five days a week.
Disclosures:
This is not to be taken as individualized advice. Any examples are hypothetical and for illustrative purposes only. Any investments involve potential loss, including total loss of principal. Consult with your financial advisor for determining an appropriate investment and retirement savings plan for you.
