Monday, September 11, 2006

How Much to Save - THE NUMBER

How much should one save from every paycheck? If one’s goal is to retire comfortably, the minimum number is 12% of one’s before-tax salary. This is based on an article by Charles J. Farrell, J.D., LL.M. He recommends that people save 12% of their salary (or income) from 30 to 65, the age of retirement.

His rationale is that saving 12% of one’s salary will result in a next egg of 12 times one’s salary at 65. At a real growth rate 5% and a 5% withdrawal rate, this next egg will provide 60% of one’s final salary for many years. With Social Security providing another 20%, the retiree will have an income of 80% of his final salary.

80% will be equivalent to their actual pre-retirement available income since they previously had been reducing income by 18% (saving 12% and paying 6.2% in Social Security tax).

Personally, I am saving at a 20% rate for a couple reasons.

First, I’d like to retire earlier than 65. Since I will have more retirement years, I think will need about 16 to 18 times my salary saved when I retire. I will know for sure in the next month since I have requested an estimate from my financial advisor.

Second, I don’t believe that Social Security income benefits will be available to me at 65. Therefore, I plan to provide 100% of my retirement income needs. I’ll consider it a bonus if Social Security income benefits are available.

This is not financial or saving advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC


GolbGuru said...

I think your saving rate of 20% is more reasonable than the 12% recommended. I am not sure the 12% accounts for inflation, unexpected medical costs and other traps of time.

Super Saver said...

Good point. I agree that one should also take action in areas one can control (i.e. increase saving percentage) to offset risks one cannot be control (e.g. higher inflation, lower real rate of returns, or higher than expected medical costs). Also, one should consider good use of insurance (medical, life, and liability) for additional protection.

Anonymous said...

I know I am commenting on an old post here but, I am now 44, single, never married no kids, and have been sort of playing catch-up in making contributions to my 457 NYS deferred Compensation Plan. I am contributing 51% of my $35K yearly salary.