How Much Savings Should I Have Accumulated By Age?
If you want to achieve financial independence, you’ve got to implement a savings routine. I don’t want to hear excuses as to why you can’t save if you want to be free. Go somewhere else please. If you are serious about living life on your own terms, study my recommended savings chart carefully.
Your savings rate should increase the more you make. To do this, you’ve got to spend at a slower rate than the rate of your income increase. I’m trying to use realistic numbers here so that folks don’t overly bitch and moan. I started saving 50% of my after tax income when I began earning more than $60,000, so please, save your excuses for the government instead.
Savings amounts are important, but what’s more important is your expense coverage ratio given everybody has different lifestyles. In other words, how many years (or months) of expenses can your savings cover in case your income goes to zero? Given nobody can work forever, we must increase our expense coverage ratio the older we get because we will have less ability to earn. At this point, it’s time to start drawing down our savings.
FINANCIAL SAMURAI PRE AND POST TAX SAVINGS GUIDE
| Income Level | Savings % | Pre-Tax Savings/Yr | Post-Tax Savings/Yr | Fed Tax Rate |
| <$25,000 | 5% | <$1,250 | $500 | 10%-15% |
| $25,000-$35,000 | 10% | $2,500-$3,500 | $1,000 | 15% |
| $35,00-$45,000 | 15% | $5,250-$6,750 | $1,000 | 25% |
| $45,000-$65,000 | 20% | $9,000-$13,000 | $1,500+ | 25% |
| $65,000-$85,000 | 25% | $16,250-$17,000 | $1,000-$5,000 | 25% |
| $85,000-$100,000 | 30% | $17,500+ | $8,500-$13,000 | 28% |
| $100,000-$150,000 | 35% | $17,500+ | $18,000-$35,500 | 28% |
| $150,000-$200,000+ | 35%+ | $22,500 | $35,500-$53,000+ | 28%+ |
I recommend everybody start off with 10% and raise their savings amount by 1% each month until it hurts. If you’ve ever had braces, you get the idea. Keep that savings rate constant until it no longer hurts, and start raising the rate by 1% a month again. If you make more than $200,000, certainly shoot to save more if you can. You can theoretically achieve a 35%+ savings rate in two short years with this method!
Please note that I am making 401K and IRA contributions a priority over post-tax savings. The reasons are: 1) we have a tendency to raid our post tax savings, 2) tax free growth, 3) untouchable assets in case of litigation or bankruptcy, and 4) company match. Obviously you need some post-tax savings to account for true emergencies. Ideally, my goal for everyone is to contribute as much in their pre-tax savings plans as possible and then save another 10-35% after tax.
RECOMMENDED EXPENSE COVERAGE AMOUNT BY AGE
The below chart is an expense coverage ratio chart that follows someone along a normal path of post college graduation until the typical retirement age of 62-67. I assume a 20-35% consistent after tax savings rate for 40+ years with a 0-2% yearly increase in principal due to inflation. The other assumption is that the saver never loses money given the FDIC insures singles for $250,000 and couples for $500,000. Once you breach those amounts, it’s only logical to open up another savings account to get another $250,000-$500,000 FDIC guarantee.
Expense Coverage Ratio = Savings / Annual Expenses
| Age | Category | Expense Coverage Ratio | Savings Based Off $65K |
| 22-25 | Accumulation | 0.0 – 0.3 | $0 – $19,500 |
| 26-30 | Accumulation | 0.5 – 1.5 | $32,500 – $97,500 |
| 31-35 | Accumulation | 1.0 – 4.0 | $65,000 – $260,000 |
| 36-40 | Exploration | 3.0 – 6.0 | $195,000 – $390,000 |
| 41-45 | Mid-life crisis | 4.0 – 8.0 | $260,000 – $520,000 |
| 46-50 | Exploration | 6.0 – 10.0 | $390,000 – $650,000 |
| 51-55 | Crunch Time | 7.0 – 12.0 | $455,000 – $780,000 |
| 56-60 | Crunch Time | 8.0 – 15.0 | $520,000 – $975,000 |
| 61-65 | Dream Time | 10.0 – 20+ | $650,000 – $1,300,000 |
| 66-70 | Spend Time | 10.0 – 13.0 | $975,000 – $845,000 |
| 71-100 | Spend Time | 0.0 – 3.0 | $0 – $195,000 |
| Source: Financial Samurai 2012 | |||
Note: Focus on the ratios, not the absolute dollar amount based on a $65,000 annual income.
Your 20s: You’re in the accumulation phase of your life. You’re looking for a good job that will hopefully pay you a reasonable salary. Not everybody is going to find their dream job right away. In fact, most of you will likely switch jobs several times before settling on something more meaningful. Maybe you are in debt from student loans or a fancy car. Whatever the case, never forget to save at least 10-25% of your after tax income while working and paying off your debt. If you have the ability to save 10-25% after tax, after 401K and IRA contribution up to company match, even better.
Your 30s: You’re still in the accumulation phase, but hopefully you’ve found what you want to do for a living. Perhaps grad school took you out of the workforce for 1-2 years, or perhaps you got married and want to stay at home. Whatever the case may be, by the time you are 31, you need to have at least one years worth of living expenses covered. If you’ve saved 25% of your after tax income for four years, you will reach one year of coverage. If you saved 50% of your after tax income a year for five years, you will have reached five years of coverage and so forth.
Your 40s: You’re beginning to tire of doing the same old thing. Your soul is itching to take a leap of faith. But wait, you’ve got dependents counting on you to bring home the bacon! What are you going to do? The fact that you’ve accumulated 3-10X worth of living expenses in your 40′s means that you are coming ever close to being financially free. You’ve hopefully built up some passive income streams a long the way, and your capital accumulation of 3-10X your annual expenses is also spitting out some income.
Your 50s: You’ve accumulated 7-13X your annual living expenses as you can see the light at the end of the traditional retirement tunnel! After going through your mid-life crisis of buying a Porsche 911 or 100 pairs of Manolo’s, you’re back on track to save more than ever before! You are 100% in tune with your spending habits, therefore, you raise your savings rate by another 10% to supercharge your final lap.
Your 60s: Congrats! You’ve accumulated 10-20X+ your annual living expenses and no longer have to work! Maybe your knees don’t work either, but that’s another matter! Your nut has grown large enough where it’s providing you hundreds, if not thousands of dollars of income from interest or dividends. Full Social Security benefits kick in at age 70 now (from 67), but that’s OK, since you never expected it to be there when you retired. You’re also living debt free since you no longer have a mortgage. Social Security is a bonus of an extra $1,500 a month. You’re budgeting a couple thousand a month for health care as you plan to live until 100.
Your 70s and beyond: Sure, you’ve been spending 65-80% of your annual income every year since you started working. But now it’s time to spend 90-100% of all your income to enjoy life! They say the median life expectancy is about 79 for men and 82 for women. Let’s just bake in living to 100 just to be safe by taking your nut, and dividing it by 30. For example, let’s say you live off $50,000 on average a year and have accumulated 20X that = $1,000,000. Take $1,000,000 divided by 30 = $33,300. You’re getting another $18,000 a year in Social Security, while the $1 million should be throwing off at least $10,000 a year in interest at 1%. If you’re interested in retiring early, here’s a more aggressive savings strategy for you.
Important Note: Obviously no one ever knows what might happen to provide a boost or a drag to their finances. Maybe you get lucky with a great new job offer or invest in the next Apple Computer. Or maybe you get laid off at 40 and can’t find work for two years. My chart above merely serves as a savings guideline. Work to build alternative income streams in the meantime.
SAVE AND SAVE SOME MORE!
The only way to reach financial independence is if you save and learn to live within your means. Keep some of your savings in a high interest savings account like EverBank which is offering a ~1% rate to optimize your liquidity. Money market accounts are yielding a pitiful 0.1% on average and you want to keep as little money there as possible. At least with an online savings account, you’ll get a 90-100X higher rate. Actively invest the majority of your after-tax savings in real estate, the stock market, structured notes, P2P lending, and basically anything else that matches your risk tolerance.
It’s important to then track your investments to make sure you’re comfortable with your positions. You can get a better grasp of your finances by signing up for Personal Capital, a free online wealth management tool as I have done. Personal Capital aggregates all your financial accounts in one place to see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into one place to see how my stock accounts, how my net worth is progressing, and whether my spending is within budget. The best feature is their 401K Fee Analyzer which is now saving me more than $1,300 on portfolio fees I had no idea I was paying.
Whatever tool you use, just make sure you regularly stay on top of your finances. With the ever presence of inflation chipping away at your wealth, it’s important to stay proactive in growing your wealth. Just remember that none of this can happen if you don’t start saving.
Photo: View of Diamond Head, Honolulu, HI. SD.
Regards,
Sam
I’ve been saving about 30% of my gross income total (401K and after tax) for the past five years and it is an awesome feeling to see my savings and investments grow.
You’re right that if the percentage we are saving doesn’t hurt a little, are probably aren’t saving enough. Now, saving 10% is like a walk in the park. I think I’ll shoot for 35% now. Thx!
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Some good points in here about your 20s. I just want to add that it’s important to use your 20s to invest in yourself like crazy. On Saturday I had some (okay maybe not some) drinks with an older friend. He’s now in his 40s and he has managed to make lots of good money/investments over the years. He said he’s most proud of what he did in his 20s because it’s paying dividends now.
His education, his skills, and his connections.
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Financial Samurai Reply:
December 3rd, 2012 at 10:56 am
You have a wise friend. Folks in their 20s don’t realize exactly how much their savings and good investment habits compound over time.
Take the 401K for example. Max that baby out for 10 years, and BAM.. there is a super high probability you’ll have over $250,000 in there by the time you are 35 due to compounding and matching.
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Looks like I’m not behind then. I currently save between 30% to 40% of my gross income and next year I turn 26. I think now that we’re living longer, it’s all the more reason to live within our means during the working years because our golden years will be longer than our parents went through. It’s interesting to me how in the 1930s people paid into social security and then retired at age 65, even though the average life expectancy at the time was 60, so for anyone who made it to retirement, they probably didn’t have much time to benefit from the system anyway. Today however life expectancy is much longer, but people’s mindset about retiring at 65 still haven’t changed :)
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Financial Samurai Reply:
December 3rd, 2012 at 10:54 am
Very excellent point about retirement age and mortality. That said, everybody nowadays wants to retire earlier than 65 while living longer as well. We want our lemon meringue pie both ways! The internet has allowed us to do so, but it take discipline and action.
10 more years at your savings rate, and surely you will be free by 35!
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Great so once your 70 and can’t get up without a cane its time to start spending! Woo hoo!!!!
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Financial Samurai Reply:
December 3rd, 2012 at 10:53 am
Well, you did buy a Porsche 911 Turbo or 100 pairs of Manolo’s in your 40s or 50s in this scenario. I think spending 65-80% of your income your entire life is spending money isn’t it? Just when you’re rocking your 60s and 70s is it time to spend 90%-100% of your income!
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Linda Reply:
December 3rd, 2012 at 11:29 am
Carlos, you are financially challenged if you think spending 80% of your income (20% savings) is not spending.
I’m going to take a wild guess that you are way behind on your savings!
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I hope many people can do more than what you outlined here! We should reach a savings rate of 50% soon inspired by stories such as yours. As income increases that rate will go up of course. We’re both in our 20s but we don’t waste time with the big things in life and even look for shortcuts wherever possible. School is a distant memory and we’re working hard to increase income and assets.
If you don’t save enough, you just have to hope to be rescued at some point… probably by others who can’t figure out how to save enough. I don’t like uncertain plans like that.
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Financial Samurai Reply:
December 4th, 2012 at 6:45 am
With the government getting bigger, perhaps it’s only logical for Americans to save less and get rescued?
Good job on saving so much so early!
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I do WAY more post-tax savings and a bit less pre-tax savings than you recommend for my income. Personally, I would advise to save more post-tax than you recommend so that you’re better prepared for things like buying a car and a house.
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Financial Samurai Reply:
December 4th, 2012 at 6:47 am
Are you contributing the max to your pre-tax savings before your post-tax savings? If so, then saving way more post-tax than pre-tax is a good thing. If not, it’s not optimal.
People have a HUGE tendency to spend their post-tax savings if it’s not locked away. Let’s say you make $65,000, you should be able to buy a $6,500 car with your post-tax savings while still contributing much more pret-tax for example.
Protect yourself from litigation. Pre-tax accounts are untouchable.
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Gen Y Finance Journey Reply:
December 4th, 2012 at 8:57 am
I contribute about 2/3 of the max to my 401k, then I max out my Roth IRA, and then I put away an additional 25% or so of my take-home pay in taxable accounts. I don’t have an issue with spending my post-tax savings. :)
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Financial Samurai Reply:
December 4th, 2012 at 9:01 am
Gotcha. So $11,500 goes to 401K, then $5,000 goes to ROTH, and even more than $16,500 (based on you saying you save more post-tax) goes to post-tax savings for a total savings of closer to $40,000 a year correct?
If so, that is awesome! Although, I hate the ROTH. Never give the government more money than you need to, b/c they will waste it!
At ~$40,000 a year in savings, there is no doubt in my mind you will have well over $500,000 accumulated over the next 10 years. You should write a post about your savings to encourage more young folks to save more!
Gen Y Finance Journey Reply:
December 4th, 2012 at 9:10 am
Not quite, but that would be nice! It’s $11,500 to 401k, $5,000 to Roth, then about $12,000 to post-tax savings. I also get an extra $4,000 pre-tax from my work between 401k matching and employer HSA contributions, so I think I’m doing pretty well.
I know you hate Roth, but I’m a big fan of tax diversification, so I like putting away a bit into my Roth IRA each year.
Financial Samurai Reply:
December 4th, 2012 at 9:45 am
Gotcha. So does that mean you actually do way more pre-tax savings then post-tax savings as you first mention?
$21,000 is greater than $12,000 after all! What am I missing here?
Either way, it’s a great chunk of change to accumulate over time!
Gen Y Finance Journey Reply:
December 4th, 2012 at 11:51 am
I do more tax-advantaged than regular taxed savings. But I do less pre-tax than you suggest in the chart and more post-tax than you suggest, since the Roth IRA is post-tax.
Financial Samurai Reply:
December 4th, 2012 at 12:20 pm
Gotcha! 1/10 rule for car buying for life!
Ecstatic to know that I’m actually on the right kind of track – tables like these are great – I love to actually be able to work my own way through the numbers. Thanks!
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Looks like I’m doing great! :)
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Nice chart! For the record, the knees are doing just fine. My back is doing better too. Funny, chronologically I am old (66 y.o.), but I have never felt better. My doctor says I have the stats of a 35 year old. No, I won’t pay you in tennis!
The savers out there already understand this and the non savers may never get on board. If the non savers only knew what it is like to have a huge safety net, they would get on board. Freedom is an overused word, maybe security is a new word again.
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Financial Samurai Reply:
December 3rd, 2012 at 7:11 pm
OK, will spot you two games per set! Great to hear you feel as good as you did when you were 35. Were you feeling good at 35?
What do you think attributes to your good health?
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krantcents Reply:
December 4th, 2012 at 4:18 pm
Exercise, healthy eating, great relationships (including a wonderful wife) and discipline. It helps that I get checkups and follow his advice. I am not sure if good health helps everything else or everything else helps you stay healthy. It could be the chicken or the egg syndrome of which was first.
BTW, my doctor said I had stats of a 35 y.o. I was probably at my peak at 35 years old because I lost 35-40 lbs. around 31 years old. That was 31 years ago, who knows for sure.
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Financial Samurai Reply:
December 4th, 2012 at 5:03 pm
Wow, so not only does your doctor think your body is 30 years younger than it is, you are in the best shape of your life again!
You should write a post!
It looks like I am a little behind on my savings. I used my savings to pay off all of my credit cards and am about to hit 30. While still accumulating, I need to up the amount I put away. Thanks for putting this post together. It is all inspiring.
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When we got married we had debt of mine to pay off. Now that it is gone, we are focusing on 20% savings right now and then will hopefully up it in the near future.
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I’m behind! I definitely do not have one full year of income saved, nor am I making $65K! Something to aspire to, no doubt.
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Financial Samurai Reply:
December 3rd, 2012 at 7:09 pm
Only upside for you then!
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Another good reason to focus aggressively on the pre-tax retirement is to shelter your nest egg from the armageddon. If you happen to lose a business with personal guarantee, investors can’t touch your retirement account.
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pcash Reply:
December 3rd, 2012 at 4:28 pm
Excellent added benefit to maxing out your 401(k). We live in a very litigious society, and people with a lot in the bank are big targets. However, I think the security of IRA accounts from lawsuits varies from state to state. Not sure if Sam has done an article on this, but it would be good one for the future.
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Financial Samurai Reply:
December 3rd, 2012 at 7:04 pm
True. Not much to write about. 401K money is protected from BK and most lawsuits.
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Nice table! So my wife and I are 40 and I just retired. She likes her job very much and plans to work a few more years. For comparission we are sitting at about 15x expense coverage ratio, excluding primary residence of course… Just checked my records and for the past 17 years we have managed to save between 20 and 50% of our post tax income. Work your a$$ off early in life by working hard for money in order to pay for getting a good education and skill set. With this education and skill set, work hard to earn the most money you can – The key is living on much less than you have coming in. don’t get me wrong treat yourself when special goals are reached, but never bend to the will of the marketeers out there that earn their money buy you sending yours.
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Financial Samurai Reply:
December 3rd, 2012 at 7:08 pm
Congrats on early retirement at 40! Your wife is very fortunate to still love her job at the age of 40. That is a win for you Phil as you kick back!
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Instead of looking at coverage as a multiple of after tax income, I tend to think of it as a multiple of spending. Our current net worth (updated today on the blog just for you, Sam!) is about 3x our after-tax income currently, but it’s about 8.5x what we spend currently in a year on non-investments.
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Financial Samurai Reply:
December 3rd, 2012 at 7:07 pm
You say potato, I say potato? What’s the difference between a multiple of spending and a multiple of expenses for my Expense Coverage Ratio? I think my ratios is equivalent to your 8.5X of spending. That’s pretty good! I’m assuming that is for the both of you?
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I expected to see some outrageous assumptions from you on this one Sam, but these seem dead on. You can easily adjust the percentages up if you want to retire early as well. Glad to see a more balanced approach on this on your blog.
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Financial Samurai Reply:
December 3rd, 2012 at 7:03 pm
This isn’t a “how to retire early” post. For those interested, they can click the link.
This post is for everybody as I try and address what the common path the majority of people will go through. If everybody followed this realistic path, the economy would be in even better shape!
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I was an idiot till my 25th birthday. I had a great job and relatively high income, but spend 105% of it. I moved from my parents house and started to enjoy life – two floor duplex 10 minutes from Prague’s Old Town, expensive parties twice a week, very expensive clothes, $15.000 dslr camera etc.
Luckily I’m 26 now and totally changed my thinking about money. I save now almost 40% even though I don’t earn much – about $50000 year due my visas conditions, have to pay for college, and live in one of the most expensive place on Earth – Sydney, Australia. I’m still in red – about $5000 now, but that should be done soon and than I’m going to continue work hard and save like crazy. I also started 2 small businesses which are bringing me about $1000 a month – not a jackpot, but better than nothing, and 3 weeks ago bought a website for $2500 which looks to be earning about $500 a month.
I’m really pissed off to myself because of those wasted money. But I can’t change the past. All I want now is to earn through my business and side income enough to left “employee” status in the dust.
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Financial Samurai Reply:
December 3rd, 2012 at 7:01 pm
Jakub, you must be quite a photographer with a $15,000 DSLR camera! Do you have a portfolio online?
The good thing about spending more than you earn is that you had a lot of fun, and you have the material goods to show for it e.g. camera still works right?
I like your small business initiatives. Better late than never. 26 is still very young!
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That’s a fun chart.
I am 30 and currently live on about 35% of my after-tax income. I have over 5 years worth of expenses covered in savings and stocks (not including my home equity). I built my house when I was 23 and paid cash for it, so I’ve been living rent/mortgage free for the last 7 years. (Although I have a HELOC on my house to use for investing, as I mentioned in a previous post.)
The hardest part is keeping my income up. I started a business when I was 18 and was doing really good for several years, but then I got hit hard in 2009/10. Things are going back in the right direction, but it’s been a long, bumpy recovery. For a while there my income over the years looked like a bell curve — definitely not something people want to see! Fortunately it’s starting to curve back up again so I can accelerate my savings.
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Financial Samurai Reply:
December 4th, 2012 at 6:51 am
Saving 65% of your after-tax income will lead you on a path to early retirement within 20 years of start for sure!
Many got trounced in 2009/10, but things are definitely coming back for those who were able to hang on!
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I love this chart. Your expense coverage ratio is even higher if you consider that once you reach financial independence, you won’t include the savings as part of your yearly payout. A $65K earner in your example saving 50% only needs $32.5K to live for a year with no inflation.
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Financial Samurai Reply:
December 4th, 2012 at 6:53 am
That is true indeed. I provided a wide range for the expense coverage ratios to allow for the age range and wiggle room. I’m hoping everybody can achieve 20X or greater coverage when it comes time to retire. Provides a huge runway to do what you want… and get back to work or build new income streams in case 20X is not enough!
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Another great way to create savings cash flow is to find a second job. It can be freelance work or side gigs. Any money you make from this side job can be invested and plowed into becoming financially independent faster.
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College&Beyond Reply:
December 6th, 2012 at 11:42 am
Amazing recommendation, any extra income invested from a side job will increase your chances of retiring earlier.
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ristlin Reply:
December 10th, 2012 at 8:22 am
The first thing I did while I was still in college was figuring out a backup plan in case I couldn’t find a job when I graduated (2010 was about middle of the recession). My backup plan turned out to be running a writing business. I had a few clients during college that taught me a lot of important lessons. By the time I graduated I was able to make enough to support myself with a modest income until a real job came along.
I love my job, but I still run my business on the side for extra income, recommendations, and skill hardening. Like Sam, I think ANY side job is a great way of improving your income stream, but I think everyone should pursue something that can provide meaningful support toward career progression.
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Sam, I wish you had been telling me this at age 20, but I probably wouldn’t have listened. I’m not sure why this isn’t taught in school. Even if half of the people bought in, we’d be in a much better economic state.
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Financial Samurai Reply:
December 3rd, 2012 at 8:28 pm
Don’t know why basic personal finance education isn’t taught in school either. Being able to save and invest the first 10 years out provides a huge windfall when we are in our 30′s.
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I love that you factored in a mid-life crisis, and rightly left out the apocryphal quarter life crisis. Note to all of you recent grads: that’s not a thing.
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Financial Samurai Reply:
December 4th, 2012 at 6:55 am
Ha! Well, according to the #YOLO generation, quarter-life crisis is totally a thing, even though they haven’t done much of anything yet. Spend baby spend!
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I like the categories you used in your Expense Coverage Ratio = Savings / Annual Expenses table. :) I’ve been slowly increasing my savings each year and I update my long term financial goals tracker a couple times a year. I started keeping my checking account balance super low so that I won’t withdraw that much cash and I then I can also earn a little more in interest from my savings account each month.
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Financial Samurai Reply:
December 4th, 2012 at 6:56 am
Good stuff. I’d take a HARD look at your cash and move it to a higher interest online savings account, structured notes, or something that yields more than what it’s yielding now. Don’t give your existing bank free money!
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Why not just buy an annuity after you know how much is your annual spending. That way you dont run out of cash and also dont need to go crazy spending after 70
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@Jon
Good work Jon! Just keep on increasing the savings percentage to feel the squeeze!
@Michelle
Congrats!
@Grayson @ Debt Roundup
No problem. The guide isn’t the end all be all, but I definitely think the expense coverage ratios are realistic and important to follow as we grow older.
@Miss T @ Prairie Eco-Thrifter
Try raising your savings by 1% a month. If you do, I’m SURE you will get to 20% and beyond within 12 months if you start at 10% a month!
@John
It is a possibility. Annuities just restrict your liquidity flexibility. Also, locking in an annuity now may not be the greatest idea since interest rates are at record lows. Refinance your mortgage yes, but not so much investments for 20-30 years.
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One problem I have with conservative investing at the 20 year age group is the effect of inflation and unforseen economic events. We all know the U.S. is hemoraging financially along with the rest of the world. I think it’s a good idea to take the money saved in the 20s and use it for high return/high risk reward investments. That could be real estate, option trading, buying a business, etc. You could become rich relatively quick with hard work (10+ years) or you could save and have the economic environment change in 30 years(which is a strong possibility) and wipe out that hard work of saving your peanuts.
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Financial Samurai Reply:
December 4th, 2012 at 7:18 am
Did you say option trading? That’s risky, and I know a lot of derivative traders. They don’t even trade a lot of options with their own capital, only the capital of the firm’s. Selling covered calls ain’t so bad though.
Share with us how you got rich after 10 years. Also, please define what “rich” is to you in terms of absolute dollars or expense coverage ratio. Thx!
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I absolutely love your charts. It helps to keep me on track.
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You should combine this saving chart with your 401k chart. I guess add an asset chart and you’ll have a net worth cart. :)
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Financial Samurai Reply:
December 4th, 2012 at 5:37 pm
Got one! The Average Net Worth For The ABOVE Average Person. It’s actually one of the most trafficked posts on Financial Samurai. Should come up on page 1 of Google if you do an “average net worth” search.
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THis is pretty good. And what I like too is the concept of starting by saving 1% mroe than you usually do for a month, then make it 2% until it hurts . Genius!
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Financial Samurai Reply:
December 4th, 2012 at 5:37 pm
I really hope nobody saving only 1-2% hurts though! That’s why I recommend starting at 10% and ratcheting it up from there.
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Great stuff here. I think that there are hard truths to savings required to be able to retire with minimal stress, and many people simply bury their head in the sand and pretend this isn’t an issue. The reality is that we are working for not only ourselves (and kids, if we have them) now, but also for the old person version of ourselves down the line who may or may not be in good health. Math is math, can’t get around that!
It’s always fascinating to me how there are probably people that reject this entire line of thinking. Clearly, I’m not one of them :)
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Financial Samurai Reply:
December 6th, 2012 at 7:03 am
Hey Ray, thanks mate. Building wealth takes active management for sure. Burying one’s head is definitely not a strategy, just like HOPE is not a strategy! This is why I’m so happy to have found a free online tool like Personal Capital to help me manage my finances.
Once we think of our kids, or others who depend on us, we get that much more motivated to do better.
Hope all is well!
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Thanks for the charts. I am saving the right amount just in the wrong buckets at 32 years old. I save $13800 in the 401k, max out the roth IRA and do $20000 per year in post tax savings. The reason for the big post tax amount is that Im saving up to just pay off my house in 4.5 years and in the meantime using it for my emergency/house/car repair fund. I’ll be maxing out my 401k in about 2 years (increasing the amount 2000 per year). My company gives me $11,000 for the 401k account.
Hopefully in 4.5 yrs I’ll be maxing out the 401k and Roth IRA and saving $35000 per year (when I turn 37). Thants the birthday gift I’m working for.
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Financial Samurai Reply:
December 4th, 2012 at 3:22 pm
Whatever works for you Cosmic. That’s around $39,000 in annual savings right there which is excellent! If you can boost it to $57,000 a year at age 37, all the better. Savings add up QUICK!
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Great charts Sam! I think you are pretty spot on, and being conservative given savings grow with proper investments. Better conservative and safe than over aggressive and come up short!
I’ve got about $750,000 at 43, spread through various investments and savings.
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Financial Samurai Reply:
December 6th, 2012 at 7:04 am
Good stuff Larry. I see $1 million plus in your horizon very soon!
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Hi Sam, great article. Just so I’m clear, the savings by age chart includes pre-tax savings and post taxing savings combined?
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Financial Samurai Reply:
December 4th, 2012 at 1:41 pm
Correct. It’s a blended combination that allows for flexibility in interpretation for all those interested in saving more and seeing where they stand.
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Ryan Reply:
December 4th, 2012 at 4:41 pm
Thanks – I just bought my first house and I’m thinking instead of upping my pre-tax savings, saving up for a down payment so I can move in 5 years and rent out the place I just bought. What do you think?
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Financial Samurai Reply:
December 4th, 2012 at 5:04 pm
If u can afford it, sure. That’s what I did to build my rental property portfolio and it has worked out well 10+ years later.
This is a really interesting comparison chart. I don’t really like comparing myself to others and would rather just focus on myself and how much I personally require for my own financial needs.
There will always be someone better off than you, so I have learned to be happy with what I have.
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Financial Samurai Reply:
December 5th, 2012 at 6:24 am
Glen, this is actually not really about comparison, b/c there’s nobody to compare yourself with. These charts are a guideline for everyone to check if one is on track to have a reasonable chance of retirement by their 50s and 60s.
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Sam – great article. I’m doing much better with post-tax savings than pre-tax savings, largely because my company does not contribute a dime to the 401K and a house that required me to significantly up my post-tax savings for a down payment :) Next year I’m focused on pre-tax savings and getting as close to 17K/yr in savings via 401K or IRAs. Next year’s bonus and salary increase will help with that too!
But question – what about those who can live cheaply even in retirement? Why do we need such large sums of money in our late 60′s, 70′s when most don’t want to travel at that age or really live the way we do when we are in our 20′s/30′s? It seems the older my grandparents get the more they are inclined to get in that recliner and watch TV all day. They hardly spend money at all with the house paid off! Not saying I want to mirror this, I’d like to think I’ll have more adventure…. but at a certain age, let’s say 70, I don’t think my propensity to consume would be very high at all. Or am I wrong about this?
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Financial Samurai Reply:
December 5th, 2012 at 9:13 am
Everybody’s tastes are different. My parents, for example, have pretty low expenses since they have no debt, but they love to take multiple month long cruises a year which costs a good chunk of change.
It’s better to be safe than sorry than filled with regret. Life likes to throw curve balls, so it’s best to have as much padding as possible. Besides, wouldn’t it be nice to help donate some money or help support the grandkids? $500,000-$1,300,000 is not a huge amount of money with healthcare and other living costs for someone who plans to live for another 30 years.
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This would be ideal for many but probably unrealistic for vast majority of Americans. For one, most people live roughly up to their income (after putting away some money in 401k and paying taxes). Then, in 30s, you have many people still paying down college debt and often times, starting w kids. People are having kids later, so now those kid expenses shift even into 40s and 50s. Then the college expenses start to hit. For people with 2-3 kids, living in a medium-high cost of living area, probably way too aggressive. Unfortunately, what you prescribe is actually what is required for a conservatively safe retirement. There’s a major gap in America.
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Financial Samurai Reply:
December 6th, 2012 at 7:05 am
Darwin, do you really think these charts are “way too aggressive” for “many” or “most” people? I really tried to make the charts as realistic and feasible as possible.
Increasing savings by 1% a month is NOT that difficult. I would say a large majority of people won’t even know that 1% is missing!
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This is really helpful FS. Feeling pretty good about having a 75% saving rate right now!
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Financial Samurai Reply:
December 6th, 2012 at 7:06 am
75% is huge man! Keep it up. After 10 years, you’ll have tremendous optionality to do whatever you want!
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Not enough people understand or have the discipline to save. If there was one thing I could teach anyone it would be the value of saving. Investing, real estate, and starting a business take a back seat. Without saving you have nothing!
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Financial Samurai Reply:
December 8th, 2012 at 11:00 am
I’ve got to say, this is one of the main reasons why I love to write about personal finance. It feels great helping motivate people to save and secure their financial future. When you can do something you like to do and help someone else in the process, it’s one of the best feelings in the world!
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I’m definitely behind the power curve, but I’ve always counted on a pretty generous pension and a second career to account for my poor savings. I’m late to the game, but I’ll catch up pretty fast with about a 50 percent savings rate! Great post!
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Financial Samurai Reply:
December 8th, 2012 at 11:02 am
Mike, you are fortunate to have a pension! I’m considering taking on a government job in retirement and work for another 15 years traveling overseas (foreign service) so that I can have a nice pension as well. But, my fear is that Obama won’t be able to hold back the detractors over the next four years who call for a reduction in pensions!
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Mike Reply:
December 8th, 2012 at 11:13 am
Yeah, this is definitely a real concern, but i tell you: the last place they had better go when the chopping starts is military benefits. I’ve seen too many people spend too many years fighting in over a decade of wars– people who served this country with an expectation that they had earned their benefits. Certainly there are other places that they can look where the sacrifices haven’t been so great.
But, enough editorializing from me…
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Financial Samurai Reply:
December 8th, 2012 at 12:44 pm
I hear you man, and I agree. It is a TRAVESTY if our Federal Government doesn’t take care of our troops at home.
Awesome post!! It really makes you reflect on your situation and see how good or how bad you’re doing. Which is a good thing because if you’re not on track, then you can get yourself on track.
I’m in my mid 30′s and according to the charts, looks like I’m right on track!
But I was wondering, where did you get this data from for the charts above? Is this something that is well known in the finance industry like the rule of 72.. that I just didn’t know about? :-)
Or did you compile this yourself?
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Oh..one other thing…
I’m currently using about half of my post tax savings to help pay off my mortgage. I have no other debts, so me and the wife are putting extra cash towards paying off the house while also saving.
Does the numbers you provided above account for a situation like this? Because if not, then I guess I’m a little off track with how much is actually going towards savings. If we were to put that 50% we’re putting in our mortgage towards savings, then we’d be right online with the chart above.
But for us..we kind of see it as if our mortgage is paid off, then we’re almost retired since we don’t have no other debts. So the sooner we can do that..the better. At the rate we’re going at…we’ll have it paid off in less than 2 years. But we may end up going into a bigger house in a couple of years at some point because the house we’re in will be a tight squeeze when we plan to add another addition to the family.
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Financial Samurai Reply:
December 9th, 2012 at 7:00 pm
Hey Ryan,
Paying off your mortgage is great of that makes you feel more financially secure.
The question is, what is your after tax liquidity like? I actually think the ideal mortgage is $1 million bucks if you can afford it. Good to take advantage of as much government goodies in this interest rate environment.
Spend some time looking around the site!
Sam
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Ryan Reply:
December 11th, 2012 at 10:26 am
Hey Sam,
Could you clarify what you mean by “after tax liquidity”? I’m not sure exactly what you’re referring to.
an ideal mortgage of $1million dollars sounds like a lot for a mortgage to me…but I guess it all depends what city you live in.
Ryan
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Financial Samurai Reply:
December 11th, 2012 at 10:50 am
I’m referring to the cash you have in your money market, CDs, and stock trading accounts you can easily sell.
$1 million mortgage is ideal if you can afford it. The article explains why.
thx, Sam
This is positive reinforcement at its finest. Most of these are VERY doable with a regular dose of effort. The real beauty comes from encouraged people wanting to do even better, which will lead them to pursue your tougher goals — like early retirement and building up passive income. I’ve been following this blog for just a few months and I’m already noticing a positive difference in my spending habits.
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Looking at this chart sure doesn’t make me feel very good about how much I’m putting away. I’m not even close to the suggested savings in the table.
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Financial Samurai Reply:
December 11th, 2012 at 3:21 pm
The good thing is, if you love what you do, and plan to do it for a long time, it’s not too late to start saving more!
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Time to start a new year and a new savings plan!
I have been working and saving at a CPA firm in San Francisco for the last 5 years
Being around finances for other clients, I have taken to tracking my own. I am not a superb saver, but try to do as much as is comfortable (which I am going to challenge in 2013).
I am currently behind the “8 ball” when comparing myself to your calculation. Typically I have been saving somewhere between 15%-20% annually. This savings is heavily weighted toward retirement assets, but about 20% of it goes to contribute to a small mutual fund balance my family started investing in for me as a kid, as well as into a Schwab count for one-off trades.
In early 2013 I will be turning 28. My savings as of year-end is approximately:
ROTH IRA: 34,000
ROTH 401(k): 27,000
Pre-Tax 401(k):10,700
Total 71,000
For 2013 I am going to aim to max out my Pre-Tax 401(k) [17,500]. This will equate to about 23% of my current salary. Additionally, I am going to still try to add some funds to my ROTH IRA, setting up a deposit of $100 a month. In addition to this I can convert my credit card points into Fidelity contribution amounts; this should help me add another 250-500 of ROTH deposits over the course of the year.
I am really going to take your recommendation of “saving until it hurts” to heart this coming year. I know some sacrifices today will help make things much easier to handle further down the road!
Thank you for all your advice, Cheers! & Happy Holidays
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Financial Samurai Reply:
December 21st, 2012 at 12:04 pm
Nice work Nick and welcome to my site! Glad you are going to take my savings strategy seriously. Savings will accumulate quickly before you know it!
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This is an excellent and very clear chart – road map to financial independence. The advantage of this method is that there is possibility to leave principal alone for the kids, should investments perform well.
Alternatively there is some room to cover for inflation. What it does not take into account is fact that to reach $65 K a year takes time. On the other hand the life does not stop there and once there the income goes beyond it.
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Financial Samurai Reply:
December 26th, 2012 at 6:40 am
Glad you enjoyed the post. I use $65,000 because I think it is a realistic income level average across a person’s entire career here in America. However, I recommend folks look at the expense coverage ratios and less on the income or absolute savings amounts because everyone’s costs of living needs are different.
Thx!
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I’m confused why you say pre-tax savings are best. I have always been told to invest in the roth option of retirements savings. This is because 1. I plan on having a higher income when I retire and thus can save on taxes by investing in roth when I am in a lower tax bracket, and 2. Historically tax rates always go up so even if I were in the same tax bracket when I retire the tax % for that income will most likely be higher. With those two things in mind I prefer ROTH retirement options, why do you feel that Pre-tax savings is better?
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Financial Samurai Reply:
January 6th, 2013 at 7:58 am
Here you go. Read this: Disadvantages of a ROTH IRA. I doubt you will have higher income in retirement than while working. But, maybe.
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FS, yours in the first voice that I’ve heard against Roth options. I have always assumed that income tax rates will be higher in retirement. It’s 17 years or so until I can withdraw penalty-free. I contributed to my 401k for the first 10-15 years. I have been contributing to a Roth 401k and Roth IRA for the last few years, with the rough goal of having about the same amount in Roth and non-Roth retirement accounts.
Your post has made me realize that although I believe income tax *rates* might be higher, my actual income might not be higher. I’m not ruling out a 2nd career of some kind in retirement. Traditional retirement account withdrawals will count as “income”, but it seems that if I’m withdrawing proportionately or working a more modest “retirement job”, then perhaps even moderately higher tax rates won’t result in a higher tax bill for me.
I agree that reckless and excessive government spending is a good reason to contribute the legal minimum via taxes. One question I have for you is whether deferred taxes now really results in lower total taxes paid to the government. Let’s say you have a Roth retirement account with identical contributions and returns (for the sake of this example). In the “traditional” example, then I’m paying taxes on the contribution plus investment returns in the future at future tax rates. In the “Roth” example, I’m paying taxes on the contribution today at today’s tax rates. Therefore, isn’t the higher tax bill the “traditional” tax bill, even assuming constant tax rates paid with inflated future dollars?
Please correct me if I have a mistaken assumption in here.
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Financial Samurai Reply:
February 18th, 2013 at 1:40 pm
Howdy Dan,
Thanks for your thoughts. The way I see it, if you pay taxes up front, you are a guaranteed loser. If you defer as long as possible, you have a chance of being less of a loser.
Here’s an example to illustrate. From 2003-2012, I was in the top marginal tax bracket. There is generally nowhere to go but down for me, even with income tax rates potentially increasing. As a result, I did not pay my rental mortgage down so as to have maximum deductions in order to have a net loss to pay zero taxes on my rental income. Since retiring in 2012, I no longer am in the top tax bracket. I can now pay down my mortgage and happily pay a marginal tax rate 10% lower on income I could have earned during my highest tax years.
Bottom line, once we pay taxes upfront, we give up our optionality and our power.
Sam
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In retirement, you will not have anywhere near the income that you had when working unless you are truly a special situation. Much of your spending will come from non-income sources. This could be from accumulated cash savings, sales from mutual funds (where a portion is return of capital which is not taxed and a portion is taxable at cap gains rates) and interest from bonds. Yes, your 401k will be subject to ordinary rates but you will only take out what you need to spend. So, in all likelihood, even if rates increase in the aggregate, your rate most likely will decrease from what it was when you were working.
I see the magazines state the opposite all the time and it drives me crazy. Now, there are some additional, fantastic reasons for considering a Roth IRA and having a portion of your money coming back tax free is not a bad thing. It is just that I think that benefit is oversold.
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Sam,
Can you help me out a little here? I’m (getting) old – spouse and I are in our mid-50′s. I love what I do and intend to work for a good 10 years, but spouse would quit her job in a heartbeat if we could afford for her to do so. Combined income is about $150,000 and she makes $100,000 of that. We’ve gotten all our kids thru college debt-free and don’t have any debt ourselves, except $130,000 mortgage left on a $400,000 house. (we intend to have that mortgage paid off in 3 years). We’ve only got $650,000 saved for retirement – mostly in 401(k)’s. She really does want to retire (grand babies are very alluring). Any suggestions? Thanks.
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@ MD
Am I missing something here? How is someone making more than $150,000 going to contribute $22,500? Are you assuming that they have to be over 50? IRA contribution is NOT deductible at that income level. Am I missing some investment (per tax) vehicle?
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I have been reading your savings suggestions. These sound good except in this economy and years past, very few people were making 65k. I worked for the better part of my life at 35-40k. I saved what I could most now gone due to layoffs one right after another. Getting behind and playing catch up kills your saving potential. It’s taken me to the age of 59 to finally make 65k. I’ve managed to rebuild my savings to about 10k in 401k. I plan to work at least 10 more years. Ill save what I can but it’s a little too late to accumulate what you suggest. I venture to say there are a lot of people like me, hurt by the economy now left out in the cold. The problem with people like you is you don’t factor in the average wage earner. What you and others like you preach are for those who have the ivy league jobs right out of college. Where we’re you 30 years ago.
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Financial Samurai Reply:
May 1st, 2013 at 10:20 pm
Sorry to hear about your circumstances. I hope this article can inspire those who still have a lot more time.
30 years ago I was trying to get good grades to give myself a chance at getting into a good college to get a good job.
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I am 27 yrs old. I don’t own any stocks, not have I invested in anything. Besides saving, what is the first step I should take to see any kind of money grow before I hit 40? Please note, I have not been very well educated on how I can make sure I’m taken care of by the time I’m elderly (based on my own actions).
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