Savings is the foundation of good personal finance. This article will discuss how much savings to accumulate by age so you can achieve financial independence and retire comfortably. It’s important to have savings targets at every age to keep you on track.
I don’t want to hear excuses as to why you can’t save if you want to be free. Go somewhere else please. During the height of the pandemic in March 2020, the U.S. personal saving rate rocketed above 32% from 6%. Therefore, we can all save more if we want to. If you are serious about living life on your own terms, study my recommended savings by age chart carefully.
Your saving 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. Let’s review my savings by age chart below.
Recommended Savings By Age Chart: Pre and Post-Tax Savings Guide
Below is my command savings chart by age. It shows how much you should have saved in your pre-tax retirement accounts (401k, IRA, Roth IRA, 403b, etc) and your post-tax investment accounts.
Your saving rate should increase the more you make. Not only should you be maxing out your tax-advantaged retirement accounts, you should also be building your taxable investment portfolios.
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.
The maximum 401k contribution for 2020 is $19,500. The maximum pre-tax contribution will probably increase by $500 every two years or so if history is any guidance.
Recommended Expense Coverage Ratio 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 saving rate for 40+ years with a 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
Note: Focus on the ratios, not the absolute dollar amount based on a $65,000 annual income. Take the expense coverage ratio and multiply by your current gross income to get an idea of how much you should have saved.
Savings By Age: 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.
Savings By Age: 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.
Savings By Age: 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.
Savings By Age: 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.
Savings By Age: Your 60s
Congrats! You’ve accumulated 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.
Regarding a more aggressive target net worth, shoot to accumulate 20X your annual gross income by the time you want to retire. By using a multiple of income, your net worth goal continues to increase as you make more money. There’s no way you can “cheat” your way to financial freedom by slashing your expenses.
Savings By Age: 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.
In your 70s, you should also think about what type of retirement philosophy you want to follow: YOLO or Legacy. Personally, I’m following the Legacy retirement philosophy in order to create a perpetual giving machine after I’m gone.
Save And Save Some More!
The only way to reach financial independence and hit my savings by age chart is to live within your means. National average money market accounts are yielding a pitiful 0.1%. In fact, I keep about 90% of my saving in high-yield online savings accounts. They prevent me from having the temptation to spend.
Below is the saving rate chart during the pandemic. Notice how the U.S. personal saving rate spiked to 33% in April 2020. It has since fallen as more Americans become more comfortable with living through uncertainty. My savings by age chart is based on consistently beating the median savings rate of Americans.
The more you save, the more you can invest and generate more passive income.
How I’m Reinvesting My Savings
For the money you are comfortable risking, actively invest the rest of your after-tax savings in real estate, the stock market, bonds, private equity and anything else that matches your risk tolerance.
Personally, I’ve invested $810,000 in real estate crowdfunding because I like owning real assets that produce income that are less volatile. I’ve invested in the heartland of America to take advantage of strong demographic trends. Valuations are cheaper and rental yields are higher. It’s great to earn income passively instead of having to manage tenants and work on maintenance issues.
My favorite real estate crowdfunding platform is Fundrise. They began in 2012 and are the pioneers of the private eREIT asset class. For most investors, investing in a diversified real estate fund is the way to go. You can sign up with Fundrise for free to explore.
If you are an accredited investor, check out CrowdStreet. CrowdStreet offers individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and potentially higher growth. If you have more capital, you can build your own select real estate portfolio with CrowdStreet.
As inflation picks up, owing real estate is a shrewd move. Inflation whittles down the cost of debt and boosts the value of your real assets. Inflation also reduces the value of your cash savings. Hence, you should always be strategically investing your savings by age to at least keep up with inflation.
Diligently Track Your Net Worth
It’s important to then track your investments to make sure you’re comfortable with your positions. I highly recommend signing up for Personal Capital, a free online wealth management tool. It enables you to easily monitor your finances. It’s easier to hit my savings by age target with this free tool.
Before Personal Capital, I had to log into eight different systems to track 28 different accounts to manage my finances. Now, I can just log into one place to see how my stock accounts are doing. I can track how my net worth is progressing as well.
One of their best features is their 401K Fee Analyzer. It is now saving me more than $1,700 in portfolio fees I had no idea I was paying. There is also have a fantastic Investment Checkup feature that screens your portfolios for risk.
Finally, utilize the incredible Retirement Planning Calculator. It uses your linked accounts to run a Monte Carlo simulation to figure out your financial future. You can input various income and expense variables to see the outcomes.
Definitely check to see how your finances are shaping up as it’s free.
Savings by age charts are completely updated for 2022 and beyond. After this post, hopefully, you are no longer wonder how much savings should I have accumulated by age. If the amount of money you’re saving each month doesn’t hurt, you’re not saving enough!
I just wanted to thank you for this wisdom.
When I finished my Ph.D., the one thing that I wanted the most was to own a supercar. I wanted all of those years of hard work and low pay to be worth it.
I got a very nice paying job doing what I love, worked hard, aggressively put in constant overtime, basically lived at the office on weekends for two years, and saved up constantly toward that goal. However, something always went wrong when I went to order a car. The first time, at one dealership, the sales associate left mid-transaction for another dealership and thus wasn’t responding to emails or phone calls. My car went to another buyer on accident. The second time, at another dealership, the sales associate couldn’t get me a build-order allocation due to the the model line being discontinued. A new model had been announced a few days after I made a deposit; I was put on a waiting list, as a result, and later had my deposit refunded since I’d be waiting about a year for a build slot.
I was furious each time, but I didn’t know that I was also severely lucky. It saved me from making incredibly bad decisions.
I later stumbled on your blog. At first, I thought that the advice was about cars and the one-tenth rule was out of touch. Then, by happenstance, I sat down with an asset manager at dinner and realized it was absolutely wonderful.
I turned all of that overtime money into a just enough of a down payment to get a house in a highly desirable area. I put in for constant overtime so that I could make substantial home improvements in short time, like adding solar panels and a whole-house battery back-up system. I then sold that house and bought property to build my own house. I downsized immensely on that next house, but, thanks to the architects I used, I was able to get more usage out of less space. The overall build quality was vastly superior too. Most importantly, I was able to pay off the mortgage in under three years. All of that overtime led to back-to-back promotions that increased my pay rate and enabled me to make large principal payments every year.
Even though life is good, I’m still driving the same car that I bought when I was in grad. school. I keep it looking new and take good care of it. I’ll likely get another six or seven years out of it.
Without a mortgage payment and a car payment, I’m currently saving up almost ninety percent of my after-tax salary and investing about eighty percent of that every year. I just put everything into a mixture of ETFs and treasuries and let it grow. I could probably save up even more, but there’s a point where life becomes too austere; sometimes, you need to live a little.
I don’t get paid a crazy amount compared to some of my peers from my lab in grad. school. I took the path of doing what I love, and basically being my own boss, versus grinding for an obscenely high paycheck. However, I can say that even with a good education, strong work ethic, and prudent spending mentality, you can easily save and invest to the point where, after about fifteen to twenty years of being patient, getting a new supercar every year is basically a fraction of the annual investment returns.
If I still want a fancy car at that time, then at least I’ll be able to truly afford it.
Hi there,
I am 26 yrs old currently saving 16.5% pre-tax in my 401k including the company match and maxing out my Roth IRA each year. The rest post-tax money after expenses I put into multiple funds for emergency, car maintainence, and investment property. My question is should I reduce my 401k contribution to the minimum so that I can maximize saving for the investment property and/or put the post tax money into a taxable account?
I don’t plan to get rich quick with real estate but I am looking to develop multiple cash flows sooner rather than later.