Are you wondering how much you should have saved by 55? By 55, you should have saved at least 12X your annual expenses or income. Your ultimate goal is to save more than 25X your annual income before you retire.
Saving 12X your annual income is much harder, but for those of you who like a savings challenge, a multiple of income is a good goal. If you use income as the target, you will always force yourself to save more as your income grows.
Age 55 is a somewhat tricky age. You should be in your prime earning years. At the same time, you may be burned out. You're too young to start using your 401k or IRA without penalty too. Further, the earliest you can take Social Security is at age 62, if the rules don't change.
Hopefully, after several decades of work, you will have saved by 55 enough to feel financially secure. You're almost at the traditional retirement finish line.
Savings Calculations By Age 55
Savings is the key to financial freedom. From savings, comes investing. And from investing, comes asset growth that will set you up for a comfortable retirement. Personally, I'm heavily investing in real estate post-pandemic because it is an inflation play. Inflation acts as a tailwind for real asset prices.
In terms of savings by age 55, your expense coverage ratio is the most important ratio to determine. You must calculate ow 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.
At age 55, if you spend $80,000 a year, you should have about $960,000 in savings or net worth to live a comfortable retirement. If you make $150,000 a year in gross income, you can also shoot to save $3,000,000.
Savings can be defined as cash, pre-tax investments, post-tax investments, rental property, and anything with value.
Your ultimate goal is to achieve at least a 20X expense coverage ratio to be financially free. If you're 55 now and aren't close to having $960,000, then I suggest putting your savings intensity into overdrive for the next 5-10 years. Save all you can before Social Security and / or a pension kicks in to help supplement your lifestyle.
Pre And Post Tax Savings Guide By 55
Below is a pre-tax and post-tax savings guide by income level. The higher your income level, the higher your saving rate should be. By age 55, you should be able to have at least 20X your annual expenses saved up if you follow this guide.
Minimum Saving Rate By Age 55
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 Ratio By Age 55
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
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. By 55, you should have 12X your annual expenses.
Saving In Your 20s And 30s
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.
Savings During Middle Age And By Age 55
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.
Saving During Traditional Retirement Age
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 find yourself unable to save as much, then you've got to make some sacrifices to reduce expenses. You can also consider moving to a lower cost area of the country or the world. Many retirees move down to Mexico or South East Asia, where $1,000 – $2,000 per person is good living. The proper geoarbitrage strategy is really to relocate within your own city first.
You Can Save More If You Want To
The only way to reach financial independence is if you save and learn to live within your means. Before the 2020 pandemic, Americans were only saving roughly 7% of their personal income. That's pretty pathetic! During the pandemic, the U.S. saving rate ballooned to 33%! Therefore, we can save more if we want to. By 55, we shouldn't have a problem with our finances if we stayed focused.
For the money you are comfortable risking, actively invest the rest of your after-tax savings in real estate, the stock market, bonds, real estate, and basically anything else that matches your risk tolerance.
Generate Passive Income In Retirement
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. However, owning physical real estate gets more cumbersome by 55. Instead, you want to try and make as much 100% passive income as possible.
Take a look at my two favorite real estate crowdfunding platforms to take advantage of lower valuations in the heartland. Both are free to sign up and explore. I've personally invested $810,000 in real estate crowdfunding to diversify and earn more income passively.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Recommendation To Build Wealth
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 that let's you easily monitor your finances. 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 everything in one place.
One of their best features is their 401K Fee Analyzer which is now saving me more than $1,700 in portfolio fees I had no idea I was paying. They also have a fantastic Investment Checkup feature that screens your portfolios for risk.
Finally, they came out with their incredible Retirement Planning Calculator that 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.
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How Much Should I Have Saved By Age 55 is a Financial Samurai original post. You're so close to the finish line. Try and boost your savings as much as possible and have a net worth equal to 25X or greater your annual expenses. Or, shoot to have a net worth of at least 20X your average household income.
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