If you want to achieve financial independence, you've got to implement an aggressive savings plan by various age markers. I want to share how much should have saved by age 20, 25, 30, 35, 40, 45, 50, 55, 60, 65, 70 in order to reach a comfortable retirement.
If you are serious about living life on your own terms, study my recommended savings chart carefully. Most people wait until AFTER they hate their jobs before they try to seriously start saving. Worse, most people don't even start building passive income from investments. Don't be like most people!
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. Curse lifestyle inflation to hell!
What's most 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 look at the methodology on how much should have saved by age 25, 30, 35, 40, 45, 50, 55, 60, 65, and 70. Hopefully by the time you are in your 60s, you can at the very least stop working and start living the good life with your remaining years.
How Much You Should Have Saved By Age 20, 25, 30, 35, 40, 45, 50, 55, 60, 65, 70
Before we figure out how much you should have saved by age 20, 25, 30, 35, 40, 45, 50, 55, 60, 65, 70, let's first go through my pre-tax and post-tax savings guide by age.
As you can see above, how much should have saved by age is based on your saving rate.
I recommend everybody start off with 10% and raise their saving 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 2021 is $19,500. The maximum pre-tax contribution will probably increase by $500 every two years or so if history is any guidance.
The Expense Coverage Ratio
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. The ultimate goal is to have an expense coverage ratio of over 20X by the time you retire.
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.
Now that you know a good saving rate guideline by income and age, it's good to calculate an Expensive Coverage Ratio.
Expense Coverage Ratio = Savings / Annual Expenses
An Expense Coverage Ratio equals your savings divided by your annual expenses. You should ideally shoot to have an expensive coverage ratio of 20X or more.
Note: Focus on the ratios, not the absolute dollar amount based on a $65,000 annual income. How much should have saved by age is all about covering your expenses. Take the expense coverage ratio and multiply by your current gross income to get an idea of how much you should have saved.
How Much You Should Have Saved By Age In Decades
Now that we have a savings rate guide and an expense coverage ratio guide, we can finally calculate how much you should have saved by age 20, 25, 30, 35, 40, 45, 50, 55, 60, 65, 70.
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.
Middle-Age Savings Goal
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.
Retirement Years Savings Goals
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. Meanwhile, the $1 million should be throwing off at least $10,000 a year in interest at 1%.
Important Note: The future is unknown. My savings chart by age guidelines above merely serves as a savings guideline.
Save All You Can Save At Every Age
The only way to reach financial independence is if you save and learn to live within your means. You must follow my how much should have saved by age guidelines.
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 crowdfunding, and basically anything else that matches your risk tolerance.
The point is to gradually expand your savings into investments where you feel most comfortable. Many people, including myself, love real estate because we can see what we are buying.
Don't count on anybody but yourself. Not the government, not a rich aunt or uncle, and not your parents. If you get a windfall from them, great. But if not, that's fine too because you've got your own money keeping you alive and thriving!
Suggestion For Investing Your Savings
One of the investments I'm most excited about today is real estate crowdfunding. Fundrise is the leading platform that was founded in 2012. They've seen fantastic growth in their business by enabling individuals like you and me to passive invest in real estate for as little as $1,000. The great thing is, you can invest without all the hassle of managing tenants, finding tenants, and maintaining a property.
I've personally invested $810,000 in real estate crowdfunding. This is after selling my SF rental house for $2.74 million to simplify life as a father. It's nice to earn income 100% passively as being a full-time dad and writer is a lot of work.
I also like CrowdStreet, a leading real estate platform for accredited investors. They focus on 18-hour cities, secondary markets with lower valuations and potentially higher growth rates. The pandemic has accelerated the demographic trend towards lower-cost areas of the country.
Both Fundrise and CrowdStreet are free to sign up and explore. I've personally invested $810,000 in real estate crowdfunding to earn income passively and capitalize on the heartland of America.
Wealth Management Recommendation
The best way to know how much should have saved by age is to track your finances. I highly recommend signing up for Personal Capital, a free online wealth management tool. It let's you easily monitor your finances.
Before Personal Capital, I had to log into eight different systems to track 28 different accounts. Now, I can just log into one place to see how my stock accounts. It shows how my net worth is progressing and whether my spending is within budget.
One of their best features is their 401K Fee Analyzer. It helped me is now save 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. 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.
About the Author:
Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing. He spent the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
FinancialSamurai.com was started in 2009. It is is one of the most trusted personal finance sites today with over 1.5 million pageviews a month. Financial Samurai has been featured in top publications such as the LA Times.