How much should I contribute to Retirement?

Original Article Posted On: May 14th, 2014
Article Last Updated On: January 21st, 2018

How can a question that is only seven words be so difficult to answer?  I would love to say “Save 10%”, or “Save $5,000 per year” or even “Save enough so that the weight of all the money saved is equal to your typical food intake during march madness”.  But alas, this is one of those questions that can only be answered by generalizations.  Why you ask?  Well, primarily because this question has too many unknowns to create the perfect rule of thumb (and i love me some rules of thumb).  It’s similar to asking “what should I have for dinner tonight”… Which the answer to is Ramen, so that probably wasn’t a good example.

Through an intense amount of research I’ve done my best to quantify an answer how much should be saved for retirement.   The reason this is a difficult question to answer is because there are multiple variables that this question deals with.  Below I’ve detailed out the variables and how this article deals with each:

  1. What percentage of your income are you saving?
    • We will make this a variable since it changes from person to person.
  2. How much does your money grow each year?
    • We will hypothetically assume 9.62% to match the S&P.
  3. What inflation are you assuming?
  4. How much will you need in retirement (as a percentage of your pre-retirement income)?
    • We will make this a variable because it will depend on what type of lifestyle you’d like to live in retirement.  This is further explained below.
  5. What is  your typical raise you expect to see over the long run?
    • This can obviously change quite a bit depending on your job but i’ve assumed an average raise rate of 4% to slightly outpace inflation.
  6. What percentage of my nest egg can I spend each year?
    • For simplicity, we will assume the 4% rule is being used.

Choose Your Retirement Lifestyle:

What retirement lifestyle works for you?

What retirement lifestyle works for you?

Your lifestyle in retirement may not necessarily match your lifestyle before retirement.  For example, if you currently have the following scenario:

  • Household Income : 100k
  • Retirement Savings per year: 20k
  • Tax Savings by earning less in retirement: 5k
  • Gas/Food Savings by not working anymore: 5k
  • House Paid off by retirement: 10k

In order to maintain your current lifestyle you will need to earn roughly 60k.  But you may find that you could even get by on less, and the above doesn’t even include any Social Security benefits you may have.  Therefore it is fully feasible that you only need 40-50% of the money you needed pre-retirement to enjoy a comfortable retirement.  You will see below that this aligns with saving 10% of your income over 35 years which very closely relates to what most savers do anyways.

Some good indicators to determine your retirement lifestyle are (as a percentage of your pre-retirement income):

  • 70% or more – You are living a life of luxury
  • 45% to 70% – You are living a very comfortable lifestyle
  • 25% to 45% – You have cut back some but still have enough to live on
  • 25% or less – You have had to severely cut back and will likely have trouble paying all your bills. Expect to pick up a side job in retirement to fill in the gaps.

How much of my nest egg can I spend?

A good rule of thumb on how much of your nest egg you can spend follows the 4% rule.  For the purpose of simplicity we’ll assume that rule is being used on the following charts.  Since I plan on writing a nice long article on the 4% rule (and subsequent withdrawal rules of thumb) i won’t go into too many details on it here.

Charts & Graphs for the visual people in the audience:

With all these numbers in tow, we’ve come up with the following tables and graphs.  The first chart is for the extreme savers.  The second chart is a truncated version of the first to clarify what average savers can expect.  The table is a summation of all the data points.  Overall, these charts should be used as a ballpark, if you really want to have some accurate numbers then it would behoove you to run these numbers for your specific situation.

 Adjusted to assume inflation:

A few rules on reading the above:

  1. I typically start with how much i’m saving.  With that, you can see what % of your income you’ll have available over “x” number of years.
  2. The yellow tabs on the tables show your hypothetical maximum required without significant lifestyle inflation in retirement (you wouldn’t need more than 60% if you’re saving 40% since you are already used to living on 60% at that point).  As you’ve seen in the above section (“Choose your retirement lifestyle”) even this estimate is conservative.
  3. Under all scenarios try to avoid significant lifestyle inflation.  A 3.5% lifestyle inflation per year can add up to a few more years of working.   If you are constantly adjusting your lifestyle upwards as you earn more then you will be trying to hit a moving target.

The idea of over-contributing to retirement:

A common theme with super-savers is drawing the fine line so you are saving for retirement, but not over-saving for retirement.  The general idea behind this is if you only save for retirement, then you may have difficulties getting to your money before you’re 59.5.  There are a few methods to avoid this including: splitting saving between retirement accounts and non-retirement accounts, working with Rule 72(t) with your 401k which allows for substantially equal periodic payments, and a Roth IRA conversion ladder.  These methods allow early withdrawals from retirement plans to cover the in-between years.  We’ll cover them all in more detail down the road.

It should also be noted that the great majority of the population is so terrible at saving for retirement that this shouldn’t even be considered.

Final Thoughts (especially if you didn’t read the article):

As a bare minimum, it looks like in today’s world you should be saving a minimum of 20% of your income (not all of that needs to go to retirement).  This article does not assume that significant amounts of money are being saved outside of retirement but if that’s the case all the better.  If you are planning to retire early, you’ll want to plan accordingly to make sure you have funds for the in-between years (those between retirement and 59.5).  Or at the very least make sure you’re utilizing your RothIRA which has more relaxed withdrawal rules.

Be very careful taking any advice as law (even mine).  It’s important to run your own numbers and determine what your comfort level will be.

Read More on the subject:

A lot has been written on the subject.  Some of my favorite articles include: