The question in the title is one I’m asked quite frequently. Unfortunately, I never feel that I’m able to give a satisfactory answer. Easy-to-follow instructions like, “invest 10% of your income” are popular, but I think they’re rather problematic.
The amount you should invest per year depends significantly on your plans and circumstances. To get even a ballpark figure, there’s a whole list of questions that need to be answered.
How Much Will You Need (per year) in Retirement?
- How will your retirement spending compare to your pre-retirement spending?
- Will you have a pension?
- Will there be a stage of semi-retirement during which you’ll have income from a job or business?
The more you expect to spend in retirement, and the less of that spending that will be satisfied via wages or a pension, the more you need to save now.
How Much Will You Need (in total) to Retire?
- At what age do you expect to retire?
- How much of your portfolio are you willing to annuitize?
- Is it important to you to leave money to your heirs?
The longer your expected retirement, the more money you need saved, and the fewer working years you have to reach that level of savings–meaning you need to save significantly more per year.
Working in the other direction, the less you care about leaving money to heirs, and the more of your portfolio you’re willing to annuitize, the less money you’ll need saved before you can retire (and, therefore, the less you have to save each year).
How Many Years Do You Have to Save?
- When did you start investing?
- Did you (or do you expect to) take any years off to have/care for children?
For example: Investor A gets a full-time job at age 22 and works straight through to age 65. Investor B gets a full-time job at age 25, doesn’t start saving until age 28, takes 6 years off from 30 to 35 to have/care for children, then works from 37-60, at which point he/she retires.
Investor A has 43 years of saving. Investor B has 26 years of saving. In order to finance the same level of retirement spending, Investor B will have to save significantly more per year than Investor A.
A Better Approach
Rules of thumb that ignore all of the above person-specific circumstances will, by definition, lead some investors to dramatically under-save and others to dramatically over-save.
Instead, I’d suggest working your way one-by-one through the following questions:
- How much do I expect to spend each year in retirement?
- How much of that spending will have to be financed by savings (rather than Social Security, pension, part-time job, etc.)?
- How much (total) savings will I need in order to finance that level of spending?
- Given how many years I expect to be saving, how much must I save per year to reach that level of savings?
Hi. I'm Mike Piper, the author of this blog. I'm 
If the question is less about retirement and more about liquid savings per year, homeowners need to remember that they must have at least 1-3% set aside each year in savings, devoted purely to the cost of homeownership. On top of that, as you mention, strive to save at least 10% of your monthly income. (Establishing an automatic savings plan, or ASP, helps hugely in this task!)
Great article Mike.
I am currently using using the rule of thumb approach putting away around 15% of our family income and trying to increase this amount every year. At 30 I still have at least 30 plus years of saving for retirement that I will do, but I should probably sit down sometime soon and try to come up with my “magical retirement number” and see how my current savings rate compare to those projections.
“Automatic savings” is a great way to get started. This means you are moving money to a savings account automically on a weekly or monthly basis. If you’re not sure how much to save, start out small with say $25 dollars and slowly bump it up until you are comfortable with the amount you are putting away. Once you get that emergency fund to a healthy balance (say 3-6 months worth living expenses) then you can move onto investing. Keep it one step at a time. Great article and really good advice for anyone having trouble figuring out how much to save.
I’m planning on retiring on about 800,000 in today’s dollars. I actually have a nice series of articles on my blog about how much I need and why. If anyone is curious it’s under “How much dividends do I need” part 1-3.
Mike, Great article and it is quite a common question. I agree with all the points you made. I think the simple answer is “Whatever makes sense in your budget, but just START today!” Most of the time, just getting started is the hard part. Most of the time, it takes an act of Congress just to get a person to start. After getting that out of the way, you can figure out the “how much” part. Still, I agree there needs to be a larger spotlight on the questions you pose.
Another question which is fundamental is “How much can I save?” Most folks don’t have a firm grasp of their monthly cash flow (income minus expenses). A monthly cash flow statement generated periodically will indicate what monies are left over each month to plan accordingly. If folks are spending more than they’re earning, a cash flow statement will also indicate such and lead to corrections for a balanced budget.
I appreciate your tips for telling people the “minimum” that they “should” be saving. But I cannot agree with your implication that it is somehow bad to save “too much”…? I agree with Suze Orman that nobody is safe unless we are living on 50% of total income + investment growth.
There is really no difference between income and average investment growth. Whatever we get, we get, minus inflation eating it up. Whether we are working stiffs or trust fund babies, young or old, we should not spend more than 50% of the in-coming amount. Otherwise, quality of life is liable to deterioriate. So alright, we might make do with half our standard of living. Saving 25% of income is respectable. But then there is that bout with cancer, that 2-3 years between good jobs, that family emergency, that lemon car deal gone sour, etc. That brings us back up to 50% that we “should” save if we possibly can.
Drill this 50% habit into every youngster from first grade, starting with their weekly allowance… and then maybe… just maybe… when they start feeding their own first baby they might be able to save your 15%. And maybe they will even think twice before having a second baby. Worst case scenario: you are able to leave money to Greenpeace or leave a trust for your grandchildren or nephews and nieces. Then just maybe they or some aborigines somewhere will have a chance to own a home and survive in the hell of a world that is coming. Is “over-saving” so bad?