Savings Rate

There’s a lot of financial literature out there telling you how much you should have in retirement the nice “nest egg” amounts often rest around 1 million or more dollars. These are often good numbers to shoot for but, in my opinion, big numbers like that don’t mean a whole lot to a lot of people. I think it’s helpful to think of our retirement investments in terms of our savings rate and amount of yearly salary set aside.

                For much of the basis of this article I’ll be using the research from “How much to save for a secure retirement” from the Center for Retirement Research at Boston College. They are arguing that you’ll need to replace around 80% of your income in retirement in order to maintain your lifestyle in retirement. This means that if you’re making $50,000 dollars in pretax income, you’ll need roughly $40,000 dollars per year in retirement to maintain your pre-retirement lifestyle. In order to save 80% of your income for retirement the authors provide some handy charts in order to determine what you’re likely to save in order to reach those goals, I picked out the chart that is most applicable to most people. But feel free to follow the link if you fall into a “high” or “low” income group of $68,000 or more for high income earners or $19,000 for low-income earners.

Here we can see how much our savings rate and when we start saving for retirement matter. The sooner we start and the bigger the percent we put down, the sooner we can retire.

However, for an even more accurate tool to really put things into perspective on how we can really slingshot our retirement goals is to use networthify.com. They have a retirement calculator that is based your personal income, savings, expenses, and portfolio value. If you enter those amounts in you can see when you can comfortably retire.

The assumptions with this tool are a 5% rate of return on investment which is pretty low as the historical S&P500 return is around 7-12% and a reliable and conservative estimate is 7% that’s obtained by even the Vanguard Total World Stock Index. Further, it assumes that once your rate of return covers 100% of your expenses, you are financially independent and could retire. However, it’s advised to work slightly longer than you need to because your withdrawal rate should be less than your return on investment.

By checking your savings rate against your annual expenses, it can be a really exciting, or a really sobering look at just how quickly or slowly you have till you can retire. Ultimately, I believe that anyone can retire, and retire early, if they choose to make the necessary changes to their lifestyles. One of the best ways to retire early is by automating your finances, which M1 Finance does just that. Or if you’re looking for ways to enhance your returns check out our high risk and ultra-high risk newsletter.

But, ultimately, the goal is to dramatically increase your savings rate and attempt to put a large portion of your take home income into investments. Starting earlier helps but these goals are obtainable for anyone.

Note: the m1 referral link gives the reader $10 extra dollars to invest with if they choose to fund a taxable with $100 dollars within 30 days of opening the account or fund an IRA with $500 within 30 days of opening an account. The author of this article will receive a $10 dollar compensation as a result of the reader opening an account. The compensation for both parties occurs 30 days after the deposit occurs and assumes the full amount is retained in the account until the end of 30 days from the deposit day.

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