What percentage of your income should go to retirement savings: Find out the exact percent of income you need to save to retire early.
Regardless of whether you want to reach early or a regular retirement, you must save money.
Even if you are one of the best investors of all time, an important part of reaching retirement is saving money.
The question is: what percentage of your income should go to retirement savings?
In this post, I aim to answer this question and clarify what percentage of your income you should save.
Let’s dive in.
What Percentage Of Your Income Should Go To Retirement Savings?
Your Savings Rate Depends On Age, Income, Expenses, And When You Want To Retire
Before I tell you what percentage of your income you need to save, there are a few other factors you need to consider.
Mainly, you need to know when you want to retire, and how much money you will need to retire.
As a general rule, you should be able to retire once you have saved 25 times your annual expenses.
So, to find out how much you need to retire, figure out your annual expenses and then multiply that by 25.
For example, if I can afford to live on $40,000 per year, I need to save $1,000,000 to comfortably retire.
Once you know how much you need, the next important factor is how old you are.
Simply put, the younger you are, the longer your money will have to compound.
If you have 40 years until retirement, you would need to save $25,000 per year if you do not invest that money.
However, if you invest the money and it earns 7% annually, you would only need to save $5,100 annually to reach $1,000,000 in 40 years. (Source: compound interest calculator via Get Smarter About Money)
Conversely, if you want to retire in 20 years, you would need to save a lot more because the money has less time to compound.
The Short Answer Is At Least 15%
Of course, most people don’t want to go through all the detailed calculations.
You simply just want to know what percentage of your income should go to retirement savings.
Well, the short answer is 15% of your income should go towards retirement savings.
If you have a long investment time frame like 40 years, even a 15% savings rate should get you there.
For example, if you earn $40,000 per year, saving 15% of your income means you save $6,000 per year.
If you invest $6,000 per year in an and it grows at 7% per year, you will end up with $1,197,810.67 over a 40-year time frame.
Basically, if you want a regular retirement and you are 25 years old, you need to save at least 15% of your income.
What Percentage Of Your Income Should Go To Retirement For Early Retirement?
If you want to retire early, you will need to save more than 15%.
The short answer is you will need to save at least 20% to 50% of your income.
Maybe more, depending on your age.
If you want to reach early retirement at an extremely early age, you likely need to save greater than 50% of your income.
One of the most eye-opening statements about the importance of savings rates on early retirement I’ve ever heard was from the Radical Personal Finance Podcast:
“If you have a savings rate of 50%, you need to work one year before you can take one year off.” – Joshua Sheets from Radical Personal Finance.
In other words, if you want to retire as fast as possible, or if you are starting later, increase your savings rate.
In the scenario above, I stated that someone that lives on $40,000 annually would need to save $1,000,000 to have 25 times their earnings.
However, if someone earning $40,000 annually saves 50% of their income, technically, they only need $20,000 per year to retire, because they are living on $20,000 annually. If that’s the case, they only need to save $500,000.
If they save 50% of their income and earn a 7% return annually, they would be able to retire with $500,000 in only 15 years.
Essentially, saving 50% or more of your income will allow you to retire in 15 years or less.
What Percentage Of Your Income Should Go To Retirement Savings? – Final Thoughts
The short answer is that you need to save at least 15% of your income for retirement.
By consistently saving and investing 15% of your income from ages 25 to 65, you be able to save 25 times your annual income. This will allow you to maintain the same lifestyle when you retire.
However, if you have less time to save for retirement or if you want to achieve early retirement, you will need to save between 20% to 50% of your income. Possibly more, depending on your age and how quickly you want to reach retirement.
In short, the higher the savings rate, the sooner you will be able to retire.
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