Sound Financial Planning | How much do I need to save?

Making your financial calculator work for you

Previously, we reviewed how to calculate your safe withdrawal rate for retirement planning. On the flip side of the equation is understanding how much you need to save to provide you with that safe amount to withdraw so that you can live the life you desire.

When it comes to the rule of thumb for savings it’s usually thought by looking at the size your retirement portfolio needs to be. You will find advice that you need to aim for 70% – 90% of your pre-retirement income. Calculate that amount and then divide by the 4% rule, you completed some back of the napkin retirement planning. If napkins don’t excite you then this is how nearly every financial calculator used for retirement will be structured.

There are a few problems using a 70-90% replacement methodology:

  1. According to the Employee Benefit Research institute over half of retirees surveyed spent 95% or more of their pre-retirement income during retirement.
  2. You need to predict your lifestyle inflation plus necessity inflation costs 20, 30, or 40 years into the future.
  3. It gives you a big number to shoot for, but no actionable steps to get there.

Probably the biggest problem with this methodology is that it puts a huge burden on your shoulders. Calculating the end goal amount may end up being a number so large you can’t comprehend how to get there.

If you earn $50,000 with the goal to replace 90% of that income in retirement you will need to save $1,125,000. Your goal is to somehow save that much money? Stressful! The goal might seem so far reaching that it gives you more ammunition to eat ice cream every day since now you know for sure you’ll be eating cat food in retirement.

Don’t get me wrong. I love goals. I think goals are great. However, a goal without a plan is just a wish anyway.

For example, pretend you just landed your dream job to coach the Green Bay Packers. Your goal as coach is going to be to win the Super Bowl. What are you going to do to get your team to the Super Bowl?

After you stopped hoping, praying, or whatever else, what would you do to put together your formula for success? You have many practices and many games to finish before you reach the Super Bowl.
Identifying how you will progress through those stages will be critical to creating a team that could win the Super Bowl.

When it comes to saving for your goals, it is the same thing. You will need to put your formula for success together.

How much do I need to save each paycheck?

Fortunately there has been real research behind calculating what you need to save from each paycheck to retire when you want to.

There are two main research studies completed to answer what is the Safe Savings Rate. The most interesting part of the first study (at least for me) is that the study by famed retirement researcher Wade Pfau used the Safe Withdrawal Rates in his study. This is interesting because he looked at the worst 30 year period for safe withdrawals to find the safe savings minimum, or SAFEMIN.

In other words, what do I need to save for the next 30 years to cover 30 years of retirement?

To summarize this research, Pfau, found that if you are saving for 30 years and plan on spending for 30 years you need to save 16.62% for the duration of your savings period. A secondary study that used an entirely different approach concluded that 15% is the magic number.

Two different studies with two different approaches found a similar safe savings rate of approximately 15%. The 15% of your income rule also requires that you save 15% of every raise.
The unfortunate part is that both studies used the dreaded income replacement rate I referenced above. The rate they used was 70% of your pre-retirement income.

Basically the research states that if you plan on retiring at age 65, by age 35 you need to be saving at least 15% every year to ensure you can live on 70% of your pre-retirement consumption. Worth noting is that the studies used historical returns for a 60/40 portfolio or a 4% real return during the savings periods.

Investing wisely is critical to any financial strategy.

While the dreaded income replacement rate comes to bug us again, the real point of this research is proof how your savings rate impacts your timing to retire more than any other factor.

Will my savings rate allow me to retire earlier than 30 years?

The savings rate research lays solid groundwork for an actionable step you need to take to save enough money to retire. In real life there are many examples of this being done much quicker than 30 years.

Possibly the most compelling studies are of real life financial bloggers who have used extraordinary savings rates and retired in under 10 years. While investing wisely is scientifically critical to any financial strategy, the ultimate savings rate can win the day.

Popular financial independence bloggers are retiring in less than 10 years on occasion!

None of these popular success stories received a large inheritance, won the lottery, or got rich quickly. What they did was focus on their savings rate and invest wisely.
In fact, if you save 50% of your earnings you could afford to retire in 17 years. Here is a breakdown of different savings rates and their corresponding impact on years until retirement:

  • 10% savings rate = 42 years
  • 20% savings rate = 32 years
  • 40% savings rate = 21 years
  • 50% savings rate = 17 years
  • 60% savings rate = 14 years
  • 70% savings rate = 10 years
  • 80% savings rate = 7 years

Yes, it is possible to retire in under 10 years for many people. The internet is full of these success stories. It’s easier to do if you’re a high earner, but you can even do it on an average salary.

The point is, consistent, good behaviors is the key to reaching your retirement goals. Understanding your goal is great for planning your progress, but the prize is in the process.

Do you want to understand how to make your money work for you and keep more of what you have earned? 

Reach out to me at or schedule a free consultation.


Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Nate Byers a Madison, WI CPA Financial Advisor,  and all rights are reserved. Read the full Disclaimer in the footer below.