If you're looking for advice on how to retire sooner, richer, or at all, there's certainly no shortage of it out there. During the decades that personal savings rather than pensions became people's top source of retirement income, plenty of lessons were learned and then passed along to others.
Not every one of these rules, however, has withstood the test of time. Namely, saving the long-suggested 10% of your earnings in a retirement fund isn't going to cut it any longer, even if this money's growth beats the market. With most people now living longer lives than they typically did just thirty years ago, you'll want to do whatever it takes to tuck away 20% of your total income if you want to maintain your current standard of living. You'll possibly be retired for 20 or more years, after all.
We're all living longer, and therefore retired longer
The suggested number can vary from one source to the next. While older people still in their working years (40+) may have heard 10% is the magic number, younger workers (25 to 40) may have heard a figure of 15%.
But both are numbers suggested for a time when the average life expectancy was less than 75 years, and living beyond 80 years of age was a relative rarity. The most recent numbers from the Centers for Disease Control indicate the average lifespan in the U.S. right now is right around 79 years old with most people living that long usually making it well into their 80s. In fact, the most common age at which people pass away in the United States these days is actually 87, with 88 and 89 getting honorable mentions.
Image source: Getty Images.
These numbers jibe with recently posted retirement-length data from the Organisation for Economic Co-operation and Development. You'll likely live another 20 years after you retire, assuming you retire somewhere around the age of 65.
Translation: It's a heck of a lot easier to outlive your money now than it was previously. We'll all need to save more than the people who were born before us did. A target of 20% of your wages is a lofty goal for most households, to be sure, but it's a target worth aiming for all the same.
With that as the backdrop, let's work our way through a comparison of three hypothetical investors each putting different amounts of money into their retirement funds.
Don't be Harry ... be Sidney
Our three investors? Let's call them Harry, Melissa, and Sidney.
To make it a completely fair comparison, everything like their age and income will be exactly the same: All three are currently 30 years old, and they all intend to retire when they turn 65. We'll also use the Census Bureau's most recent calculation of median household income in the United States. That's $70,784 per year (from 2021). We'll even raise those wages in step with inflation, since many people's incomes will do the same.
Let's further assume all three investors are going to invest all of their savings in an S&P 500 index fund with any gains or dividends realized during this time being reinvested in more shares of the same fund. That should give all three of our hypothetical investors an annual average return of 10%.
The only difference? The portion of their household incomes that will be set aside for retirement. Harry's only saving 10% of his yearly wages. That's $7,074 per year. Melissa's putting away $10,617 per year, or 15% of her salary. Sidney's saving the most, contributing 20%, or $14,157, of her annual earnings.
How did each investor fare after 35 years? Check it out: The graphic below compares these three people's net returns on their retirement savings.
Data/calculator source: Vertex42. Chart and calculations by author.
Sure, even though Harry saved the least, he seemingly did all right. He's still worth a little over $3 million come 2058.
Don't be too impressed, though. That's in future dollars. Adjusted for inflation, that's probably only going to be a stash worth around $1.1 million in today's dollars. Not bad, but given the soaring cost of healthcare and housing, that's a sum that could easily be burned through in 20 years' time. Remember, withdrawals from a retirement account tend to be bigger than the account's average yearly gains once you stop putting money in and start taking money out.
Melissa did measurably better. Saving 15% of her yearly wages for 35 years left her with a retirement fund of nearly $4.8 million. Nevertheless, that's only $1.7 million in today's money. Most people could make that work. However, an extended stay in a healthcare facility or a major medical need could also easily wipe that money out. That's also not an amount that supports the purchase of a second home or a great deal of overseas travel.
As for Sidney, she's doing the best with her $6.4 million nest egg that would be worth nearly $2.3 million in today's dollars. It may still be an exhaustible amount, but this figure's likely enough to live on dividends and interest and still achieve growth that outpaces inflation.
This much money will also allow Sidney to leave her children or grandchildren some money, whereas Melissa doesn't have that assurance, and Harry just won't likely be able to. He'll probably use up most of his savings simply maintaining his current standard of living.
Save as much as you can right now, even if it's not much
Yes, 20% of your wages is a huge amount to save ... particularly when costs are as high as they are now. Socking away 15% may not do the trick, though, and investing 10% of your earnings is even less likely to let you keep on living like you are now and also leave behind a financial legacy. Do whatever you can to get your savings up to the 20% mark.
Even if you can't quite get there right now, however, do what you can when you can. You never know how or when things might take a turn for the better, letting you catch up when you're behind. The worst thing you can do is do nothing at all, even if what you can manage feels far too modest to matter at the time.
