In just about any retirement related thread you’ll find the suggestion to save 15% of your income for retirement. It’s a great easy to use number and is good to get in the minds of people(especially those starting out) to save appropriately for retirement.
However if you try to find the reason it’s 15%, you realize it’s far more complicated, and many people are just quoting the number because it’s the number they heard. Other’s are basically just doing the equivalent of saying “It seems right” and one finance blogger just said:
So why is 15% the rule of thumb? Why not more? Or less? There are a couple of reasons. They’re called your mortgage and your kids.
Investing 15% of your gross income leaves you enough wiggle room to pay off your mortgage and save for your kids’ education at the same time.
Maybe it’s just me, but I didn’t find that logic compelling. How much I need to save for retirement is not driven by costs that
won’t shouldn’t, exist in retirement. So I decided to look into things a little further and figured I’d share two key things I came across.
Watch out for the retirement assumptions
Fidelity did the math on a hypothetical average person and they seem to be one of the more in-depth analysis including cited sources and the methodology behind their calculation. More importantly, they also listed out the assumptions they used that while realistic on average may not reflect what you want to (or can) do when it comes to retirement. Their base line is assuming you save 15% starting at age 25 and keep working up until age 67. If you got started late or want to retire earlier than 67, 15% is not the right number for you.
At the end of the day, retirement savings is about trying to get to a certain amount of money relative to your income(under the assumption you’re trying to replace a percentage of that in retirement). So the real thing to keep in mind is not the percentage you contribute, but also where your savings are relative to your current salary if your current salary is reflective of the income you want in retirement. Fidelity’s assumption is that you’re aiming to replace 45% of your final salary and assumes SS will play a role in that. Whether or not those assumptions are valid for you will have a huge impact on how much you save.
15% Assumes you’ve been doing this right all along
You could have been contributing 15% all along, but if you we working low income jobs most of your 20’s and didn’t start your real career until 30 and are now making double, you’re behind assuming retirement income is based off your career job. It’s impossible to know if you’re going to be behind in the future due to a big promotion that hasn’t happened(and whether that will really lead to the lifestyle inflation these formulas assume) but that’s why it’s important to do a periodic check of where you stand today.
T. Rowe Price put out a guideline explaining how all of these recommendations stem off the real measure which is the amount you’ve saved as a multiple of income at certain age points. If you’re not inline with the recommended savings milestones,
This image from a PDF they put out in another post shows how much current savings drives the amount you need to save going forward. If you’re just getting started at age 30 on retirement for example, you should be saving 18%. If you’re only at 1x salary saved at age 45, you need 22%. Common sense when you think about it, but something that gets overlooked when telling people to set aside 15% in their budget.
TL;DR – 15% should only be the advice given to people starting their careers at 25. Everyone else should consider using a retirement calculator to see where their numbers put them and periodically monitor their progress.
Two of the many calculators out there
Fidelity’s calculator – A quick way to see what your percentage should be if you use their assumptions, just provide Age, Income, and Current Savings and you’re done.
T. Row Price’s calculator – A much more in depth calculator that let’s you adjust just about all assumptions. If you want to get into details, this does it.
Bank Rate’s Calculator – This one provides much of the same variable adjustment but uses a slider and shows the results as a graph as well.