What percent of my money should I be saving for retirement?

That is the question. And it’s a freaking tough one for millennials to answer.

It’s also a question that many of us just choose to ignore, not wanting to worry about it because it seems so far away.

But, the days of fantastic pensions are gone and if we want to retire, we’re going to have to save for ourselves.

And the earlier we start, the better off we will be.

But how do we know how much to save? Some people say 8%, some say 10%, some 15%, and others say even more.

But what if your situation is different? What about figuring out your specific needs?

That’s when it gets hard to know where to start.

So before I jump into how much you should be saving, I first want to cover all of the assumptions behind the often quoted percentages.

## What Are You Saving For?

First of all, let’s clarify, that most of the time when people talk about saving a certain percentage, they’re talking about saving for retirement.

If you want to save for a new car, new house, cool vacation, or anything else, you’ll want to save above and beyond what you’re already saving for retirement.

The problem is, millennials don’t even know what they want out of a retirement. We know we don’t want to work jobs that we hate for 40 years. We would rather find a job we enjoy and our passionate about.

We also know that the idea of a traditional retirement isn’t necessarily appealing.

But let’s keep going, I’ll address some of these concerns in a minute.

## Percent Of What?

When you’re talking about retirement savings, most people look at your percent of income saved.

The problem is that this assumes two things.

- You currently spend your entire income
- You will spend the same amount in retirement

But income doesn’t matter. What matters is what you plan to spend in retirement, not what you make now.

Here’s why:

- When you’re retired, your house (if you choose to own one) will probably be paid off, so you won’t have a housing payment.
- You will already be retired, so you won’t need to continue saving more for retirement
- Expenses related to your kids will be gone

For these 3 reasons, most people actually end up spending less each year during retirement than they did before.

Now, of course, you could increase certain things like travel, hiring housework, and extra hobbies.

The bottom line is that you want to come up with a rough idea of retirement spending and work from that. Don’t let your current income level have much affect on what you plan for retirement.

## 3 Variables To Figure Out How Long You Need To Work

There are three things that affect your savings percent for retirement and how long you need to work before you can retire.

- Amount You Save Per Year
- Total Money Needed During Retirement
- Average Return of Investments

These three variables will help you figure out how many years you need to save before you can retire.

The most often quoted percent is 10% of your income. But when people say 10%, they’re using different variables from the ones above.

- Years You Plan to Work
- Total Money Needed During Retirement
- Average Return of Investments

They go ahead and assume a certain amount of years and then they figure out you only need to save 10% of your income.

I think you might see the problem.

What if you don’t want to work that many years? Well, then you’ve got to change the other variables.

Well, then you’ve got to change the other variables.

You could increase the average return. But that’s probably not very smart because we have a lot of data on the stock market. So increasing rate of return would be guessing and hoping.

You could decrease the total amount of money you needed, which means you have less to spend in retirement.

Or you could increase your savings rate, which lets you hit your number faster.

So now you understand some of the built-in assumptions behind these percent figures. But how do we figure out what’s going to work for you?

## Figure Out Your Variables: Rate of Return

Two of the variables are really easy to figure out.

First is the rate of return.

We have a lot of data on the U.S. stock market and while the past is no guarantee for future returns, it’s the best thing we have to work with.

So let’s start there.

The easiest place to check on past returns if Money Chimp. You can simply type in the dates you want to check and it calculates it for you.

Be sure to include the dividends and the inflation to get the most accurate picture. You want to look at the line “Annualized return (= True CAGR)”

If you look at past 65 years (from 1950 to 2015), it’s been a very bumpy ride, but the stock market has returned roughly a 7% CAGR.

Remember, this INCLUDES inflation. So in real dollar terms, 7% is a great place to start when trying to figure how much to save.

Again, this isn’t perfect, and if you are nervous you could use 6% or even lower if you want. But we’re just trying to get in the ballpark.

## Figure Out Your Variables: Total Needed

The second variable you want to figure out, is how much you need in retirement.

Remember, it doesn’t make any sense to base this number on what your current income is. What matters, is how much you plan to spend every year. Like I said earlier when you retire you won’t have a lot of the expenses you do now like a mortgage payment, car loans, student loans, and kids.

So basing your savings off your income isn’t very helpful. It’s likely that you will spend less in retirement than you do now, even if you travel a lot.

Now when it comes to actually figuring out the number, there’s a lot of debate around it.

Mr. Money Mustache put out a great article on figuring this out using a 4% withdrawal rate from your retirement money. You should check it out here.

Basically, what you need to know is that a general rule of thumb when saving for retirement is to have 25 times whatever your annual spending is.

So if you plan to spend $50,000 in retirement, you would need to save 25 times $50,000 = $1.25M before you retired.

This number is based on calculations performed during the Trinity Study where finance professors looked at various withdrawal rates starting at different intervals in U.S. history and compared the outcomes. Based on this study, they concluded that a 4% withdrawal rate was safe for a retirement of 30 years.

While all retirements are different and yours may be long or short, this 4% (or 25 times spending) is a great place to *start.*

## Figure Out Your Variables: Time and Savings

The last two variables go hand-in-hand together. The longer you save, the less you need to save each year.

The more you save each year, the sooner you can retire.

They balance each other.

**Here’s an example. **

Let’s say you and your spouse decide you want to spend $50,000 per year in retirement and you currently make $75,000 per year.

Using the 4% rule, you need to save $50K times 25 = $1,250,000 before you retire.

Rather than focusing on a percentage, let’s focus on dollars saved per year and the number of years you plan on saving.

If you’re 25 years old and planning to retire at 55, this gives you 30 years to save. If we assume the market increases at 7% per year, this means you would need to save $13,233 per year. This works out to be about 17.5% of your income.

So we can see here, that 17.5% is a bit higher than what you may have expected.

But remember, all sorts of things can change this number.

**What if you want to work for a longer time because you really like your job.**

Alright, so let’s say instead, you plan to work until your 65. That gives you an extra 10 years.

If you save for 40 years total, you would only need to save $6,261 each year. That’s only 8.35% of your income.

Your savings rate needs are significantly lower just by working an extra 10 years.

**But what if you want to retire early??**

Lot’s of people are now working very hard to retire early. Just look at Mr. Money Mustache. He retired in his early 30s because he saved like a mad man and cut his expenses ruthlessly.

If we use the same example numbers above, except this time you start at 25 years old and want to retire by 35, here’s what you need.

If you save for 15 years, you would need to save $47,324 each year. That’s 63.1% of your income.

Now that is extremely tough. And the only way you could do that would be extreme frugality.

Not impossible. But *extremely* difficult on $75,000 per year.

So for the earlier retirees you normally have 1 of 2 options.

- Focus on cutting your expenses to the absolute bare minimum
- Increase your income significantly so that it’s easier to save

I’m not trying to be discouraging, but I want to provide realistic expectations.

But, there are some things I’m leaving out. So let’s keep going to look at the full picture.

## Pay Attention To The Variables

It’s important to notice the impact of each variable. If you can work just a few years longer it makes a huge difference.

If you can cut your spending so that you need less during retirement it makes a huge difference.

If you can save a little more it makes a huge difference.

## Important: Remember This

All of these calculations assume that you won’t work **at all** during retirement and you will be living solely off the amount of money that you save.

While this may be true for some people, it’s often not the case for many.

Lot’s of retirees find small part-time jobs they would enjoy working that helps them make a little bit of spending money.

Not to mention that many retirees get bored and end up wanting to work. Odds are, you’ll want to do a little something that will bring income.

Also, remember that Social Security will help you on top of your savings. And we haven’t accounted for it at all.

If you stick with these calculations, do receive social security, and work at all during retirement, your totally safe.

## Final Steps To Calculate For Yourself

If you would like to play around with these variables and figure out how much you should be saving, i’ve created a google doc you can download.

Then go to file>Download As>Microsoft Excel (.xlsx) to play with the numbers yourself

Again, the three variables you’ll need are:

- Years Till Retired
- Yearly Spending
- Percent Return

Then it will calculate how much you need to save each year and each month until then.

Hopefully, this has helped you figure out how much you need to start saving. Remember that personal finance is personal. What works for someone else may not be quite right for you.

So stop focusing on a percent of your income.

Instead, start focusing on your financial independence number.

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