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I live in a 3rd-world country. I earn $500/month.

How much percentage of my income should I save each month, if I plan for early retirement?

Currently I am saving 30% of my income.

Is there any rule of thumb for saving for early retirement?

  • Does your country have any tax-advantaged retirement accounts? What kind of social programs are there fore retirees (e.g. health care, etc.) or would you have to pay for your own? These are some things to consider. – Chris W. Rea May 3 '13 at 12:40
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    My country offers no social program for early retirement whatsoever. – user5800 May 3 '13 at 12:49
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    How bad is inflation in your country? It can be pretty bad in many 3rd world countries and would eat up all your savings, unfortunately. – Lagerbaer May 3 '13 at 22:10
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    Another important question would be how politically stable your country is and how likely it could be that the state will just randomly decide that you have too much money and just take it away from you. Could you specify "third world country" a bit more? – Lagerbaer May 3 '13 at 23:18
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    @Lagerbaer Don't need a third world country for the government to decide that one has too much money -- look at Cyprus, which comes awfully close. – a CVn May 5 '13 at 11:00
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There are a number of variables to consider, and the issue is that they cannot be know in advanced, just guessed. An educated guess, based on history, of course.

  1. Savings rate (how much of your income each year)
  2. Investment return
  3. Withdrawal Rate (the safe % you can withdraw)
  4. Withdrawal Amount (the currency amount you'll want to withdraw)

Somewhere in this mix, we usually see the "percent of income replaced" i.e. the initial withdrawal value as a percent of final income. In the US, we often choose 80%. And, as a math guy, I picture a bell curve where a good number of people are happy with 80%. Some need more, some less. Again, in the US, the 80% isn't all from savings. Nearly 40% can come from our government plan, Social Security. Thus we're left needing to replace 40% with savings, and by dividing that number into a withdrawal rate we get the years income we must save. At a 4% withdrawal, we need 10 year's final income saved up.

That nest egg needs three numbers solved, percent saved, rate of return, and years to save up.

You earn $6000/yr but save $1800, so are living on $4200, correct? What rate of return are your investments earning? If you are invested to see an 8-10% return, the 4% rule may work, and $105,000 is the nest egg you'd need to produce the $4200 per year withdrawal.

It's a moving target of course, as time passes, you'll earn a bit more, costs go up, etc. But you are looking to accumulate about 17 times your annual earnings.

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@Lagerbaer has some very good points in his comments. You got a bunch of answers that basically work under assumptions of reliable and rather free economic conditions (politically stable, predictable, state under the rule of law (not sure about the correct term - I look for a translation of the German Rechtsstaat), freedom to save and invest according to what you think advisable, and so on).
All these are characteristics that your country may lack.

The lack of such conditions doesn't necessarily mean that saving isn't worth doing. In fact, I'm very happy to see this question here, because it indicates that there is someone in a 3rd world country who judges that the political/economical situation makes saving a sensible choice. This is IMHO extremely important, because I think that such conditions are a necessary condition without which it is hardly possible that a country (all or at least most people) can gain wealth. IMHO the western countries achieve a substantial amount of their current wealth because people do not need to take such unreliability into their saving plans. In your country, neglecting this would amount to a high-risk type of saving. But you'll know better than most of us what your local risks are, and whether/how you can avoid them.

All that being said, I think my answer would be putting as much as possible into savings and investment-type of purchases (the rough idea: tools as opposed to tobacco). That is, not all savings need to be monetary.

  • obviously, your savings grow faster that way, allowing you to retire faster if things work out nicely.
  • at least equally important, keeping the practice to live on less money, gives you more freedom with a given amount of money. And this applies regardless of whether your government or someone else takes your savings away, or if everything goes smoothly (in that case, you'll get more enjoyment out of less money).
    In other words, exercising how to consume less money than comes in gives you a buffer against a whole lot of "typical disasters" that just happen (and maybe happen more frequently in 3rd world countries).

  • When comparing your savings rate to recommendations or reported saving rates for other (western) countries, these are probably far too low for you. The reason is that your savings take also the role of a bunch of insurances that are often assumed as existing (and not referred to by a value) in the western saving recommendations.
    If I look at my pay sheet (Germany) and start with what my employer pays, I find roughly

    • 1/6 directly going to taxes*. You may say that part of this is the cost for economically and politically stable conditions. Another (large) part finances pensions and social insurance.
    • 1/6 directly going to social insurances according to the laws of my country: (health insurance, unemployment insurance). I have two more private insurances, an additional insurance in case of inability to work that fills some gaps in the "governmental" insurance, and a private liability insurance. However, they cost less than an additional 1% (because of the large coverage of the insurance necessary by law).
    • 1/6 are pension cass fees. This is counted as social insurance for historical reasons, and is required by law as well. I list them here separately, as the question is about retirement savings.

So I find that half of the money my employer pays out is already gone before the basis for calculating saving rates arrives at my bank account. However, the major part is gone for purposes for which you probably need to provide for by yourself. That is, as an approximation, you either need to have similar insurances, or put at least the same amount into savings which also cover emergency needs. You may argue that your savings are more efficient than a governmental pension or social insurance scheme, but the big insurances and pension casses have the advantage of large numbers of participants, so individual events will average out.

If you look up savings rates for other countres, look at the definition as well: both enumerator and denominator of the fraction vary! Some people calculate it from gross income (in some countries like Germany, even gross income is not very well defined, we distinguish employer's gross and employee's gross), more usual is to use "disposable income" (and often it is not quite clear which of the above listed fees are subtracted). I've also seen savings as difference between disposable income and consumed income, and savings as opposed to investments (i.e. savings = money in savings accounts).

* income tax is calculated on a lower basis, so the nominal income tax rate is higher.

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The other answers are good, and bring up many valid points (including the potential for political instability), but there's one critical issue that I don't see brought up in any of them to the extent that is probably needed. Namely, the rate of inflation in your country. Many third-world countries have high rates of monetary inflation, which means that even with what in most first world countries would be considered a very good rate of return (say, 10% per year on average) might do you little good.

What you really want to figure out is how much you need to save to retain a certain amount of purchasing power. The easiest way to do this is probably to think in terms of today's money and only then adjust for an expected rate of inflation.

You are currently living on approximately $350/month and saving $150/month. You don't mention your age but I'll make a guess that probably is as good as any and suppose that you are now 30 and want to retire at age 60. This gives you 30 years to save for retirement. I will also assume that you expect to live to the age of 80 and that government retirement income is negligible. So you need to save up enough to live on for 20 years, in a 30 year timeframe. I'm also assuming (for simplicity's sake) that you have no retirement savings at all right now, which given what you wrote pretty clearly is not true, and that your expenses in retirement will be similar to those you have today (though you will likely be spending money on other things). It should be simple to adjust the below for your particular situation.

With your current expenses, to live for 20 years you need 20 × 12 × $350 = $84,000 in today's money. In order to end up with $84,000 in 30 years, you need to save $84,000 ÷ 30×12 = approximately $230 per month, not considering any return on investment. So you come up a fair bit short with what you are saving now. Figuring in 2% return per year, every single year, according to one online calculator I found you need to save $170/month, which seems to be within reach.

If you are willing to retire at age 63 and expect to live until 80, that means you need to save up $71,400 and have 33 years to do so, which brings you down to needing to save about $180/month. With 2% return that's about $130/month, a fair bit less than what you are saving now (but don't take anything out in advance). You still come up a little short without some more or less guaranteed return, but the difference is needing to save ~35% of your income (marginally more than today) as opposed to ~45% -- clearly, that is a marked difference.

Note that in the above paragraph, I am mostly concerned simply with today's value of the money. Any return on investment must be calculated adjusted for inflation (and you should probably take the official inflation figures with a handful of salt; considering that even first world countries fudge them, I would be very surprised if a third world country doesn't), so if any investment you make returns 12% average year over year, but the rate of inflation is actually 10%, that's a return of about 2%. You also need to consider any potential taxes when you withdraw the money, which unfortunately is fraught with uncertainties anywhere in the world.

Also, as has been pointed out in other answers, retirement savings do not have to be monetary. Consider if there is anything you can do to lower your monthly expenses. Maybe you can reduce your electricity usage somehow, plant a garden to supplement any purchased groceries, or something entirely different. Even if it only saves you a few dollars per month, it may very well be worth the investment of time.

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There's a great article in the Economist magazine, which I will summarise here. (And the full paper Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle is also accessible)

It is more important to put aside a set amount of your income, over a long period, rather than to focus on the withdrawal rate. If you are saving for 30 years, you should be putting aside 16.6% of your income. If you are saving for 40 years, you need less than half that, 8.8%.

That's based on investing 60% of your money in equities and 40% in bonds, not putting it aside in an interest-bearing savings account. It also assumes zero fees.

As Joe Coder Guy points out, you want to invest as much of your money as you can if you wish to become rich and/or have a great retirement. If you are able to put aside 30%, that's great so long as you are in your 20s; if you are in your 50s and just starting to save for retirement, 30% will likely not be enough.

I haven't read the paper referenced in the Economist write-up, nor am I qualified to speak to its accuracy. You'll also want to read up a bit on withdrawal rates, even though the article refutes them, because that's how most people go about planning retirement.

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    I've seen the discussion of Wade Pfau's paper, and have mixed feelings about the results. There are too many variables for a plan based on just one to suffice. His dismissal of the 4% rule with "The 1980s class of retirees could have withdrawn 8% a year" offers no explanation how one can know at the beginning of retirement what their withdrawal rate can be, only in hindsight. He also includes a generous social security payment, which OP doesn't have. – JoeTaxpayer May 3 '13 at 14:07
  • Thank you for bringing this up, JoeTaxpayer. I must admit I'm quite cautious about the results of that paper, too. Your counterpoints are good. – ChrisInEdmonton May 3 '13 at 15:02
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    -1 Even assuming the paper is valid for American retires and with suitable adjustments for differing sizes of govt pensions in other developed nations doesn't give it, or most other 1st world tailored advice, any bearing on what someone in a poor country should do. Investments in the local economy are subject to much higher volatility/default risks. Investments in the 1st world are vulnerable to reduction in effective local value if the local economy booms. Continued rapid economic growth after retirement makes erosion of savings a bigger risk, etc. – Dan Neely May 3 '13 at 17:29
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    @ChrisInEdmonton - I added a link to the full paper, in case readers are interested in the source. And the edit let me retract my downvote. – JoeTaxpayer May 3 '13 at 18:47
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I assume the question is still relevant.

You cannot know the future. Savers in 1913 Germany probrably felt fairly secure. Or investors in Cote d'Ivore until the president died. 30% sounds good. Is it too much? Maybe.... but you rarely regret having too much money at retirement.

You say you are from the Third World? That's a pretty broad statement but great, so am I. A fairly wealthy, reasonably stable, arguably lucky ex-colony, independent for 56 years. I can share some of the strategies that people here have used for retirement since independence under governments characterized by incompetence, corruption, populism and declining rule-of-law.

Most of the answers above - no doubt given in good faith - assume a continuance in the country's currency and financial system. A big assumption in the Third World. I might suggest a slightly different tack. Save as much as you can but also diversify those savings as much as you can. Cash in bank accounts is a sitting duck for goverments to freeze, seize, devalue and sur-tax. Over your years of saving, look for good times to invest in :

(1) Property. Certainly you'll want your own house or condominium, paid for and unencumbered. If property looks good in your country, build or buy a 2nd house when prices are low. And/or land. (Though that's riskier if no residence is on it.)

(2) Stocks and bonds. Depending on your national situation, either directly in well-established private companies. Or in privately-managed investment funds. Or both. Starting as early as you can. Re-invest your dividends if you can. Pay attention and sell when the price is high.

(3) Foreign currency. US dollars, Euros, Swiss Francs. Buy when exchange rate favorable and if you can open (discrete) accounts in USA, Switzerland, etc. so much the better. Illegal in your country? More reason to do it!

(4) Precious metals. Certified little bars of gold, platinum, silver. Buy when prices favourable. (Some say now.) The ultimate in portability and liquidity. If you have to flee the country as a refugee, you'll be happy you have these. (If you don't have to flee, you'll be happier still.)

There might be other options depending on the circumstances of your country - and not all the ones I listed may be suitable for you. The idea is to be wary of too much cash. Do-gooder governments -who do not know the prime rate from prime rib- can destroy the value of your currency (or the currency itself) literally overnight. You'll have time (hopefully.) With a little dilligence and luck, you should secure your future.

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It depends on how early you want to retire early. The earlier you want to retire the more you will need to put away as savings. It also depends on how high a return you can get on your savings (if any) and how much money you feel you can live off for the rest of your life after retirement.

The earlier you retire the longer your savings would have to last you, so the bigger the savings you would need. So to properly answer this question you would need to provide a lot more information. With the question how it is at the moment, you will just get generic answers which may not be useful to you at all.

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I like the answer of user76516, excellent advice if your location is not the most politically stable. But then you have places like China with enormous economic growth. If you had put 30% of your income in China into a savings account twenty years ago, that would have been very little value now because the economy has grown so much.

You might be in the same situation, just twenty years later. In that case, in addition to what user76516 says, investing some money in shares of local companies might be a good idea, so your investment will benefit if the local economy improves.

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