"What percent of my salary should I save?" is tightly coupled with its companion, What size “nest egg” should my husband and I have, and by what age?
Interestingly, Mr.Christer's answer, 10%, is the number that plugs into the equation that I reference. Jay's 25X rule is part of this. We start with the assumption that one's required income at retirement will be 80% of their pre-retirement income. That's high by some observations, low by others. A quick look at the expenses that go away in retirement -
- Savings (Obvious, no? if you save 10%, by definition, you've started your budget with just 90% of income).
- FICA (social security) - You paid 7.65% of your income (up to $118K) to this fund each year, this goes away.
- Mortgage - In other posts here, we talk about the mortgage costing 25% (or a bit more) of one's income. Let's say 15% of it goes away, 10% left for property tax and maintenance.
- College savings - for many of us, this was a 10% budget item. When the kid(s) head off to college, that account will hopefully be enough, and this budget item gone.
- Work-related expenses - I won't list percents, but I am thinking of items such as commuting, whether it be public transportation or your car, along with clothing.
The above can total 35-40%
It would be great if it ended there, but there are costs that go up.
- Health care costs. The post-retirement plan is never as cheap as when you worked.
- Travel. It's time to take that 30 day cruise you dreamed of.
- Hobby. Golfing with clients/customers was either a write-off or on the company altogether. Now, it's on you.
- Eating out. When you worked, there was little time to cook, now, your excuse is that you just don't want to.
- Home improvements. Yes, you have no mortgage, but now that you actually use the deck in back, you realize how small it is. And the grill? Time for a new one.
The above extra spending is tough to nail down, after all, you knew what you spent, and what's going away, but the new items? Crapshoot. (For non-native speakers - this refers to a game with dice, meaning a random event)
Again, referencing Mr Christer's answer "financial planners whom you could pay to give you a very accurate number," I'm going to disagree with that soundbyte. Consider, when retirement is 30 years away, you don't know much
- Actual Rate of return
- State of health for 30 years till retiring, and then health in retirement.
- Partner situation - one divorce, and second family can throw a monkey wrench into your plan.
- Decades of raises while working
- Actual glide path of employment
If I can offer an analogy. I once had the pleasure of hearing Jim Lovell (The astronaut played by Tom Hanks in Apollo 13) give a speech. He said that for the first 99% of the trip to the moon, they simply aimed ahead of their target, never directly at the moon. In this manner, I suggest that with so many variables, accuracy is impossible, it's a moving target. Start young, take the 10% MrC offered, and keep saving. Every few years, stop and see if you are on target, if not, bump the number a bit.
Better to turn 50 and find that after a good decade you've reached your number and can drop your savings to a minimum, perhaps just to capture a 401(k) match, than to turn 50 and realize you've undersaved and need to bump to an unsustainable level. Imagine planning ahead in 1999. You've seen 2 great decades of returns, and even realizing that 18%/yr couldn't continue, you plan for a below average 7%, this would double your 1999 balance in 10 years. Instead you saw zero return. For a decade. In sum, when each variable has an accuracy of +/-50% you are not going to combine them all and get a number with even 10% accuracy (as if MrC were wrong, but the pro would tell you 11% is right for you?). This is as absurd as packaging up a bunch of C rated debt, and thinking that enough of this paper would yield a final product that was AAA.