# What percent of my salary should I save?

Here is my situation: right now I am living in Puerto Rico, and I am planning to relocate to the mainland US (probably to Seattle, WA). Although Puerto Rico is a territory of the US, almost everything "works" different here in comparison to the states, especially the cost of life.

I already made a budget to see how much I should receive in salary in order to fulfill my current and expected financial obligations, but my question is: what amount or percent of my salary should remain without being used to pay the bills and other financial obligations (basically the percent of money that I should retain for savings, vacations and other unexpected events)?

I am pretty sure you could find a number of financial planners whom you could pay to give you a very accurate number, but the rule of thumb I like best is Save a dime of every dollar. 10%

(Savings means save for retirement, not vacations.)

Here is a nice article from radio personality Clark Howard with some adjustments based on your age:

If you're getting started saving for retirement later in life, the dime out of every dollar rule won't cut it for you. So for you, The Baltimore Sun has crunched the following numbers:

• If you start saving at 35, you need to save 20 cents out of every dollar to have a comfortable retirement at a reasonably young age
• If you start saving at 45, you need to save 30 cents out of every dollar
• If you start saving at 55, you need to save 43 cents out of every dollar

Jayraj has a particularly good and just as simple bit of math. https://money.stackexchange.com/a/30751/91

Your retirement and financial planning should not end with a flat percentage. In fact, the chances that any simple math formula is adequate are very low. My percentages (or Jayraj's simple math) are only starting places. If you are at the point where you are asking "where do I start", starting with this super easy no-brainer approach is great because the key is starting and doing it.

I disagree with the selected answer. There's no one rule of thumb and certainly not simple ones like "20 cents of every dollar if you're 35".

You've made a good start by making a budget of your expected expenses. If you read the Mr. Money Mustache blogpost titled The Shockingly Simple Math Behind Early Retirement, you will understand that it is usually a mistake to think of your expenses as a fixed percentage of your income. In most cases, it makes more sense to keep your expenses as low as possible, regardless of your actual income.

In the financial independence community, it is a common principle that one typically needs 25-30 times one's annual spending to have enough money to sustain oneself forever off the investment returns that those savings generate (this is based on the assumption of a 7% average annual return, 4% after inflation). So the real answer to your question is this:

1. Calculate your annual expenses, say x
2. Multiply by 25 (You can also use 30 instead of 25, if you want to be more conservative)
3. Calculate your current annual savings, say y
4. 25 * x / y is the number of years, call it z, you will take to save up enough money to retire

UPDATE

Keats brought to my attention that this formula doesn't work that well when the savings rates are low (20% range). This is because it assumes that money you save earns no returns for the entire period that you are saving. This is obviously not true; investment returns should also count toward your 25-times annual spending goal. For that reason, it's probably better to refer to the blog post that I linked to in the answer above for precise calculations. That's where I got the "37 years at 20% savings rate" figure from.

Depending on how large and small x and y are, you could have enough saved up to retire in 7 years (at a 75% savings rate), 17 years (at a 50% savings rate), or 37 years! (at the suggested 20% savings rate for 35-year olds).

As you go through life, your expenses may increase (eg. starting a family, starting a new business, unexpected health event etc) or decrease (kid wins full scholarship to college). So could your income. However, in general, you should negotiate the highest salary possible (if you are salaried), use the 25x rule, and consider your life and career goals to decide how much you want to save. And stop thinking of expenses as a percentage of income.

• This is a great answer, but I think it oversimplifies some aspects of planning. For instance, current expenses often include a mortgage and/or school loans that will be paid off before retirement, which considerably offsets x. Also, the percentage being saved for retirement is already accounted for in the multiplier, so that can be removed from x as well. I think a better approach would be to calculate x as expected sustained expenses instead of current expenses as they could differ greatly, but inflation still needs accounted for as step 5. – Nicholas May 14 '14 at 19:49
• To answer your points one by one: 1) mortgage equity should (to a point) be counted toward your retirement "savings", because it's "earning" you money by saving you from spending on rent (although that supposes low property taxes and maintenance expenses). other loans are assumed to be 0. If you have other debt (apart from a mortgage) pay it off ASAP (unless you have a ridiculously low rate of interest and can do better on the market). 2) inflation is accounted for because the 25x rule assumes a 4% return after inflation (with a 7% average annual return) – Jay May 14 '14 at 20:53
• I didn't understand what you mean by "the percentage being saved for retirement is already accounted for in the multiplier". I put the four step formula in to help calculate time till enough savings are accumulated. – Jay May 14 '14 at 20:58
• Thanks for the clarification. I understand better now. Though if you're counting mortgage towards savings I think you need to count only equity reduction, as interest makes up a large percentage of early payments. You're correct that you accounted for inflation - I missed that; sorry. – Nicholas May 15 '14 at 12:26
• @Nicholas Savings are not an expense because you didn't spend that money; it is (presumably) invested and earning you money. If your living expenses are \$40k and savings are \$10k then your savings rate is 20%. About interest making up a large part of mortgage payments, if you pay off your mortgage early, you pay less interest than you would if you dragged it out over the entire term – Jay May 15 '14 at 17:17

A single percentage figure makes little sense here as you are asking for a bunch of different things:

• unexpected events - this is what emergency funds are for, and most recommendations (at least for the USA) are to keep somewhere between 3 and 9 months of expenses in liquid funds. It depends a lot on what kind of health insurance you have, as the biggest risk for most people is health problems.
• vacations should be budgeted like any other one-off luxury expense: only spend what you have left once living expenses, emergency funds and savings are accounted for.
• savings - complex topic, and depends a lot on how you plan to lead your life (and of course your age!). This question and answers suggest that when starting early, 15% of your income is a minimum for retirement savings.
• Excellent point about the emergency fund. Retirement isn't an emergency. – MrChrister May 14 '14 at 13:43
• Vacation is one-off? Tell my family that. It's a budget item that's there year after year. – JoeTaxpayer May 14 '14 at 14:19
• @JoeTaxpayer: well, that's fine (and really the same for me) as long as it's budgeted. Maybe it should be put "vacations should be budgeted like one-off luxury expenses". – Michael Borgwardt May 14 '14 at 14:29
• I think this is a better way to look at it. Short term: \$1,000 sitting in a savings account attached to your checking. Medium term: 3-6 months worth of expenses in an emergency fund. Long term: Money you might save for a downpayment on a house. Retirement: Start with at least enough to get your employer's 401k match, and preferably 10-15% total. There are a lot of calculators that will give you a good idea of what you will need for retirement. – TechnicalEmployee Jun 4 '16 at 18:36

"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

• Inflation
• 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.

Its been years since I lived there, but I found Seattle to be pretty expensive. Housing costs seem out of line with expected salaries. Coming from Puerto Rico you might be shocked how expensive it is to live there, and also how infrequently you see the sun.

Your question is highly subjective. One person would need 100K to cover those things you are talking about, while others would need less then 30K. Also where you live in the Seattle area makes a difference. Will you be in Redmond or Bothell? Housing costs vary considerably.

One nice thing about that part of the country is can be very inexpensive to vacation. A fishing license, a packed lunch, and a bit of gas is all that is necessary to really enjoy that part of the country. Back in the day I used to ski Steven's Pass during the week, and the lift tickets were a 1/3 of the weekend rate. Having hiking/camping gear and or a bicycle is also a good way to enjoy life.

Bottom line I would make a budget, and go from there. If you intend on retiring in PR, then you would need a lot less then if you choose to remain in Seattle so even that is subjective.

Perfect Example, Marysville, which is way out of town so a commute would be a problem. However, unlike many parts south of Seattle, it is safe and nice. ~200K for a 1200 sq ft home. Holy cow.

Here in Orlando, figure about 130K for the same home with less of a commute. And you will see the sun more than 5 days per year.

• Yeah, I was looking at Zillow for apartments to rent, and I was very shocked. I still do not know which part I will be. Which place is cheaper in terms of renting: Redmond or Bothell? – scubaFun May 14 '14 at 13:53
• For the posterity, this answer was also a great one; however, the one that I marked as the answer contained the information that I was looking for. Pete, thanks for the information given here. It is valuable. – scubaFun May 14 '14 at 14:49
• Bothell. The larger question is where you intend to work. Commuting from Bothell to Redmond or Seattle would be pretty horrible. – Pete B. May 14 '14 at 14:50
• Check out my edit for a home that I found. – Pete B. May 14 '14 at 15:07
• Wow, with this example, and what you are mentioning about commuting, I think I should reconsider moving to Seattle, and instead stick to the original plan, which was coincidentally moving to Florida. Very great info what you have given to me. Thank you very much. – scubaFun May 14 '14 at 15:47

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