You worked hard every day and saved away for 30 years. Well, what happens at the end of the 30 years if you saved away the minimum of 3% to get your company to match? Well guess what is likely to happen….you’re not going to be able to stop working. Saving 3% will keep you poor.
Saving 3% Scenario
Let’s suppose you are fresh out of college and picked up a job paying you $35,000 a year. After you meet with the company and find out there is a three percent match you decide that is what you are going to do.
Let’s be honest most folks are rarely thinking retirement when they start working, but it seems like a good plan. At this point in life, you are likely more comfortable having debt than investing which is just part of the financial brainwash that our society has built which just puts us all behind financially.
At the end of year 10 (yes I know there will likely be raises along the way) this is what your account is going to look like assuming just a 5% return on investment.
So far you have invested $10,500 and turned it into $27,579 in your retirement plan. Doesn’t seem too bad, but after 10 years you haven’t saved one year of salary, yet which is probably going to put you behind schedule. However, we’re going to give you a nice raise, but you still keep your percentage at 3%. For some reason, we are still afraid to become rich.
Here is how you are going to look by year 20 if you are making $45,000 a year and picking up the same 3% match at work and a 5% return on your investments.
Now you are in your mid 40’s and have been putting away $1,350 of your pay each year into retirement. You log in to your account and see there is now $80,581 and you are feeling pretty good. You now almost have two years of pay saved in retirement.
Now let’s look after 30 years of work. Your pay went up again to $55,000 a year and you are still putting in 3% and getting a 3% match from the company. You are starting to think about retirement now that you are in your 50s and sit down with your financial adviser. This is what they are going to show you.
Hey, $174,841 is pretty good. That is a lot of money. The best part is that you only contributed $40,500 to get to that amount. Your company also kicked in $40,500 as well and you are thinking I have got it made.
However, you barely have a little more than 3 years’ salary saved at this point after 30 years of work. Your fear and misunderstanding of risk have kept you from becoming rich even though you have invested in so many other things you didn’t consider to be investments that were just as risky if not more.
If you are trying to replace 80% of your salary you will run out of money within 5 years. Social security may delay that to six or seven years but inflation is going to kick your butt!
Inflation in 30 years
Do you know how many houses were 30 years ago? Let’s say you started in 1985, guess how much a house cost back then? The median house price according to the census was $84,700 in September 1985.
Now, look at where we are 30 years later and the average price is around $250,000. Your buying power is gone. That is what is going to happen again in 30 years. That $174,841 isn’t going to be worth anywhere close to that amount. Your buying power is gone.
How Much Money Should I Save?
So how much money do you need to save by the time you decide to quit working? Well, it depends on your lifestyle. The more control you have over your lifestyle the earlier you can quit your regular job.
In general, this is what you need to save by your age:
So by this figure, you should have at least $440,000 of your salary saved by the time you get set to retire. This chart also has you working 40 years and not 30 years.
Saving the Minimum Won’t Get You There at Retirement
But even at the pace of 3% you just aren’t going to get 8 years of salary save no matter what your salary is; you will not be able to feel the relief that comes from being able to leave the working world. Doesn’t matter what your salary you will be short over and over. Really this is 6% savings because of your company and that didn’t get you there either.
How Much of Your Salary Do You Need to Save Each Year
So how much do you need to set aside to get you to have eight years of salary? The math shows you are going to have to save between 10-15% of your salary and then also get a company match of around 3% as well. That range of 13-18% of your overall salary (along with at least a 5-7% return) is going to land you in that eight-year salary range to retire.
Of course, the more you add earlier on the faster you can reach that number. Really it’s up to you to decide how long you want to work and when it all clicks for you when you learn about investing in life. Early on you may not have enough to save, but the earlier you start the faster you can finish.
Do you have a plan in place, or have you done the math on how to get to your magical number?
