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Retirement Savings Rule Of Thumb

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    Retirement Savings Rule Of Thumb

    Seeing the financial tip of the day threads got me thinking about retirement recommendations you commonly see in particular most sources will say to save at least 10-12% of your income annually into a retirement account like a 401k plan. I wonder why you rarely see a recommended $ amount to save per year? Even the IRS limit for IRAs & 401ks is based on $ limits

    The reason I ask this is because you take a person making $30k per yr saving 10% vs someone making $90k per year saving 10% turns out to 3x the amount being saved per year by the higher income individual. Factor compounded interest over 30-35 years makes a big difference. Now I realize these are simple examples with fixed income over a number of years but you get the idea.

    The key point is both individuals once in retirement will pay the same $ for many living expenses such as property tax, vehicles, fuel, food, utilities, medical expenses, prescription cost, recreational expenses on hobbies or vacation

    So how do you predict 10% will be enough for retirement across all levels of income when factoring facing future equal expenses?

    Now I realize it’s not practical for someone making $30k to save 30%+ towards retirement & maybe that’s the reason the general guideline is 10% minimum.

    Just food for thought

    #2
    I know how much I spend a year. I have tracked it for years. It is easy to predict how much I will need to live when I am not working. The rest is just math.

    Comment


      #3
      Standard of living and income replacement. As a general guideline the guy making 90k has a higher standard of living than the guy making 30k a year therefore he will need more savings to replace that income without changing his standard of living.

      Comment


        #4
        Without getting into the appropriate %, I think a reason that the general rule of thumb % is the same regardless of income is that people generally tend to upgrade their lifestyles as their income increases. Once you hit those higher income levels, if you want to maintain a similar lifestyle in retirement years, you are going to need more than the person used to living on a lower income level.

        Comment


          #5
          ^^^ I tend to agree in general but there will be a lot of similar expenses we will all pay regardless of income
          I’m just thinking of those similar everyday expenses we all face like groceries, healthcare, utilities, cars/trucks, repairs to vehicles, repairs to home,

          Those alone can hit hard at times.

          Good discussion though

          Comment


            #6
            Originally posted by thegrouse View Post
            I know how much I spend a year. I have tracked it for years. It is easy to predict how much I will need to live when I am not working. The rest is just math.
            Good for you & good way to plan ahead

            Comment


              #7
              All of those everyday expenses can be and typically are drastically different based on income levels. It is amazing the "everyday" expense creep that happens when your income increases.

              Comment


                #8
                Originally posted by bgbean90 View Post
                All of those everyday expenses can be and typically are drastically different based on income levels. It is amazing the "everyday" expense creep that happens when your income increases.
                Even for the following?

                Gas at the pump
                New tires on a vehicle
                Vehicle repairs
                Home repairs
                Dr visit
                Prescription costs (will depend a lot on type of insurance coverage)
                Groceries
                Utilities
                Cell phone

                These are just some that come to mind

                Comment


                  #9
                  Originally posted by HogHunter34 View Post
                  Even for the following?

                  Gas at the pump
                  New tires on a vehicle
                  Vehicle repairs
                  Home repairs
                  Dr visit
                  Prescription costs (will depend a lot on type of insurance coverage)
                  Groceries
                  Utilities
                  Cell phone

                  These are just some that come to mind
                  There is a floor of expenses that everyone will have. Just the cost to have a roof, vehicle and food. Expenses go up from there.

                  Comment


                    #10
                    Originally posted by HogHunter34 View Post
                    Even for the following?

                    Gas at the pump
                    New tires on a vehicle
                    Vehicle repairs
                    Home repairs
                    Dr visit
                    Prescription costs (will depend a lot on type of insurance coverage)
                    Groceries
                    Utilities
                    Cell phone

                    These are just some that come to mind
                    Maybe not gas.
                    People with higher incomes typically have nicer cars/houses (higher costs to repair)
                    Healthcare could be similar
                    Groceries - people with higher incomes typically buy higher quality/healthier food (more expensive)
                    Utilities - bigger house - higher utilities
                    Cell phone - could be similar

                    Comment


                      #11
                      Originally posted by HogHunter34 View Post
                      Even for the following?



                      Gas at the pump

                      New tires on a vehicle

                      Vehicle repairs

                      Home repairs

                      Dr visit

                      Prescription costs (will depend a lot on type of insurance coverage)

                      Groceries

                      Utilities

                      Cell phone



                      These are just some that come to mind


                      I think all of these except utilities can be cut back on in one way or another.

                      To the original question, 10-12% is the amount recommended to save to maintain the same standard of living. Many folks making 30k already have to cut back, even on things such as doctor visits and groceries. The same will be true in retirement.

                      Comment


                        #12
                        Saving a certain percentage of your income is not a good way to know if you will have enough in retirement or not. That's too simplistic. You need to know how much you have saved already. You need to know how many more years you plan to work and save before retirement. You need to factor in a realistic rate of return on your investments. You need to estimate what your spending will be once you retire, and then apply an inflation factor to that spending number (every year from today until your death) - which brings up your need to project a life expectancy. You need to estimate what sources of income you will have - Social Security, pension, royalties, etc. - and then get an estimate of the amount of income from each of those sources you expect.

                        If your projected retirement spending needs amount is larger than your expected retirement income from Social Security and/or any other retirement income will be, then you do the math to see how much of a lump sum you'll need to have invested at retirement to withdraw from without running out of money before you die. Then you do the math to see how much you'll need to invest every month/year between today and retirement in order to end up with the lump sum you need at retirement. Maybe you need to invest 10% of your income. Maybe you need to invest 6%. Maybe 20%. It's not going to be the same percentage for everyone. It all depends on all the other numbers.....

                        Comment


                          #13
                          Originally posted by Austin View Post
                          Standard of living and income replacement. As a general guideline the guy making 90k has a higher standard of living than the guy making 30k a year therefore he will need more savings to replace that income without changing his standard of living.
                          And be the guy making 90k a year living like the guy making 30k. 😁

                          Comment


                            #14
                            Originally posted by rjet View Post
                            And be the guy making 90k a year living like the guy making 30k. 😁
                            My rule of thumb is going to be. When My money makes as much as I do I can retire.

                            Comment


                              #15
                              Don't worry about saving for retirement until you are out of debt. The only exception that I can think of is if your employer matches 401K contributions. I never had that luxury. In the end, I didn't even have any health insurance benefits. Getting out of debt sometimes is the best return possible for your spare dollars. Once you are out of debt, stay out of debt. The whole dynamic changes at that point. You will be able to invest perhaps half of your income at that point. You also will be able to give a sizeable amount away to causes that you care about or to people that need help.

                              Comment

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