A few weeks back, I ran a poll on retirement savings accounts which revealed that more than 9 out of 10 respondents are saving for retirement through either an employer-sponsored plan or an IRA of some sort (or both). This week I’m interested in learning even more about my readers’ retirement savings habits, which brings us to the question of the week… “What percentage of your annual income do you save for retirement?” For the purposes of this poll, feel free to include matching funds from your employer. For example, in my case, I get a dollar-for-dollar match of up to 5% of my annual salary (which I take full advantage of) and I’m also kicking in an additional 9% (we bump this up by 1% every year when I get a raise). So that means that we’re saving 14% + 5% match = 19%. With that said, let’s get to the poll…
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My wife and I are currently maxing out our 401K contributions of $22,500 each, plus our employer’s matches. This equates to 25% of her annual salary with a 5% employer match. Me, I am contributing approx 16% of my salary with a 8% employer match. My wife also saved 9% of her salary in after-tax savings. I also saved 17% of my salary in after-tax savings. Hence, my wife is contributing 33% annually towards our retirement (pre- & after-tax savings). I am contributing 47% annually towards our retirement (pre- & after-tax savings). This equated to ~$89,000 put back for retirement in 2012.
How does one calculate this number with accuracy and honesty? For instance, In financial advice circles the phrase “pay yourself first” is often offered. I always find this statement a bit strange. Because you can set aside 10% of your income into savings as “payment” for yourself first before your bills but if you turn around and spend more than what you had left you didn’t “pay yourself first”. You can finance it by using credit cards or HELOCs or playing games with zero percent credit cards or paying down less on student loans or selling off certain other assets or any of the inumerable ways you can fool yourself into believing that you are saving 10% of your income. And I have heard all of those offered as ways to pay yourself first.
I find this advice to be financial trickery. Perhaps the goal is that if you pay yourself first you will spend less but that is the only way this truly works. In the end it doesn’t matter if you pay yourself first or last, only how much money you spent in the month versus how much money you earned. And by spent that includes debts accrued, not just cash that left the bank account.
I know for many people the monthly cash flow is the thing that is immediately in front of you but the only thing that matters in the long run is net worth.
So with that said, are people really aware of what they are saving? if you make 100K in a year and put 20% aside for savings and then have 20K in taxes and 70K in expenditures during the year, how much did you save? 10% is the answer. You came up with a way to save 20% and spend an extra 10% from somewhere else. And that is the key thing to be aware of. People can spend interest on savings, equity gained on houses, finance debts over long periods of time and convince themselves they are saving a large amount of money. Its more difficult to get at the accurate value of this number and it would probably be instructive for people to stop and think about their cash flow and see if they are saving on the front end and borrowing or spending on the backend so as to be saving less than they think.
Just a thought.
Currently, we are saving 23% of our income for retirement. We unfortunately do not get any matching contributations from work. We probably will decrease the amount if we are in a lower tax bracket in the future.
The best piece of advice on how much to save for retirement is not the exact amount or percentage. Yes, that is definitely important. However, it is even more important to not get discouraged and postpone saving. If all you can manage today is the 5% that your employer will match, save 5%. Then with every raise, increase that percentage.
I’m saving at somewhere in the neighborhood of 30% overall. The exact percentage will depend on lots of factors, including what kind of a raise I get this year. I didn’t get there by maxing out my 401(k) contribution in my first paycheck at my first job and immediately opening an IRA. I got there in steps. I think I started at 6% because that’s what I could get matched on at the time.
My advice is to start now, in any amount you can. Increase it as soon and as much as you can.
Including bonuses/overtime, I’m at about 16%. As a percentage of my base salary, it creeps up to a little over 20%.
Of course, it helps (or hurts, depending on your view) when your base salary is low enough that your Roth IRA contribution is almost 10% of base.
My company is nice enough to match 100% up to 5% and then throw in an extra 7% for good measure. So I’m at 17% right now, but am thinking about bumping it up 1%.
Short answer: not enough.