T. Rowe Price has a brochure [pdf] which has the common advice that you target saving at least 15% of your gross income each year to prepare for retirement. Of course, the earlier you start, the better. The added wrinkle here is that they offer an alternative route if you find 15% a stretch when you are young.
In their simulation, if you start saving at age 25 at a 6% rate and increase it 1% each year until you reach 15% (and then stay at 15%), you’ll actually come out ahead of someone who starts saving at age 30 at a 15% rate. You’ll even do okay if you start at age 30 at a 6% savings rate and increase it 2% a year until your reach 15% (and then stay at 15%). The two big takeaways are (1} start, even if small and (2) bump up your savings even if just a little by banking some of your raises each year.
The assumptions made seemed largely reasonable:
Examples beginning at age 25 assume a beginning salary of $40,000 escalated 5% a year to age 45 then 3% a year to age 65. Examples beginning at age 30 assume a beginning salary of $50,000 escalated 5% a year to age 45 then 3% a year to age 65. Example beginning at age 40 assumes a beginning salary of $80,000 escalated 5% a year to age 45 then 3% a year to age 65. Annual rate of return is 7%. All savings are assumed tax-deferred. Multiple of ending salary saved divides final ending portfolio balance by ending salary at age 65.
Bottom line. Start saving regularly, no matter the amount. Even if you feel like you can’t save 10% or 20% or whatever you read somewhere, just should start as soon as possible with a smaller number. After a year, try to increase your savings rate by 1% or 2%. Repeat each year. This can help minimize how much you “feel” the savings, while still ending up with a healthy nest egg. Build the habit.
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© MyMoneyBlog.com, 2018.
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