So to start this discussion, lets start out with some “fun” facts about American’s savings rates:
- The average savings rate in the United States in 2018 was 6.73% of their disposable income. Disposable income meaning money after taxes. (United States Bureau of Economic Analysis)
- 1 in 3 Americans do not have any money saved for retirement (GoBankingsRate)
- 56% of Americans have less than $10,000 saved for retirement (GoBankingsRate)
- 38% of Americans spend roughly equal to what they make while 18% spend more than what they make. (FINRA Investor Education Foundation’s 2016 report)
- According to a 2018 survey of 5,000 people, 40% of people’s primary reason for saving was for a vacation or a car than for retirement (29%) (GoBankingsRate)
CONCLUSION: Americans suck at saving and are really good at spending…okay, we knew this.
But think about this for a moment, the average American saves 6.73% of their income…For every $100 dollars you make, that means you are saving less than 7 dollars of it. But let’s make an example to really make this point stick.
Let’s use the average Joe for our example:
Average Joe
Joe is the Average American, making the average income, spending and saving the average amount. Nothing wrong with average, is there?
- Average individual income: $61,372 (2018 U.S. Census Bureau).
- Disposable income: $46,820 (Calculated using Smartasset)
- Savings Rate: 6.73%
- Yearly Savings: $46,820 x .0673= $3150.99
- Yearly Spending: $43,669.01
- Savings needed to retire: $1,091,725.25 (calculated using the 4% rule)
- Years until retirement without investing: 346.47 years
- Years until retirement with investing assuming 7% return: 46.75 Years
Well let’s hope you are young!
So how much should I be saving?
According to Fidelity, you should be saving 15% of your income. Which in is this scenario puts your years until retirement at around 35.6 years, again assuming you are investing at a return of 7% per year.
Obviously in these examples, there are a lot of assumptions being made. Life, income, and spending can never be looked at in a vacuum but this is why we use the averages to best represent the average American.
So looking at these numbers in a vacuum, 36 years until retirement isn’t a bad outlook if you are starting your retirement planning at a young age.
However, one survey looking at millennials (age 18-34) found that 42.2% of us have not started saving for retirement yet and 72% have less than $10,000 saved up.
So according to this survey, most of my fellow millennials are not on track to even stay up to pace with the Average Joe…
So what should I ACTUALLY be saving?
I don’t expect everyone to try to save the 60% of their disposable income that I was able to save this past year. This isn’t to say that you can’t, or that you can’t even exceed this number. It just means that we all have different financial circumstances that leads to different allocations of income.
However, I do believe that everyone can “feel” their savings more than what we currently do. But what does this mean?
Saving should be a felt thing. You should be able to feel that you are grinding out the last couple of percentage points in savings.
Not that you are living off of ramen and missing out on social events with your friends. Just meaning that you are conscious of your saving amongst your everyday life. That you are aware of what each purchase is doing to your checking account and where that purchase leaves your budget at for the rest of the week.
You don’t have to count pennies, you just need to be aware.
It should never come from a point of stress but merely from a point of awareness.
My Recommendation
I usually recommend starting by attempting to save 20% of your disposable income per month. Attempt to reach this number for 3 consecutive months. Once you are able to accomplish this feat, then you can start to slowly increase your savings rate by 1-2% per month until you find that number that is both challenging yet comfortable.
Now, you aim to stay near this number.
You’ll have months below this number, but hopefully you’ll have months above this mark that will help average you back out. Then, when you look back at the end of the year, this number will likely be near your target amount.
Every increase in the percentage of savings has the potential to take years off of your targeted retirement age. It all helps, but I do understand how difficult it can be to see past the end of the year, month, or day.
Don’t get discouraged, we all have months that are less than desired where we have a little too much fun or we have an unexpected expense pop up. Saving should never increase your stress. The ultimate goal is to increase your financial security now to decrease any future financial stress.
Bonus:
Remember, when we save 20% this not only increases what we are contributing to retirement, but it also decreases our yearly expenses and therefore decreases our target retirement number. So let’s looks at what would happen in a vacuum in our average Joe scenario if he saved 20%:
Average Joe:
- Average individual income: $61,372 (2018 U.S. Census Bureau).
- Disposable income: $46,820 (Calculated using Smartasset)
- Savings Rate: 20%
- Yearly Savings: $46,820 x .20= $9,364
- Yearly Spending: $37,456
- Savings needed to retire: $936, 400 (calculated using the 4% rule)
- Years until retirement without investing: 100 years
- Years until retirement with investing assuming 7% return: 30 years
The Extremists
It’s hard to even list myself into this group, but I am putting myself here purely due to my 60% savings rate. I feel like I don’t belong here because to me, none of my savings has felt extreme.
I’m aware of it, but it has never limited me or made me feel like I have missed out on anything. Like I’ve mentioned in the past, I don’t skimp on anything that offers value to my life such as healthy eating, working out, socialization, or travel.
With this savings rate, I was still able to travel around the country, vacationing and exploring at any moment. But when I compare this 60% rate to the nations 6% rate, this is the group I likely belong in. Even though there our others saving much more than me.
The Fiscal Therapist
- Disposable income: $74,606
- Savings Rate: 59.93%
- Yearly Savings: $74,606 x .5993= $44,710
- Yearly Spending: $29,896
- Savings needed to retire: $747,400 (calculated using the 4% rule)
- Years until retirement without investing: 16.72 years
- Years until retirement with investing assuming 7% return: 10.95 years
Yes, I understand that my spending and savings will change as I grow older. And no, this number isn’t exact. But, this is a good exercise to do a quick and dirty check on where you are in relation to your own personal retirement goals.
Conclusion
There are many of us who couldn’t retire on $750,000 or save over 50% of their income, but that is based on your own personal numbers and situation.
You never should compare yourself to others, only try to grow and learn for yourself and make small changes along the way. Because when many small changes accumulate, it and can lead to some very large results.
Also, at no point do you ever have to be done working just because you reach your number.
Many times reaching your number just allows you to find more joy in what you do as you are now working because you want to and not because you have to. Or, it may give you the financial flexibility to pursue a passion that may have more financial risk involved.
Life is all about doing what makes you happy, reaching your retirement goal early in life just gives you more flexibility to do so.
What’s your savings rate??
If you have any specific questions for me comment below, or as always, feel free to message me directly here.
