Financial Advice for Retirement, Social Security, IRAs and Estate Planning

How Much Should You Save Each Year?

This article is mostly for younger people who are wondering what percentage of their income they should be saving for retirement. The thesis of the article is that there is no good rule of thumb. Each rule mentioned in the article has pros and cons.

Here’s a point not made in the article. Save a lot when you’re younger. The reason is that you’ll have a lot more time for the magic of compounded returns to work. If you save a lot when you’re young and invest decently, then you won’t be in a panic at you near retirement and might very well be able to reduce the percentage of income you’re saving. Saving early means investment returns will provide 70% or more of your nest egg. Wait to save or save only a minimal amount and your contributions will provide most of the nest egg.

The honest answer is: It depends. “The best-laid plans can be undone by a messy divorce, a disabling disease, or a stock market crash,” Jonathan Skinner, a professor of economics at Dartmouth College, wrote in a study on the topic. Your future health-care expenses are almost impossible to predict, for example, especially as Congress considers big changes to the system.

But “it depends” is no help to millions of American workers, who aren’t experts in finance and just want to know what to do. Uncertainty can be paralyzing, leading people to believe retirement is impossible and discouraging them from even starting to save. Many are getting the wrong impression from their employers’ 401(k) plans, which often default workers into saving far too little.

 

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