Back to basics: To hit retirement goals, start saving a large percentage of gross income

Financial independence is the primary savings and investing driver for most people, and with good reason. In order to be successful in retirement, most folks will require a higher-than-anticipated wealth position, appropriate insurance coverage, and adherence to a very controlled spending plan. Almost every new client I speak with is not adequately prepared for this reality. I spend a lot of time in the first year simply broadening the discussion and assumptions, and I hope to do a little bit of that here as well.

My general recommendation for folks in the accumulation stage of their life is this –– assuming you don’t invent something, inherit funds, are a beneficiary of a generous pension (such as the Wisconsin Retirement System), or win the lottery, you need to save at least 15% to 20% of your pretax salary beginning in your 20s in order to be able to retire at an early age (assuming around age 65). If you have delayed saving for retirement into your 30s, assume at least 25% to 35%. If you delayed savings for retirement into your 40s and 50s, well, the math is going to be very tough. You’ll likely need to continue working for a long time.

There are some key assumptions behind that broad statement. I assume you actually want to enjoy retirement and have a relatively comfortable spending plan. I also assume you will be healthy and live in retirement for 20 to 30 years. And I assume you have no other sources of income in retirement other than Social Security, of which a large percentage may likely be needed for health and long-term care needs.

Here’s some basic math and additional assumptions:

  • Let’s assume you’re currently married, age 35, and want to retire at age 65, and you have not started saving yet. We assume you will need funds for 20 to 30 years.
  • The median family income in the age range of 35 to 44 is just under $57,000.
  • Let’s also assume you want/need $4,000 per month to cover lifestyle needs after tax. This is about 85% of that median income. This is wildly general and fails to consider the multiple stages of retirement, but it’s a good proxy to illustrate a point, and consistent with the readings and cost-of-living research I follow regionally and nationally.
  • If your average tax bracket when you enter retirement will be 20% for both state and federal, in order to get your $4,000 per month in spending you will need income of $60,000. This is in today’s dollars.
  • Let’s assume inflation between now and retirement is 3%. Today it’s about 2%, but historically it’s been about 3%. Adding inflation to your retirement income target over 30 years means your income needs grow from $60,000 to $145,000 (rounded). Yes, inflation increases spending by over 240%! This missed assumption is a critical error I see in many people’s initial plans.
  • Let’s assume the average SS benefit, according to the SS Administration (June 2011), is $1,180 per person. So figure SS provides you, as a married couple, $28,320 per year in today’s dollars and $68,740 in 30 years. This is a big assumption because many question SS solvency and ability to pay claims 30 years out. We’ll keep this assumption in place, but if SS is not available in its current projected form, you should obviously assume you’ll need even more resources.
  • Subsequently, you need $145,000 minus $68,000 SS Benefits, or $77,000 in gross income in 30 years given the above assumptions.
  • Finally, let’s assume you follow a reasonable 30-year guideline for sustainable spending distributions off of your portfolio. For a 25 to 30 year timeline in retirement, industry standards suggest anywhere from 2.8% (Pfau, et al, low-yield analysis) to 4.4% (Bengen historical stress test) to 5% (Guyton Decision Rules) target. This is highly dependent on the current yield, investment operating costs, market valuation, and inflationary environment. There’s a tremendous amount of research and thinking behind these assumptions, which could be a series of articles. For sake of discussion, let’s assume a 4% distribution rate, which is an average of the three ranges.



Now the calculation:

  • Very simple: $77,000 targeted income need divided by a 4% initial distribution rate = $1,925,000 target portfolio.
  • So, rewinding today, you would need to save about $20,500 per year (not inflated) or $14,000 (if you increase your savings annually by 3% inflation) a year, assuming a 7% return target.
  • I assume 7%, which today may be aggressive. I based it on the following asset allocation target of 70% equity with a 9% equity total return, and 30% bond with a 2.5% total return.
    • This could be aggressive in today’s yield and market valuation environment because it also assumes that all the returns are tax-deferred (i.e., you save entirely in your retirement plans and IRA assets).
    • This return also does not come without serious volatility that one would need to live through to get those returns.
    • It also assumes fees tied to the portfolio are below industry averages (again another series of articles could be written on this), but let’s keep it there given this is a 30-year time horizon.
    • NOTE: If you’re assuming investment returns of more than 7% on this asset allocation target, BE CAREFUL. There is substantial evidence suggesting forward looking returns will be far lower than historical returns (again, another series of articles).

Subsequently, for this family, they need to save 25% to 35% of their gross income for the next 30 years to hit their target.

The above, again, is a relatively basic analysis to prove a point. Every one of the above assumptions can be massaged to your specific situation, while it would also be very valuable to run probability analysis around whatever assumption tracks you use. The primary point above is that, in this scenario, you simply have to save a lot of your money to hit a comfortable retirement. And the sooner the better; the longer you wait, the harder it will get. If you haven’t already started, it’s time to get going, or assume you’re going to work a lot longer.


This article contains the opinions of the author. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described in this website or that of the author’s.

Mike Dubis does not guarantee the relevancy, appropriateness, or accuracy of any outside information or links. Mike Dubis does not render or offer to render personalized investment advice or financial planning advice through this medium. All references that might be made to an investment or portfolio's performance are based on historical data and one should not assume that this performance will continue in the future.


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