How much should I be saving?

[Anonymous]

So how much money should I be saving per paycheck? I’ve heard you should be saving 20-25 % of your paycheck. Currently I am saving 15 % in my personal savings and 10% goes to my 401k. Does the 20-25 % include the 401K contributions or should they be separate when you are saving? I just want to make sure I have enough.

[Anonymous]

Not possible to answer until we know your age and when you hope to retire.  Also need to know whether you own a home right now, and if you don't whether you think you might be planning to buy one, and if you do plan to when that might be.  Saving toward a downpayment is a big undertaking.

A web site that is to Retirement Planning what this site is to FICO scores is the Bogleheads site.  They can help you best in my opinion.

[iced]

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@Anonymous wrote:
So how much money should I be saving per paycheck? I’ve heard you should be saving 20-25 % of your paycheck. Currently I am saving 15 % in my personal savings and 10% goes to my 401k. Does the 20-25 % include the 401K contributions or should they be separate when you are saving? I just want to make sure I have enough.

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The answer is: as much as you can, as soon as you can. $10,000 saved when you're 25 can be over $150,000 by age 65 whereas $10,000 saved at age 45 may only grow to $40,000 by age 65.

The ideal is to cap HSA, (Roth) 401k, (Roth) IRA, ESPP if you have one, and drop excess in personal brokerages. If you can't cap everything, don't go all-in on accounts that have penalties for early withdrawal. You do want to have some money invested in individual brokerages since you can pull money from there before age 59.5 if needed.

Percentages don't mean as much as dollar amounts since incomes can vary so much. 10% would hit 401k cap for someone making $185,000/year whereas someone making $50,000 per year would need to withhold 37% to cap 401k.

Make a budget and stick to it for 3 months. If you were able to get through it without touching savings, reduce your budget a bit more and go another 3 months. Keep repeating this cycle until your budget is just big enough to maintain your living standard. Everything else should be going into savings.

[Anonymous]

I like the 10% of income to start. Pay yourself the 10% first. Then increase percentage as you get old. If you can. It’s easy when you single then you get married and have kids. Then you squeezed. Especially here in NY

[Anonymous]

Right now I’m 43 and for the last 20 years I had a job that didn’t have any retirement options. I recently got a job that has great retirement benefits and I know I am playing catch up because I started with 0. They may 7% of my 401k contributions so I am putting aside 10% to help it along. Playing catch up is hard. I just raised my personal savings account contribution to 20% per paycheck because I’m trying to reach that magic “need 3 months expenses” amount that I constantly hear about. Balancing my bill money, play money and savings can be difficult sometimes though.

[Anonymous]

I too did not save when I was younger and made the painful (but correct decision) to start socking away every penny I could in my mid-40s.

Bear in mind that, unless your salary is huge, there is almost no limit to how much you could sock away, even if we focus only on tax-sheltered retirement accounts.  This year your legal limits are 18.5k into your 401k and 5.5k into an IRA..  That's 24k.  When you turn 50 the IRS will let you sock away an additional 6k or so, thus 30k total.  If you think you might get close to those limits, you could make those contributions Roth, rather than conventional (pay tax on them now and then never pay tax again).

I do encourage you to open a Roth IRA if you have not yet done that.  Start funneling your Emergency Fund money into it (until you reach the 5.5k limit).  The reason is that a Roth will permit you to withdraw the principal that you deposit at no penalty (unlike a conventional IRA), so if an emergency does happen you can still access that money.  In the much more likely event that no emergency occurs, your money can begin earning 100% tax-free money at returns higher than a savings account will give you.

Should you get to a place where you have more money to invest than the 24k (or 30k) limit, there are many other options.  An obvious first place is paying off existing debt (unless it is extremely low-interest).  Other would be creating an account at Vanguard (or a similar place) to invest in funds that generate little taxable income (typically tax-managed large cap stocks -- though here you'd be wanting to talk to more knowledgeable folks than myself).

Aside from the raw dollar amount you sock away, you should be learning a lot about how to invest it: the theory and practical habits of good investors.  A good place to start might be the short guide IF YOU CAN by William Bernstein and then moving to his longer (but still easy to read) THE INVESTOR'S MANIFESTO.  (His FOUR PILLARS book might be a good third read.)

[Anonymous]

I read recently that by your 30s you should at have at least one year’s salary saved.

[shiftomnimega]

Upon getting your emergency fund straight, I suggest upping your 401K.  I am not aware of all of your financials, but if you can afford 18.5k a year, then you need to do it.  You have between 15 to 20 years to retirement and if you are starting from 0, then you'll need as much dough in there as you can so you can live comfortably in retirement.

[Anonymous]

It's good that you're thinking about saving. Many don't until it's too late.

The specific $/% to save couldn't be given to you. It's driven so much by your current financial situation, age, and many other life factors. Most personal finance books that you read will recommend a savings equal to 20% of your pre-tax monthly income. This 20% is a combination of any account related to retirement, savings, money markets, and brokerage. 

The first place that I usually start is retirement because of the power that it holds later in your life. Who knows if social security will exist when we're all ready for it. If your employer matches any given amount, I recommend contributing at least that amount. I'm not sure of any employer that matches 10%, but if you know of one, let me know. I'm currently 25 and fortunetely I've become annoyingly interested in personal savings and credit the past couple years.

It's unrealistic to think you're going to contribute the yearly max to 401k, unless you make a ton of money, but it is highly realistic to contribute the yearly max to an IRA account and I encourage you to do so. Any time you can get your money into a Roth account, it allows post tax money to get to work.

Some people love to see a lot of money in personal savings and money market accounts, but it seems like a waste to me as these accounts have such low rates. I do think it is important to keep 3 month to a year's monthly income in a liquid account of some sort for emergency purposes, but I would look into investing everything else. I saw it previously mentioned to work your savings on a trial basis and I agree with that statement. Start at 20% of your pre-tax monthly income and see if you can comfortably get by for a few months, then you can adjust as needed.

Saving money can be hard. Unfortunetely, it is not taught to students in school systems so you're more than likely to save in similar ways that your parents did. Make the hard decisions and hire your money to work for you as soon as you can!

[iced]

It's not as unrealistic as one thinks to max out contributions to savings. Someone with an annual income of $75,000 (which is above average in some parts of the country, but below average in others) can max out 401k and IRA while still maintaining a reasonable living standard, and would be able to max out HSA depending on their particular health benefits and needs. It might mean that you live with a roommate and don't get to drive a fancy car, but the alternatives (insufficient savings in retirement) will be far worse.

Current estimates are showing that $1,000,000 saved for retirement isn't really cutting it anymore and certainly won't in the future. For those in their 20s or early 30s today, they should be aiming for at least $5,000,000 for a comfortable retirement ... or get used to the idea of having a side hustle well into their 80s. The prognosis on Social Security isn't that great, either.