Why Saving 10% of Your Income for 30 Years Isn’t Enough (with the math)

(checkout the video of this blog too)

It’s just not realistic to save 10% of your income for 30 years and expect that to generate enough retirement income to last you 30+ years in retirement.

At one point, 10% was enough, but with life expectancy increasing so much because of modern health care, people are living a lot longer and therefore need their money to last a lot longer.

Because of people living longer, the likelihood of a long-term care event has also increased, which is yet another reason that you need to have a larger nest egg now than ever before.

Here’s the math behind why saving 10% of your income simply doesn’t work anymore:

⭐️ Assumptions ⭐️

✅ 35 years old & retiring at 65 (30 years to save)

✅ $120,000/year salary (remaining fixed for this example)

✅ 7.5% annual rate of return on investments (compounded annually)

✅ Compare saving 10% per year & 20% per year

✅ A 4% withdrawal from retirement assets in retirement

⭐️ The Results ⭐️

✅ Saving 10% per year results in $1.24M @ age 65 which can produce approximately $49,600/year of retirement income @ a 4% withdrawal rate

✅ Saving 20% per year results in $2.48M @ age 65 which can produce approximately $99,200/year of retirement income @ a 4% withdrawal rate.

As you can see, saving 10% of your income for 30 years only allows you to replace about 41% of your income in retirement ($49,600/$120,000 = 41%).

Of course, you have social security that you can layer on top for additional retirement income, but you’re not likely to be able to replace 100% of the income you are used to living on if you only save 10% of your income.

And most people in retirement want to live the same lifestyle they are used to (in fact, in the early years of retirement, retirees typically want to live a BETTER lifestyle)!

Contrarily, if you save 20% of your income for 30 years, you will be able to replace approximately 82% of your income… and with social security layered on top, you should have enough retirement income to live the same lifestyle you were living prior to retirement ($99,200/$120,000 = 82%).

That’s why saving 20% needs to be your savings target.

The most important thing you must do in saving for retirement is reach a critical mass, where your retirement nest egg is large enough to produce enough income for you to live the lifestyle that you want to in retirement.

With people living so much longer than they used to, 10% just doesn’t cut it anymore.

Now you may end up getting better returns than I used in this example, which just means you will have more money to spend discretionarily in retirement OR, you will have the opportunity to transfer assets to the people you love (just try to avoid transferring IRA money if possible).

When you are retirement planning, it’s never a bad idea to overshoot your target.

If you get better returns than anticipated you can either retire early, retire with more money, or give money away to the people you love.

To me, that’s a much better position to be in than falling short of your retirement targets….

But wait, there’s more!

⭐️ Bonus Strategy ⭐️

You can see how much income you are able to produce using a 4% withdrawal rate on your retirement portfolio, but what if I told you there were a couple of ways you could not only increase the amount of retirement income you took, but also maximize the amount of discretionary money you have to spend in retirement!?

Well, there is a way.

If you designate and allocate a percentage of your retirement portfolio to INCOME-ONLY, you will provide what I call an “income floor” for yourself.

This is a guaranteed, lifetime income stream that you can never outlive.

Therefore, you have eliminated the possibility of running out of money in retirement (which is retirees number 1 concern).

You have also created MORE INCOME for yourself because you are leveraging the risk-pooling power of an insurance company (see example below).

Using the example from above:

$2.48M @ age 65 can produce approximately $99,200/year of retirement income @ a 4% withdrawal rate….

But there’s a way to do MUCH better.

If you take 60% of that portfolio ($1.5M) and buy lifetime income, here are the results:

✅ You will have a $102,000/year of guaranteed, lifetime income that you can NEVER OUTLIVE (for the remainder of both you and your spouse’s life) PLUS, you will still have almost $1M of discretionary money to do whatever you would like in retirement

So you can never run out of money in any circumstance, PLUS you have the freedom to spend ALL of your hard-earned money (rather than keeping it tied up in the market trying to generate income for you).

That’s why it’s so important you go through an income analysis as you approach retirement.

Not only are there ways to ensure that you retire tax-free, but working with somebody who specializes in retirement income planning (like me) can maximize your income in retirement, guarantee you won’t run out money, AND give you more discretionary money to spend how you wish in retirement.

Let’s chat.