The 50 Cent Club

How much do you need to save each year in the accumulation stage of your life?

The simple answer is as much as you can, but to look at the issue from a more academic and theoretical perspective, Wade Pfau wrote a paper that nails it down about as well as one can.

Show me the money

For the TLDR version, Table 1 from the paper summarizes what you need to know. I have reformatted this and presented it here so its easier to read (especially on a phone screen).

Replacement Rate = 50% of Final Salary

	20 years	30 years	40 years
	40/60 Asset Allocation
20 years	31.98	39.5	47.02
30 years	15.64	19.33	22.19
40 years	10.26	12.42	13.84
	60/40 Asset Allocation
20 years	30.94	35.91	38.92
30 years	13.88	16.62	18.63
40 years	7.57	8.77	9.22
	80/20 Asset Allocation
20 years	30.52	34.45	35.94
30 years	12.85	15.14	16.54
40 years	6.26	7.39	8.06

Replacement Rate = 70% of Final Salary

	20 years	30 years	40 years
	40/60 Asset Allocation
20 years	44.78	55.3	65.82
30 years	21.9	27.07	31.06
40 years	14.36	17.38	19.38
	60/40 Asset Allocation
20 years	43.31	50.28	54.49
30 years	19.43	23.27	26.08
40 years	10.6	12.27	12.91
	80/20 Asset Allocation
20 years	42.73	48.24	50.31
30 years	17.99	21.2	23.16
40 years	8.76	10.35	11.28

The tables show you how you'll need to save per year and for how long to have a % of your final salary for a given number of retirement years. Let's look at two extremes to get an idea of what the table is saying.

First, if you only work and save for 20 years, then want to live in retirement for 40 years on 70% of your final salary, and you're only willing to use a portfolio that is 40% stocks, then you need to save 66% of your income each year. On the other hand, if you're willing to work for 40 years, have a retirement of 20 years, live off 50% of your final salary, and use an 80/20 portfolio, then you only need to save 6.3% of your salary.

So your savings rate needs to be between 6% and 66%. That's quite a range. Let's be a little more specific. With some reasonable assumptions of working for 30 years, having 30 years of retirement, and living off 50% of your final salary (remember you don't have to pay as much in taxes or save for retirement and you'll likely get something from social security) and using a standard 60/40 portfolio the table suggest you need a savings rate of 17% of your gross (before tax) income. So if you take nothing else from this article, aim to save a minimum of 17% (let's round that to 20%) of your salary per year. You can do it.

The Polite Investor's Safe Savings Rate

A savings rate of 10% probably isn't enough, 20% and you're doing well, 30% and you can probably retire early. If you want to retire really early (before 50), you're going to have to bump that up even further. Even with only living off 50% of your salary and investing aggressively, you'll still need to save over 1/3 of your income during your working years.

As for me, I aim for 50% so 50 cents of every dollar I earn, I save. I save till it hurts. Why not come and join me in the 50 Cent Club?

Think this is too much? Unrealistic? What percentage of your income are you saving?