How much to save for retirement while spending the rest worry-free

  • There are many different rules that dictate how much you should save for your retirement.
  • According to CFP Colin Overweg, it’s very simple: just save 20% of your income and you’ll be fine.
  • Keeping it simple allows you to enjoy the remaining 80% of your income stress-free while you’re young.

There is no one particular way to achieve retirement goals, and different people have come up with different methods that work for them.

Some retreat strategies, especially those associated with the FIRE movement, can be quite intense at times. These workers sometimes engage in super savings tactics in order to set aside as much of their income as possible or work hard to increase their income as much as possible, and the typical FIRE savings rate is 50% of one’s income .

Other suggestions for how retirement savings can be accelerated are to take care of side hustle. Some find this approach – having multiple streams of income – ideal because it often allows people to move from full-time to part-time work and focus on the things that interest them, but others times, it can also cause burnout. .

At the other end of the spectrum, there are people who have saved very little for their retirement.

A 2021 study by Vanguard indicates that the average 401(k) account balance is nearly $130,000 but the median amount is just over $33,000. This means that some people have a lot of money in their retirement accounts, which significantly increases the national average, but the typical worker has very little in savings.

This is especially true for Gen X workers — who are now in their 40s and 50s — but have little savings. According to a 2019 survey, only 47% of Gen X Americans even have a retirement account to begin with.

How much you need to save for retirement will depend a lot on your age, current income, personal needs and location. That said, there are some general rules that most people use to determine how much they need.

One is the 25x rule, which states that you must multiply your required annual income by 25 to find out how much you need to save for retirement. A similar guideline is the 4% rule, which suggests that your annual withdrawal rate should not exceed 4% of the total amount in your retirement account if you want it to last for the duration of your retirement.

There are others, like the idea that you should have saved at least a year’s worth of salary by age 30, or that your contribution rates should increase as you get closer and closer to retirement.

However, according to Colin Overweg, a California-based financial planner with an all-virtual practice, there’s one rule of thumb he recommends to most retirement savers: save 20% of your income each year for retirement and spend the Another 80% of your income as you see fit.

Why you should save 20% of your income for retirement

More than anything else, Overweg said establishing a consistent 20% savings rate is about successfully developing a savings habit.

“The real generator of wealth for most people is consistent saving,” Overweg said. “It’s not the one-time event where you got lucky and bought a stock, and that doesn’t get superior investment performance.”

He said the reason he thinks 20% is an ideal number to save is because it’s a sustainable number to save over a period of about 25 to 30 years and will still allow the future retiree to to be where he needs to be with his finances. order to stop working.

“In broad and very general cases, you need to have about 25 times your expenses saved to be financially independent,” Overweg said, adding that he says 20% is an ideal saving figure when looking at this rule and working backwards.

“20% are perfectly faithful to that over a professional career of about 25 to 35 years,” Overweg said. “If you start saving 20% ​​at age 30, you will be financially independent around age 55 or 60.

When it comes to saving for retirement, the sooner the better. The compound interest you can earn by saving as early as age 20 can have a snowball effect on your account balances, sometimes to the point that you will have saved enough at a young age that even if you didn’t not contributed from other funds. account for the rest of your life, you will still have enough to retire in your late 50s or early 60s. This is sometimes called coastFIRE.

However, starting your retirement fund in your 30s doesn’t mean you won’t be able to retire on time – you just need to start as early as possible and stay consistent.

Why you should just enjoy the remaining 80%

Overweg also suggested that it’s important to “enjoy the remaining 80%” of your income if you save 20% each year.

“Some people can be so focused on budgeting and sticking to their budget, but not be on track to retire,” Overweg said. “Why are you so afraid of pinching a penny? Put 20% into long-term wealth building accounts, then enjoy the rest – now your budget is for you.”

Overweg has described his approach to retirement planning with his clients as “holistic” and said he emphasizes that retirement is a number, not an age, and reaching your retirement number can be achieved. in many ways.

“It’s very easy for advisors to just say – ‘no, you’re not on track, you need to be able to retire at 62,'” Overweg said. “And I will ask someone to push back and say they love their job and want to work part-time for the rest of their life. If that’s really the case, I think it would be enough sad that an adviser is saying ‘no, we’re not going to run those numbers, you still have to save more’.”

Overweg referenced Ramit Sethi’s best-selling personal finance book ‘I’ll Teach You How to Be Rich’ and said it was more important to him as a financial planner that his client live his ‘richest life. “in their twenties, thirties, forties and fifties. than to follow a complex and restrictive savings plan that does not really correspond to their needs.

“It’s not about listening to the client or putting a plan in place that would allow them to live their best life now and in the future,” Overweg said.