Savings is the foundation of good personal finance. This article will discuss how much savings to accumulate by age so you can achieve financial independence and retire comfortably. It’s important to have savings targets at every age to keep you on track. When it comes to building wealth, you don’t want to just wing it!
I don’t want to hear excuses as to why you can’t save if you want to be free. Go somewhere else please. During the height of the pandemic in March 2020, the U.S. personal saving rate rocketed above 33% from ~9%. Therefore, we can all save more if we want to.
If you are serious about living life on your own terms, study my recommended savings by age chart carefully. The more you save, the sooner you can achieve financial freedom.
Recommended Saving Rate By Age And Income
Your saving rate should increase the more you make. To do this, you’ve got to spend at a slower rate than the rate of your income increase. I’m trying to use realistic numbers here so that folks don’t overly bitch and moan. I started saving 50% of my after tax income when I began earning more than $60,000, so please, save your excuses for the government instead.
Savings amounts are important, but what’s more important is your expense coverage ratio given everybody has different lifestyles. In other words, how many years (or months) of expenses can your savings cover in case your income goes to zero?
Given nobody can work forever, we must increase our expense coverage ratio the older we get because we will have less ability to earn. At this point, it’s time to start drawing down our savings. Let’s review my savings by age chart below.
Recommended Savings By Age Chart: Pre and Post-Tax Savings Guide
Below is my recommend saving rate and guide by age. It shows how much you should have saved in your pre-tax retirement accounts (401k, IRA, Roth IRA, 403b, etc) and your post-tax investment accounts.
Sadly, the average 401k and IRA contributions are not high enough. However, you have the power to do better than average. For 2023, the employee 401k maximum contribution limit is $22,500. This is up from $20,500. Your goal should be to max out your employee contributions as soon as possible.
Your saving rate should increase the more you make. Not only should you be maxing out your tax-advantaged retirement accounts, you should also be building your taxable investment portfolios. Your post-tax (taxable) investment accounts are what will generate useable passive income if you wish to retire before 60.
I recommend everybody start off with 10% and raise their savings amount by 1% each month until it hurts.
If you’ve ever had braces, you get the idea. Keep that savings rate constant until it no longer hurts, and start raising the rate by 1% a month again. If you make more than $200,000, certainly shoot to save more if you can. You can theoretically achieve a 35%+ savings rate in two short years with this method!
Please note that I am making 401k and IRA contributions a priority over post-tax savings. The reasons are:
- We have a tendency to raid our post tax savings,
- Tax free growth,
- Untouchable assets in case of litigation or bankruptcy,
- And company match.
Obviously you need some post-tax savings to account for true emergencies. Ideally, my goal for everyone is to contribute as much in their pre-tax savings plans as possible and then save another 10-35% after tax.
The maximum 401k contribution for 2022 is $20,500 and for 2023 it rises to $22,500. The maximum pre-tax contribution amounts have historically increased by about $500 every two years. But it varies depending on cost-of-living adjustments and inflation rates.
Recommended Expense Coverage Ratio By Age
The below chart is an expense coverage ratio chart that follows someone along a normal path of post college graduation until the typical retirement age of 62-67. I assume a 20-35% consistent after-tax saving rate for 40+ years with a 2% yearly increase in principal due to inflation.
The other assumption is that the saver never loses money given the FDIC insures singles for $250,000 and couples for $500,000. Once you breach those amounts, it’s only logical to open up another savings account to get another $250,000-$500,000 FDIC guarantee.
You can buy an 18-month CD with CIT Bank for 4.5% thanks to aggressive rate hikes by the Fed. This is one of the best CD rates today. Before 2022, 18-month CD rates were less than 1%. Check back as the CD rate is always changing.
Expense Coverage Ratio = Savings / Annual Expenses
Note: Focus on the ratios, not the absolute dollar amount based on a $65,000 annual income. Take the expense coverage ratio and multiply by your current gross income to get an idea of how much you should have saved.
Savings By Age: Your 20s
You’re in the accumulation phase of your life. You’re looking for a good job that will hopefully pay you a reasonable salary. Not everybody is going to find their dream job right away. In fact, most of you will likely switch jobs several times before settling on something more meaningful.
Maybe you are in debt from student loans or a fancy car. Whatever the case, never forget to save at least 10-25% of your after tax income while working and paying off your debt. If you have the ability to save 10-25% after tax, after 401k and IRA contribution up to company match, even better.
In your 20s, it’s paramount to get your personal finance fundamentals right. You want to beat the average net worth for the above average person. And you will, if you save and invest aggressively for a long enough period of time. Everything is relative when it comes to finance.
Savings By Age: Your 30s
You’re still in the accumulation phase, but hopefully you’ve found what you want to do for a living. Perhaps grad school took you out of the workforce for 1-2 years, or perhaps you got married and want to stay at home. Whatever the case may be, by the time you are 31, you need to have at least one years worth of living expenses covered
If you’ve saved 25% of your after tax income for four years, you will reach one year of coverage. And if you saved 50% of your after tax income a year for five years, you will have reached five years of coverage and so forth.
Need some extra motivation to keep on hustling and saving money? Take a look at the top 1% net worth amounts by age.
Savings By Age: Your 40s
You’re beginning to tire of doing the same old thing. Your soul is itching to take a leap of faith. But wait, you’ve got dependents counting on you to bring home the bacon! What are you going to do?
The fact that you’ve accumulated 3-10X worth of living expenses in your 40’s means that you are coming ever close to being financially free. You’ve hopefully built up some passive income streams a long the way, and your capital accumulation of 3-10X your annual expenses is also spitting out some income.
The best age to retire to minimize regret and maximize life is between 41 – 45. Therefore, you should be aggressively saving more in your 40s. Your 40s is a decade when you really start to recognize your mortality. More friends and family members you know start dying. You might also have some health issues as well.
Savings By Age: Your 50s
You’ve accumulated 10-15X your annual living expenses as you can see the light at the end of the traditional retirement tunnel! After going through your mid-life crisis of buying a Porsche 911 or 100 pairs of Manolo’s, you’re back on track to save more than ever before!
You are 100% in tune with your spending habits, therefore, you raise your savings rate by another 10% to supercharge your final lap. As you get closer to traditional retirement age, you can save more in Treasury bonds which are yielding over 4% thanks to Fed rate hikes.
You want to focus more on capital preservation and not capital growth with your savings in your 50s.
Savings By Age: Your 60s
Congrats! You’ve accumulated 25X+ your annual living expenses and no longer have to work! Maybe your knees don’t work either, but that’s another matter! Your nut has grown large enough where it’s providing you hundreds, if not thousands of dollars of income from interest or dividends.
Full Social Security benefits kick in at age 70 now (from 67), but that’s OK, since you never expected it to be there when you retired. You’re also living debt free since you no longer have a mortgage.
Social Security is a bonus of an extra $1,500 a month. You’re budgeting a couple thousand a month for health care as you plan to live until 100.
Regarding a more aggressive target net worth, shoot to accumulate 20X your annual gross income by the time you want to retire. By using a multiple of income, your net worth goal continues to increase as you make more money. There’s no way you can “cheat” your way to financial freedom by slashing your expenses.
Savings By Age: Your 70s and beyond
Sure, you’ve been spending 65-80% of your annual income every year since you started working. But now it’s time to spend 90-100% of all your income to enjoy life! They say the median life expectancy is about 79 for men and 82 for women. Let’s just bake in living to 100 just to be safe by taking your nut, and dividing it by 30.
For example, let’s say you live off $50,000 on average a year and have accumulated 20X that = $1,000,000. Take $1,000,000 divided by 30 = $33,300. You’re getting another $18,000 a year in Social Security, while the $1 million should be throwing off at least $10,000 a year in interest at 1%. If you’re interested in retiring early, here’s a more aggressive savings strategy for you.
Important Note: Obviously no one ever knows what might happen to provide a boost or a drag to their finances. Maybe you get lucky with a great new job offer or invest in the next Apple Computer. Or maybe you get laid off at 40 and can’t find work for two years. My chart above merely serves as a savings guideline. Work to build alternative income streams in the meantime.
In your 70s, you should also think about what type of retirement philosophy you want to follow: YOLO or Legacy. Personally, I’m following the Legacy retirement philosophy in order to create a perpetual giving machine after I’m gone.
Save And Save Some More!
The only way to reach financial independence and hit my savings by age chart is to live within your means. National average money market accounts are still yielding a pitiful 0.07% as of November 2022.
Don’t fall pray to letting your cash sit in a savings account with less than a 0.1% yield. Look to direct, online-only savings accounts like CIT Bank’s Savings Connect Account instead. Even better is CIT Bank’s 18-month CD at 4.25%. Take advantage of these higher rates thanks to the Federal Reserve’s aggressive rate hikes.
In fact, I keep most of my saving in high-yield online savings accounts. They prevent me from having the temptation to spend. With the Fed hiking rates so aggressively, you might as well take advantage of higher savings rates.
Think you can’t save more? Below is the saving rate chart during the pandemic. Notice how the U.S. personal saving rate spiked to 33% in April 2020. It has since fallen back to trend as more Americans become more comfortable with living through uncertainty. But the point is, we can all save more when we really want to.
My savings by age chart is based on consistently beating the median savings rate of Americans. The more you save, the more you can invest and generate more passive income
How I’m Reinvesting My Savings
For the money you are comfortable risking, actively invest the rest of your after-tax savings in real estate, the stock market, bonds, private equity and anything else that matches your risk tolerance.
Personally, I’ve invested $810,000 in real estate crowdfunding because I like owning real assets that produce income that are less volatile. I’ve invested in the heartland of America to take advantage of strong demographic trends. Valuations are cheaper and rental yields are higher.
With private real estate, it’s great to earn income passively instead of having to manage tenants and work on maintenance issues. The work-from-home trend is here to stay. Technology is also only getting better.
My favorite real estate crowdfunding platform is Fundrise. They began in 2012 and are the pioneers of the private eREIT asset class. For most investors, investing in a diversified real estate fund is the way to go.
You can sign up with Fundrise for free and explore what they have to offer. Fundrise focuses on single-family rentals in the Sunbelt. With over 300,000 investors and $3.2 billion in assets under management, Fundrise is my favorite real estate investing platform.