The amount you need to save for retirement depends on several factors, including your current age, expected retirement age, expected retirement expenses, lifestyle goals, and expected retirement income from sources such as Social Security, pensions, and investments. Furthermore, your profession can have a significant impact on your retirement savings, as average incomes can vary widely between professions.
Rule of thumb: As a general rule of thumb, financial advisors often recommend saving 10-15% of your income for retirement throughout your working years. However, this is not a one-size-fits-all approach, and your personal circumstances and goals may require a different approach.
It’s also important to consider inflation and the potential for unexpected expenses, such as healthcare costs and long term care, in retirement.
Here are some numbers based on several surveys:
Tech workers
According to a survey by online lender SoFi, the average savings rate for tech workers is around 8% of their annual income. However, this figure can vary widely depending on individual circumstances such as age, income, debt, and financial goals.
This number is surprising as tech workers typically have higher income and not that much work related expenses.
Physicians
According to a survey conducted by Medscape, the average physician salary in the United States in 2020 was $243,000 per year. The recommended savings rate for physicians is generally around 20-25% of their income, but this may vary depending on individual financial goals and circumstances.
Physicians often have high levels of student loan debt and may also face high expenses associated with running a medical practice. However, their high incomes can also allow for significant savings opportunities.
Average Americans
According to a survey by financial services provider Charles Schwab, the average savings rate among Americans in 2021 was 14.8%. However, this figure can vary widely depending on individual circumstances such as age, income, debt, and financial goals.
According to Vanguard Group’s 2022 “How America Saves” report, the average savings rate for participants in employer-sponsored defined contribution retirement plans was 8.4% in 2020. The report notes a slight increase from the 8.1% savings rate observed in 2010.
The report also highlights the trend of increased savings rates among participants, particularly for those in plans that feature automatic enrollment and escalation. Among participants in automatic enrollment plans, the average savings rate was 6.9% in 2020, up from 6.5% in 2010. Similarly, participants in plans that feature automatic escalation saw their average savings rate increase from 6.9% in 2010 to 8.5% in 2020.
Notice the Vanguard report is only based on retirement plans. It doesn’t include data for other taxable savings that include taxable stock, bond and cash investments or even real estate investments. Adding this up, it’s possible that a typical Vanguard client might reach 10-15% savings rate, recommended by financial advisors.
Can you retire as a multi-millionaire if you save at the average rate?
Naturally, you would ask if I save just like an average American at an annual rate 10%-15%, how much would I accumulate by the time I retire? Will that be enough to preserve my quality of life in retirement?
We use our Retirement Calculator and assume the following:
The following is the annual income and investment balance:
You can be a 401k multi-millionaire ($2.3 million rich) when you retire if you just consistently save 10% annually and invest in a diversified portfolio that’s assumed to achieve an average annual return of 8%, a very reasonable assumption!
Save more
On the other hand, if you save 15% annually, your investment balance by age 67 would be 3,440,315, a 50% increase!
Save smartly
Americans have various retirement savings options, including workplace retirement plans like 401(k) and 403(b), IRAs, retirement annuities, or straightforward brokerage investment accounts. Investing in diversified stock and bond funds, particularly low-cost index funds and some outstanding active fixed-income funds, has demonstrated the ability to achieve returns that outpace inflation.
On the flip side, elevating your annual investment return from 8% to 10% can yield significantly better results by the age of 67. You could amass $3.8 million instead of $2.3 million!
Furthermore, if you commit to saving 15% annually and achieve a 10% annual return, your accumulated savings at age 67 will reach $5.7 million.
Attaining a 10% annual return is undoubtedly an accomplishment but not unattainable. The S&P 500 has had an annual return of 10.5% over the past century! Additionally, saving 15% is well within reach, as this falls within the upper range of what a diligent saver typically achieves.
Conclusions
Achieving substantial retirement income is possible through saving early, saving more, and saving wisely over an extended period. The key lies in maintaining discipline throughout your savings journey.