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Step 13 Path to FI Save 15 percent for retirement

Telling someone to save 15% for retirement (of your pre-tax income) might just be simultaneously the easiest and hardest step in the journey to financial independence.  It is incredibly easy to explain and understand this step since everyone can immediately understand why this would be important.  Saving more, earlier, is a key to any path to becoming financially independent and retiring so that shouldn’t be a surprise. 

Even the how part is relatively simple in that you could just log into your 401k right now and set your contribution percent to 15%.  As to whether or not you could actually afford to do that is a different story but everyone knows the actual mechanics of the step is the point.

Save 15% for Retirement

Wait… I want to start at the beginning.
Link to the previous step – Step 12: Big Purchases

The issue is not everyone has access to a 401k through their employer.  A regular IRA account has a maximum annual contribution of $6,000 so unless you make less than $40,000 a year you will need additional options.  If you are self employed you can open a SEP-IRA, a SIMPLE IRA, or an Individual 401k account to save your money in a tax-advantaged account. 

Consult your favorite tax professional

You’ll need to consult the IRS website and possibly an accounting expert on which one is the most appropriate and how to exactly set that up.  If none of those are an option or you don’t want the hassle, you can always contribute the amount needed to get to 15% of your pre-tax income to a taxable investment account. 

As a person who has always had access to a 401k and never self employed, I can really only speak with any level of authority on how to accomplish this step within that framework.  If you are self employed, I strongly encourage you to research or get expert advice on opening one of the alternative tax advantaged accounts before going the taxable route.  Don’t underestimate the long term gains of tax deferrals either today or when you retire.

You do you, but I do at least 15%

The percent of your pay you contribute with each paycheck is still a personal decision at this point (because you have other options now) but I wholly recommend you contribute the 15% in some capacity.  If you can’t contribute that amount right now, that is perfectly ok. 

The best method to slowly increase that percent is to increase the contribution amount every time you receive a raise or promotion. If your annual raise is 3%, consider bumping up your 401k contribution by 1-3% at the same time.  Your paychecks will functionally look the same as they did last year and you get closer to your goal of being financially independent that much faster without feeling any financial shocks. 

This isn’t shocking news, nor should it be.

I honestly believe that every person of working age knows, like truly knows, that the more you save each month of your earnings the closer you’ll get to retirement.  I don’t think, conceptually, that is an idea lost on many Americans.  What might be lost on people is just how much increasing that savings rate makes a difference.  People know that saving 10% is a lot better than 5% of their income, but I wonder if many people truly understand how many years that saves them getting to retirement.

How much can a few more % matter?

One of my favorite websites to send people when they first start talking to me about personal finance and their situation is because it is a basic, no frills uncomplicated calculator showing exactly how many years you will need to keep working and savings before you can retire.  Sometimes its hard to see how much impact it has when you save 15% for retirement.

I like the simplicity of the site that only asks you what your income is, your annual expenses, and current retirement portfolio balance.  Most people, regardless of their current financial literacy or situation, will probably know those figures.  If not exact figures, they will probably know close enough to get the concept.

First, the assumptions

NetWorthify makes a couple assumptions I need to mention for clarification. First, it assumes your current annual expenses will remain the same in retirement in that you’ll be spending about the same post retirement as you do today. 

Second, you never draw down your retirement savings in that you don’t make any premature withdrawals. This one should be self explanatory and relatively true. Most people will put money in and leave it there until retirement.

Lastly, it assumes a 5% annual return on investment that will be considered after taxes and inflation.  None of these assumptions are unreasonable and more than fair enough to generate the analysis we are looking for in the end.

Show me the money…

Time to get to the best part of this post: the numbers.  I meant the best part to me as a self-proclaimed data nerd.  Your mileage may vary on enjoyment.

Here is the breakdown of the number of years until retirement per Networthify if you start today with a zero dollar retirement account balance.  I used an income of $50,000 but mathematically it works out the same regardless of stated income because we are using a savings percent and not a fixed expense amount.

Savings Rate5%10%15%30%50%
Years until Retirement66 years51 years43 years28 years17 years
Years Saved (vs 5%)-15 years-22 years-38 years-49 years

Sweet! Let’s be real though…

I know shifting from 5% savings to 50% savings is generally not something most people can do overnight (or at all in some cases) but anyone would want to retire nearly 50 years earlier.  A savings rate of 5% is a common employer match rate and thus a common employee contribution amount, so let us start there. 

If we look at the difference between 5% and 15% (which we are recommending you bump your savings up to in this step), you can see that you would get to retirement 22 years earlier. If you save 15% for retirement you could attain financial freedom so much sooner.

22 years sooner.  Years.

The most important number in your journey to financial independence isn’t your income or your investment returns in a given year, it is your savings rate.  The more you save, the more money enters the machine you’ve set up to grow and compound each year to get you to retirement that much quicker.

I’m not alone in this obviously. The idea that savings rate is one of the most important metrics in your path to financial independence is well covered in the personal finance community.

No joke, it can be scary at first

I can recall the year we first bumped my 401k contribution percent up to 15% from 8-9% and it was honestly terrifying and a little exhilarating.  I had just received a promotion and a raise somewhere in the neighborhood of a 10% increase in salary. We figured now was the time to bump my contribution amount up before I got used to the larger paychecks. 

It was scary that we might be overreaching and not going to have enough money in my paychecks to cover our monthly expenses.  I was worried that I would be putting too much away that I couldn’t immediately access penalty-free if something happened to us financially.  I was just worried if I had done the right thing.

Spoilers: we’ve been fine

So far it has worked out well for us.  My raise made the paychecks net about the same and we were saving a lot more without really noticing.  This year I even bumped my contribution rate up again to 20% and we quickly adjusted to the new normal income.  In my life, I’ve found that I can usually conform my spending to the amount of money I’m currently bringing in. It is probably easier having the money go directly to my 401k before I even see it psychologically.

I’m not saying my experience is replicable or even normal.  I am saying that anyone can slowly increase their contribution percent every time they get a raise or promotion once they hit workable equilibrium on expenses they are comfortable living at.  What I do know is that I sincerely wish I had bumped my contribution rate up 10 years earlier.  I just didn’t know or never took the time to do the math on how much of a difference that would have made.

flow chart save 15% for retirement


Save at least 15% of your income for retirement somewhere, preferably in a tax advantaged account first before exploring other options.  Do this sooner than later.

Link to the next step – HSAs (coming next week)

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