What Percentage of Income to Save (and Invest) for Retirement
- Elizabeth Chiang
- Apr 23
- 6 min read
How Much Should You Save for Retirement?
Saving for retirement can feel confusing because different sources give different advice. Some say you should save 10%, while FIRE blogs will suggest 50%. A good rule of thumb for physicians is to save at least 20% of your income so you can have financial freedom. But how do you know exactly how much to save? Let’s break it down.
What Age Do Most People Retire?
Most people think of retirement as happening at age 65. That may be because it’s when Americans qualify for Medicare. But 65 is an aribtrary age. When I was an undergraduate, I had a summer research position working for a physician who still ran a research lab at the age of 92. Rumor had it that he wouldn’t rest until he had won a Nobel price in medicine. I never heard him say that so I don’t know if it was true but something drove him to keep pursuing his research. Others retire early to enjoy life on their own terms.
Choosing Your Own Retirement Age
When I was in medical school, I decided I wanted to retire at age 55. In 2005, I wrote that "By <date of my 55th birthday>, I will have enough investment and/or passive income to support my current living expenses at which point I will be financially free.“
Nowadays, there are so many different ways to think about what we call retirement. People can retire from one career and start a new one, either due to financial necessity but it can also be due to interest or passion. You can also semi-retire, by cutting back significantly on how much you work. You can achieve financial independence and continue to work but change the parameters of how, when or where you to work to suite your desires and what keeps your fulfilled with the work you do. That is where I would like all of us to be, working not out of financial necessity.
How Much Do You Need to Save?
The percentage to save is really based on how many years you will work and contribute to your retirement portfolio before you start withdrawing from that portfolio.
Let’s look at some real examples.
Example 1
A single doctor making $350,000 per year who contributes $23,500 to their 401(k). Their marginal tax rate is 35%. According to SmartAsset.com, their Federal and FICA taxes (using 2024 rates) add up to $96,417.
Let’s assume:
Consistant stable income
No state or local taxes apply
Their investments grow at a real rate of return of 7% per year
They use the 4% rule for retirement spending
Their blended tax rate in retirement is 24%
They save 10% of their income ($35,000 per year) in their 401(k), Roth IRA (using the backdoor strategy) and the remainder in a taxable brokerage account. They spend the rest of their income, which is about $218,000 per year. To continue to spend that much in retirement, they would need a stock/bond portfolio of $7.2 million. This would take about 39 years of saving and investing.
If they save more, they can retire sooner:
15% savings rate → annual spend $201K/year → $6.6 million portfolio → 33 years to reach goal
20% savings rate → annual spend $184K/year → $6.0 million portfolio → 28 years to reach goal
25% savings rate → annual spend $166K/year → $5.5 million portfolio → 24 years to reach goal
30% savings rate → annual spend $148K/year → $4.9 million portfolio → 21 years to reach goal
Example 2
A married couple making a combined income of $350,000 per year. Each person contributes $23,500 to their 401(k). Their marginal tax rate is 24%. According to SmartAsset.com, their Federal and FICA taxes (using 2024 rates) add up to $73,864.
Let’s assume:
Consistant stable income
No state or local taxes apply
Their investments grow at a real rate of return of 7% per year
They use the 4% rule for retirement spending
Their blended tax rate in retirement is 18%
By fully contributing to their 401(k)s, they are already saving 13% of their income ($47,000 per year). They spend the rest of their income, which is about $236,000 per year. To continue to spend that much in retirement, they would need a stock/bond portfolio of $7.2 million. This would take about 35 years of saving and investing.
If they save more, they can retire sooner:
15% savings rate → annual spend $201K/year → $6.1 million portfolio → 32 years to reach goal
20% savings rate → annual spend $184K/year → $5.6 million portfolio → 27 years to reach goal
25% savings rate → annual spend $166K/year → $5 million portfolio → 23 years to reach goal
30% savings rate → annual spend $148K/year → $4.5 million portfolio → 20 years to reach goal
Why Saving 20% Matters
If you want to retire in under 30 years, aim to save and invest at least 20% of your gross income. The more you save, the faster you reach financial independence.
Rough Calculations and Assumptions
These calculations involve several assumptions. I assume tax rates remain unchanged, income stays the same, and no state or local income taxes apply. However, tax rates will likely rise given our growing national deficit, and you probably do pay state taxes. While your income may increase, it could lag behind inflation, effectively reducing your purchasing power over time.
Additionally, I assume a 7% real rate of return each year—meaning a return adjusted for inflation. This equates to a 10% return with 3% inflation. Of course, no portfolio delivers the same return year after year. Some years will see high returns, while others may bring significant losses. The sequence of returns in the early years of retirement can be a deciding factor in your financial security. If your portfolio performs well in the first five years of retirement, you’ll likely have a solid financial foundation. However, if the market crashes shortly after you retire, the extent of the drop and the speed of recovery will determine whether you face a smooth ride or a financial rollercoaster.
Of course, there are some expenses you will no longer have once you are in retirement. Life Insurance and Disability Insurance are on that list. If you’ve been saving for higher education for your children, that’s an expense you will no longer have once they are graduated. You may also pay off all your debts, like the mortgage on your home, before you stop working. Your spending may decrease in retirement but it is unlikely to increase by more than 50%. In fact, often spending will increase in the first few years of retirement as people enjoy their new found time with doing activities that cost money like travel.
What the Research Says
If we look at the financial literature, Wade Donald Pfau published an article in 2011 titled “Safe Saving Rates: A New Approach to Retirement Planning Over the Lifecycle.” He argues that rather than focusing on a safe withdrawal rate, we should prioritize a safe savings rate in retirement planning. I tend to agree—the amount you save and invest for financial freedom is something you can control, and over the long run, it matters more than the return on investment.
The following table from his publication summarizes the savings rates he calculated.
Let’s say you want to replace 70% of your final salary and you feel comfortable with a 60% stock, 40% bond portfolio when you are in retirement. If you are willing to work for 40 years before retiring, you would only need to save10.6% to fund a 20-year retirement. This shows with a long timespan of saving and investing, a relatively low savings rate is needed which is why contributing to retirement sooner is better.
Given the long education and training it takes to become a physician, few physicians probably want to plan to work for 40 years. If we look at working for 30 years, then replacing 70% of final salary would require a range of 17.99 to 31.06% depending on length of retirement and asset allocation. Replacing 50% of final salary decreases that range to12.85 to 22.19%
How to Save More Money
What if you’re not able to save 20% of your income currently? This is when you want to take a good luck at your personal numbers.
If your income is on the lower side, then find ways to increase your income. There is only so much you can cut your expenses. It’s easier to save 25% of $300,000 than 15% of $100,000, even with the higher taxes.
If you have a high income, the find ways to cut your expenses.
Save your raises and bonuses instead of spending more.
Keep fixed expenses low. These are costs you can’t change, like your mortgage or car payment. Avoid being "house poor" or "car poor." Avoid financing any consumer purchases that aren't absolutely necessary.
Track your spending. Watching how and where you spend money can reveal a lot about your money habits. You may find yourself spending for convenience due to lack of planning where some prior effort could make a big difference. This is often true when it comes to packing food. Bringing your lunch can help you have a healthy an less expensive meal then getting food delivery from Jimmy Johns.
Need Help?
If you could use some help increasing your savings rate and changing your spending habits, consider getting money coaching with me. Sign up for a free consultation where we can talk more about how I can help you reach your financial goals.
Reference:
Pfau, Wade Donald, 2011. "Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle," MPRA Paper 28796, University Library of Munich, Germany.
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