“Save 10% of your salary each year, and you will retire successfully.”
That’s the advice that many of us have heard for years. But is telling everyone to save the same percentage a good strategy?
While 10% is often thought to be a good number to save, the average American is not saving anywhere near that much. To make matters worse, saving 10% might not be enough.
Why? The old advice is based on the fact that many people retired with healthy pensions, and Social Security was stable. As more Americans are more responsible than ever for their own financial security, saving 15% to 25% of their income may be necessary.
Make more, save more
The more you make, the more you need to save. If you have a greater income than average in your working years, your standard of living is most likely higher than those with a lower or average income. You will need to replace more of your income each year in retirement in order to maintain that standard of living.
Start young
It’s important to begin saving as early as possible. This helps make the act of saving become a natural part of routine and it helps you maximize the power of compounding. To help make it easier, make your saving automatic through either an employer-sponsored retirement plan or by transferring money automatically from your checking account to an investment account each time you get paid.
Live below your means
It’s typically advocated for people to live within their means. Instead, try to live below your means. Buy a house that you could support on a lesser income than what you are currently making. Drive your car for 10 years instead of 5 (assuming the cost of maintenance still makes sense). Buy generic food at the grocery store, even though your income could support buying all brand names. Cook more meals at home instead of dining out. All these activities will leave you with more money at the end of the month, which will allow you to save even more.
By forming the habit of living below your means, you are allowing yourself to save more when things are going well. If times become hard from a job loss or a disability, it will be less of an adjustment. By living below your means you may also avoid credit card debt, which usually has a high interest rate.
No matter how much you earn, it doesn’t matter if you aren’t regularly saving. Save a healthy portion of your income so that retirement, paying off your mortgage, or educating your children will be realistic objectives someday. Start early, save aggressively, and invest consistently.
