Playing The Percentages For Savings

Our son signed up for his company 401k plan as quickly as he could after starting work last month. The company has a good match, but he wants to make sure he is saving as much as he can to really put himself ahead in the future.

He wondered how much more he needed to save – beyond the 401k to really be on track to reaching FIRE. Typically, 401k matches top out between 3-6%. That’s clearly not enough. The typical ‘rule of thumb’ is that you should save 15% of your pay for retirement., although most people don’t save even half of that amount.

Related: National Savings Rates Are Not Enough

With the goal of seeing how much one would need to save to reach FIRE by 50, he used this online calculator from Nerd Wallet, to play with the numbers a bit. What he found was close to my estimate- that you need to save about 30% of your pay. That’s a big number to target, but being that he’s just out of college and still has minimal expenses, it’s a target he can reasonably attempt.

The obvious benefit of saving at a high rate early in your career is that you don’t have to play catch-up later. Hopefully, he can avoid the needless ‘lifestyle’ creep that many young people fall victim to when they start their careers. If he can get used to a high savings rate now, he will be way ahead of most people that haven’t even started to think about such things. We shared with him that we certainly weren’t that forward-thinking when we were his age.

How young were you when you put your savings rate in high gear?

Image Credit: Pixabay

10 thoughts on “Playing The Percentages For Savings

  1. Without good mentors, we stumbled into the +30% range in our early thirties, however we did start out with a strong 15% in our early twenties, so it worked out. Thank goodness we figured it out…fairly early enough to retire at 50 yo.

    I started both of our daughters out right after college (when in their early twenties) at a 20% 401k contribution rate, and encouraged them to also max out their annual Roth IRA’s (simultaneously) each year. I encouraged them to then put all new raises in until the achieved 30%. They both got a series of quick promotions during their first couple of years, and are now (both) nearing 30% in contributions. Once they achieve 30%, I’ve told them they could dial back to half of each raise increases, but i think they like putting in their full raises, and will likely keep pushing themselves. Both are very FIRE oriented now!

    My youngest daughter (just turned 27) has had access to an HSA and is also managing to squirrel away an extra $4500 per year in it. She and her new husband are looking to build equity in house flips (he is a builder), and they already have +$50k of equity in their first new house. They plan to sell every 5-7 years, build again, repeat until they are mortgage free. He also is asking good questions about my real estate holdings, and they want to move toward investment properties in the near future.

    My oldest daughter (recently turned 30 yo), has also started a real estate savings fund in addition to her TSP, and is actively looking for rental property opportunities. She can retire from the Military with a great officer’s pension in just under 12 years (at 42 yo), but will likely stay in for 25-30 yrs because she enjoys it, further increasing her pension.

    I’m extremely proud of both for listening and learning. They are both well on their ways!

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    1. Fantastic! It sounds like your daughters really have it nailed. Banking those raises early on makes getting to >30% quick work, doesn’t it?

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  2. Ever since I got a paying job my saving rate was always really high. The only problem was it got spent on big ticket items. I was good at saving and delaying gratification. Looking back I kind of wished I put saving for my retirement as a high priority, and not buying a trucks, a motorbike, buying and paying off our house. I could have bought my freedom much earlier.

    Looks like your son has buying his freedom and financial independence as a priority. I am sure he has you to thank for that.

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    1. It is fun to have the toys, but the freedom is worth infinitely more, isn’t it? We were jealous of a lot of the things our friends and colleagues were buying in their 20s, 30s, and 40s, but time is the ultimate luxury, isn’t it?

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  3. I am preparing for FIRE at 54, but like Tech above have been completing side projects that delay retirement, but I hope will make our nest egg last. Part of this has been toys, as we switched over to electric vehicles, but another has been infrastructure adding a 10kW solar array to our home. The net effect has been 30% reduction in our electric bill and the elimination of fuel (gasoline) costs. We have already seen our savings rate increase, and continue to save approaching my goal of retiring before I turn 55. Hopefully these investments will help our nest egg grow during retirement.

    My oldest is just starting college, and I have a second child in high school. Both are beginning to ask about investing and I am starting to explain the basics of investment around their college funds. Likewise, I have emphasized a focus on maximizing company contributions to my 401K and taking advantage of stock purchasing opportunities as they were available. As they complete school and transition to the working world I am hoping they will bank their raises and maintain a frugal lifestyle. I have emphasized that we spent years saving for the recent big ticket items, all as part of a plan to reduce our expenses in retirement.

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    1. That is interesting that your solar array feeds your electric vehicle. How long will a set up like that last? Will the solar cells last 20+ years. That would be great if it basically lasted most of your retired days. Your comment just prompted me to send a note to our home owners association to see if solar panels are allowed. I don’t know any neighbors that have them yet.

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      1. All of our PV panel warranties are for 20 years, and here in IL homeowners are protected from HOA rules regarding solar systems. I learned that I could have solar professionally installed as long as the system faces the sun and the roof can hold it whether the HOA, village, or any “corporate entity”, wants it or not. I do not know what the rules are in MN. Our system uses an inverter from Solar Edge that is also a car charger and can run DC-DC direct to the car battery if you are charging during a sunny period.

        There was an advantage to buying last year when there was a 30% federal tax credit for home solar installations (dropped to 25% in 2020). This was combined with our state solar incentive program which pays around $1000/KWh of system rating. Our system cost $31000, minus 30% FTC ($9300) and Illinois incentive (10 KWh system, $10000) for a post-rebate total of $11700.

        Based on our pre-solar electric bill and the capacity of the system, we were able to calculate that the system should pay for itself in 90 months (7.5 years) simply by offsetting electricity costs. By converting to electric vehicles we increased our electric usage, but still reduced our monthly bill by around 30%. Our current estimate of the savings in gasoline costs is around $2800/year. It looks like the payback on the system will be in around 4 years.

        The cars costs were not part of our savings, but we were driving a 20 year old volvo and 10 year old Prius which were both due for replacement. Both vehicles were purchased used, a 2018 LEAF and 2019 Model 3, with less than 10,000 miles. Overall we have no complaints about range or performance on either vehicle and just completed a 1000 mile road trip in the Tesla. The bonus on EVs is that they have almost no maintenance beyond tire rotation, wipers, and cabin air filters.

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      2. Thanks for sharing all of those details, Karl! That really gives a good picture of how the ‘system’ works for you financially. It sounds like you are definitely ‘all in’ on a sophisticated approach. A net four-year payback is outstanding. I’m guessing some tax credit / incentives are also likely to return if Biden / Democratic Congress gets elected. He made a big $2T policy announcement yesterday on supporting green energy.

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  4. I probably would not be able to take advantage to any future programs, as our purchases are already complete, but we have been seeing a net increase in our monthly savings since we dropped gasoline from our diet. Although EVs are fairly new technology, their simple design and solid state components make them cheaper to maintain over the long term and they are much cheaper to drive versus gasoline vehicles. I have estimated my fuel cost per mile in an EV is about 25% that of a ICE vehicle. As we move into FIRE, these may be the last vehicles we will need. If you haven’t test driven a Tesla, you should do so. The future is here.

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    1. Yeah – I’m hoping I. Old take advantage of future tax credits / incentives. I’ve drive a couple Tesla’s and have been impressed. I’m not a fan of the styling, but what they have done overall is really amazing. I’m always surprised that the other companies haven’t – for the most part – caught up with them. Wish I had bought their stock!

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