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How Much of Your Income You Should Be Saving for Retirement

By: David Bach  |  Last Updated: February 23, 2021
Financial Expert & 10x New York Times Bestseller
IN THIS ARTICLEHow much you should you save for retirement
Where you should stash your savings

Retirement may feel like it’s too far off to start planning for, but the longer you wait to save for your future, the further behind you’ll fall.

Don’t think of saving for retirement as a burden — think of it as an opportunity to build lasting wealth. After all, “paying yourself first” — that is, consistently contributing a portion of your income into a tax-advantaged retirement savings account, where your money can grow effortlessly over time — is the one proven and easy way to get rich.

How much you should you save for retirement

I want you to aim to save 10-15% of your gross income for your future self. Of course, more is always better. 

That said, if you can’t afford to save 10% right now, it’s OK to start off small and gradually work your way up. Even if you think the best you can do right now is to save just 1%, don’t let that stop you. Anything is better than nothing. At the same time, try to be ambitious. However much you think you can afford to save, do more. If you think you can save 4%, save 6%. If you think you can save 10%, save 12%.

Most of us tend to underestimate how much we think we can manage. As a result, we wind up low-balling ourselves — and our futures.

To help you decide how much of your income to set aside, I created a “pay yourself first formula.” Everyone’s individual situation is different, but these percentages should give you an idea of what your financial standing could look like depending on how much you save. Hopefully it’ll inspire you to set aside more than you currently are.

If you want to be …

Dead broke: Don’t pay yourself first. Spend more than you make. Borrow money on credit cards and carry debt you can’t pay off.

Poor: Think about paying yourself first, but don’t actually do it. Spend everything you make each month and save nothing. Keep telling yourself, “someday…”

Middle class: Pay yourself first 5-10% of your gross income.

Rich: Pay yourself first 15-20% of your gross income.

Rich enough to retire early: Pay yourself first at least 20% of your gross income.

As the formula suggests, the more you can set aside now, the more secure you’ll be in the future. Again, if you can only save 1% right now, it’s better to start small than to not start at all.

To ensure you don’t skimp on retirement savings, make your plan automatic. What I mean by that is, have a portion of your paycheck go directly into a retirement savings account. That way, you won’t even see this money or have the chance to spend it. Read on to learn what type of account you should keep your retirement money in.

Where you should stash your savings

As I mentioned earlier, paying yourself first means putting your savings into a tax-advantaged investment account. I don’t want you to take 10% of your income and put it in your checking account. 

There are a handful of tax-advantaged accounts to choose from401(k) plans, traditional IRAs and Roth IRAs, to name a few — and inside each of them, you can own just about any investment, from mutual funds to stocks and bonds.

The simplest way to pay yourself first is to contribute to a 401(k) plan if your employer offers one (if you work for a nonprofit, you will likely be offered a similar plan called a 403(b)). If your company offers one of these plans, make sure you’re enrolled and contributing consistently because they offer a ton of benefits:

  • You don’t pay any income tax on the money you put into the plan or on any of the returns it earns for you over the years — not a cent in taxes until you take it out.
  • In 2021, you can contribute $19,500 a year (plus, $6,000 more in “catch-up contributions” if you’re over age 50).
  • Your contributions will be automatically deducted from your paycheck, so you’ll never even see this money.
  • You may even get free money from your employer if they offer a match.
  • By contributing to your plan from every paycheck, you’ll enjoy the miracle of compound interest, which is ultimately what will enable you to retire rich.

If your employer doesn’t offer a 401(k) or 403(b), don’t worry. You have options. An IRA, which stands for Individual Retirement Account, is a personal retirement plan that most anyone who earns an income can set up at a bank, brokerage firm or online. In 2021, you can make contributions of up to $6,000 a year ($7,000 a year if you are age 50 or older) int0 an IRA.

There are two types of IRAs you should consider: the traditional IRA and the Roth IRA. Read my guide on how to choose which one is right for you.

If you’re self-employed, you have the option of contributing to what’s called a SEP IRA, which is incredibly straightforward and easy to set up. In short, it’s an excellent retirement savings vehicle that allows you to contribute a lot of your gross income.

Whether you open a 401(k) plan at work or an IRA, once your money is deposited in the account, you need to select an investment. The account itself is just a holding tank. It’s the investment you select that determines how fast your money will grow.

In terms of how to invest your money, that depends on things like when you want to retire and your risk tolerance — but regardless your time horizon, you want a well-diversified portfolio. Diversification is when you spread your money around different asset classes (think: stocks, bond, cash, etc.). It’s a strategy that helps protect you from market volatility. 

Think about it: If your portfolio consists of a bunch of different asset classes, chances are you’ll always have some that are performing well that can help offset the ones that aren’t performing well at any given time. But if you were only invested in one asset category, say stocks, and stock prices tanked, your portfolio would experience tremendous losses. 

Here are a few more good rules of thumb to follow when figuring out how to invest your retirement money:

1. Invest for growth. Many people make the crucial mistake of thinking that when it comes to their retirement money, the thing to do is play it safe.

Sure, when you’re close to retirement (five years or less) or already retired, you can play it safer — but until then, in order to secure your future, you need to go for growth. That means investing a portion of your retirement money in stocks. Yes, stocks are generally more volatile and risker over the short term than some other types of investments, but over the long term (and that’s what we’re concerned with here), they can be significantly more rewarding.

2. To determine how much of your money should be invested in stocks, use this formula: Take your age and subtract it from 110. The number you get is the percentage of your assets that you should put in stocks or stock-based mutual funds. The rest of your assets should go into something safer and less volatile, such as cash or bonds (or other fixed-rate securities).

3. Rather than looking for individual stocks and bonds that match the particular risk profile that is right for your situation, I suggest you put your money in appropriate mutual funds or exchange-traded funds (ETFs). Mutual funds and ETFs not only offer professional money management, diversification and ease of use, but most now allow you to start investing with as little as $50.

4. Look into target date mutual funds. These funds have a specific year in their name (for example, the 2030 fund or the 2040 fund) and they help you select a fund that makes sense for you, depending on your “target date of retirement.”

Say you want to retire around 2035. You simply select the fund with “2035” in it — then, the fund manager builds a diversified portfolio that will be automatically rebalanced over time, as you get closer to retirement.

The bottom line: If you’re not already automatically setting aside a portion of your paycheck for your future self, you need to do so starting today. Start small if you have to and then work your way up to contributing 10-15% of your paycheck. If you follow through, you’ll be well on your way to retiring rich.

Read next: Everything You Need to Know About 401(k) Plans, IRAs and Other Retirement Savings Accounts