When you are thinking about how much to save, here are a couple of rules of thumb:
1. If you want a comfortable retirement, saving 10% of your pre-tax income is the way to go. So if you make $50,000 per year, save at least $5,000. This has to be rock solid. If you’re doing anything like saving up for a house down payment or scraping together $1,000 to invest you’ll need to save 10% of your pre-tax income on top of this. Why should you save 10%? Because you’ll need the money. Americans are living longer long due to improvements in health care and reductions in public health risks. So the bottom line is that you’re probably going to need a pile of cash for your retirement.
2. If you want to be rich, save at least 15% of your income. Well, how do you define rich? It depends but most people say that being a millionaire means you’re rich. A great way to be a millionaire is to save and invest consistently. So for example, if your income is $55,000 and you save 15% annually for 30 years at 8% interest, you’d have $1,017,603.41. Incidentally, if you don’t believe that you can get 8% returns for 30 years, you might be right. That said, the overall trend is for older people to be richer, largely because of the compounding power of interest. So the math holds water in the real world.
If saving seems like a chore, set up direct deposit into a savings account your 401k program at work. This automates the process and cuts down on the hassle.