People often ask how much they should have saved by a certain point in their life...read on to find out
A question I am often asked by people is how much they should have saved “by now”. They want an easy number to remember, a reference if you like, that they can compare themselves against now, and work towards in the future.
There are many different formulas used by different organisations and experts when suggesting how much you should have saved.
The quite complex and difficult to work out, but the yardstick I use and like best, is easy for everyone to understand and is based upon a multiple of your income. The recommended timeline for the amount, of savings you should aim towards therefore is as follows:
By age 30, you should have the equivalent of 1x of your salary saved. By 35, you should have 2x salary saved; By 40, you should have 3x salary saved; By 45, you should have 4x salary saved; By 50, you should have 6x salary saved; By 55, you should have 7x salary saved; By 60, you should have 8x salary saved; By 67, you should have 10x salary saved.
The amount saved includes any amounts you have in pension accounts, including contributions from an employer, the amount you have in savings, shares, or share purchase programmes via an employer.
The amount you should have at any point in your life is very individual and particular, to each person, and there isn’t one number that works for everyone, and nor should there be.
There will be times during your life when you might be out of work or helping children with college expenses or you have started a family and saving money might be very difficult, no matter how hard you try.
But I like having reference points nonetheless, which you can benchmark yourself against, and doing this every five years seems about right to me.
A new client of mine, aged 45, recently wanted to know how much he should have in savings.
His income was €70,000 but he wanted to reduce the pace at which he was working, without actually retiring. His target for when he wanted this to happen was at age 55.
So, our starting point was to assess where he was at right now i.e. how much he had in savings and how much he was saving each year. And then find out how much he needed at 55.
We discovered the amount he could comfortably live off because his mortgage would be repaid, and his kids would be off the pay roll by then, was €40,000.
The amount he needed from his pension and savings accounts to pay him a salary of €20,000 was €500,000. He would have to work and earn the other €20,000, but that was fine.
The amount he needed in savings therefore was seven times his current annual income at 55 so these rule of thumb numbers were spot on for him.
You don’t want to save towards just achieving the minimum amount either. If you can, you should aim to exceed it by at least 10% to cover times you may not be able to hit the target.
Remember the numbers being suggested are just guidelines.
If you don’t have a number you should be trying to achieve, you have no idea of whether you are saving at too slow a pace and or at too low a rate.
Equally if you are ahead of these recommended numbers, don’t let up.
A remark I hear all the time particularly from those in their 20s and early 30s is that if they are behind on what they should have saved by now, they can always make up when they are earning more, but this is a dangerous strategy, because you will have to set aside a higher percentage of your income than you would have if you started saving earlier, and will you really be able to do this?
Will your income really be big enough to cover all bases when it’s needed to buy a property, get married, have children etc. and if this is the case, what typically suffers?
At 30 you want to have one year’s worth of your salary in savings from a combination of what’s in your savings and pension accounts.
If you started work at 25 and your annual income is for example €40,000, then you need to be saving €8,000 per year.
If your employer is contributing 5% of your salary to a pension scheme and you are matching this, you are saving €4,000 per year, you need to save an additional €4,000 each year; so an extra 10% of your salary.
For many this might be too much, but just because you can’t manage 10% doesn’t mean you can’t save 1% or 2%.
But the next month, try to increase it by another 1%, and the following month by another 1%.
There will come a time when you have to stop because it hurts too much, and when that happens, you might have landed at a savings rate of 4% or 7%, so you should fix your savings rate there for the time being, until your income increases or your outgoings decrease.
Rules of thumb are handy, but there is nothing better than getting the help of a professional or finding a resource that will help you work out exactly how much is required for you.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie