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How Much Should I Have Saved For Retirement By Age 30?

Posted January 25th, 2012 in Investing, Retirement, Saving by Jeremy Waller

My birthday is next week. I’m only a couple of years away from 30 now. I’m very much getting to the point where I need to get serious about retirement planning if I don’t want to experience a lifestyle cut later in life.

For the past 5 years I’ve been systematically investing 6% of my income with a 50% employer match each month. My portfolio has performed well with returns averaging around 13% per year over the last 5 years.

I’m optimistic that I can achieve returns in the 12% range but am realistic enough to know that I need to structure my plan as though my actual rate of return will be less.

My main concern after that is if I am contributing enough each month. What amount do I need in my retirement accounts by age 30 to be confident that I will have enough to retire on?

The Nitty Gritty Of The Numbers

I sat down this week and did some analysis. I assumed my portfolio balance would be $45,000 by 30. That’s a pretty conservative estimate based on the current balance and my anticipated contributions over the next 3 years. It essentially assumes no growth for the next 3 years.

The first thing I wanted to see was the effect of different rates of return on my portfolio. For this analysis I assumed that my annual income would remain flat after adjusting for inflation and that my contributions would continue to be 9% of my income from age 30 to age 65.

So what does this chart mean? For one, it shows the powerful effect of compound interest. Just look at the huge difference between a 9% return and a 12% return!

Second, it gives me a good picture of my best case and worst case scenarios at retirement. If my portfolio performs amazingly well I will have close to $5.5 million at age 65. On the other hand, if I just squeak along at 3% I will be only be looking at $500k.

Having these numbers is a good start, but it’s only half the picture.

How Long Will My Savings Last After I Retire?

You can’t determine how much is enough unless you know how much you need to last from retirement to the end of your life.

So I did some more analysis. How long could I live on each of the portfolios above?

For this analysis I assumed that I would have a very conservative portfolio at this point with returns averaging 4% – essentially everything would be in investment-grade bonds, government bonds, CDs and blue chip dividend stocks.

I also assumed that we would take distributions totaling $100k per year. That would allow my wife and me to sustain our lifestyle, cover increase healthcare costs and be able to actually enjoy retirement.

To maintain continuity between the chart above and the chart below, I have carried over the portfolio names. However, in the chart below the annual return is set at 4% for each portfolio.

Well that’s interesting…

The $500k – 3% portfolio would barely last 5 years. The $1 million – 6% portfolio would only last to age 78.

What’s even more interesting is the 9% portfolio, which was at $2.4 million at age 65, almost generates enough cash flow to cover the distributions. The balance only drops $263k over the 30 years.

The 12% portfolio more than doubles during this time period! I could more than double my distributions before it would start eating into the principal balance.

Now How Much Do I Actually Need In My Retirement Account At 30

With all of the above taken into consideration, I tried to put together a base case scenario to see if I am on track for retirement.

Here’s what I came up with:

If I can achieve an 8% return (which I believe is a good median estimate) then I need $40,000 in my retirement account by age 30 to be able to sustain annual distributions of $100k from age 65 to age 95.

Based on this, it looks like I am on track to meet one of my retirement goals!

Want to run this analysis for yourself? Download my spreadsheet here!

Have you recently checked to see if your plan for retirement is on track?

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33 Responses so far.

  1. JoeTaxpayer says:

    You are 30, so even 60 is 30 years away, 3% inflation halves the value of the dollar over 24 years.

    The chart showing growth sensitivity is alarming. How can anyone plan over such a long span? Funny, after the crazy returns of the 80’s and 90’s I “planned” on a more realistic 8%, yet saw a near zero return. My retirement date depends on the return of the next decade, 6% over 7 years will be enough, but time will tell.

    • Jeremy says:

      How can anyone not plan over such a long span? People waiting until “later” to save for retirement is the reason so many wake up in their mid 60s and realize they don’t have enough money to retire.

      • JoeTaxpayer says:

        Jeremy, I didn’t mean to imply one shouldn’t save. Only that planning is difficult when you study the first chart and see the results high and low are different by a factor of 10.
        I’ve saved since graduating college. Actually my wife and I are both extreme savers. Instead of the chart above, our retirement date forecast changes based on the current rate forecast. eg, at 4%, it’s about 9 year away, 6%, 7 years, 9%, 5.5 years. As I’m still 49, these number don’t alarm me.

  2. Dr Dean says:

    Great post. The charts tell the story.

  3. PK says:

    In an era where your stock investments only return 3 – 6% over 30 years? We’d probably have bigger problems, and $500,000 would likely be a good nest egg in that environment. That said, if your income increases and you increase the 401(k) a notch at a time, you might get a leg up.

    It’s probably better to overdo it now and scale back later – you’ll likely make a lot more in your 40s, but investing then won’t mean as much as your moves now (isn’t compound interest grand?).

    • I’m sure there are people who are highly risk averse that struggle to exceed a 6% return. This really shows the importance of having a balanced portfolio.

      I’ll be really disappointed if my income doesn’t increase over the rest of my life. I kept my income and contributions flat to give conservative estimates. I very much hope to exceed my projections above.

  4. According to your analysis I will be fine; Who knows what kind of return I will receive though?

    I am turning 30 this year as well (holding onto 29 until November:).

  5. Practically, at 30 I had nothing in retirement. I started at around 33. I missed a good few 10k’s because of starting late. Hope the extra income streams make up for that.

  6. Jackie says:

    Where did you get the charts? They look pretty useful 🙂

    I had basically nothing in my retirement account at 30, so you’re way ahead of me. (I started shoveling money into it like crazy about 5 years ago, but as your compounding comment points out, I wish I’d done it a lot sooner.)

  7. SPBrunner says:

    I stopped working in 1999 to live off my portfolio. I had devised a 30 year plan to retirement, but it took me just under 25 years. I had, foolishly, decided I could earn 10% average a year by investing. At the time I was planning I did not know that 8% was a better number. There is a lot more information around now than I had. However, I actually did better than my plan.

    I had also planned an equal investment each year. My yearly investments ended up quite erratic in actual fact. Live happens. You lose jobs, switch employers, get married have children etc. I was lucky that I saved early, because for a while when I was older I could not save anything.

  8. Adam says:

    It’s not as daunting as it seems when you take into account that you’ll only be saving more when you’re making more. One thing I thought was interesting in an Equifax finance blog was that most people don’t consider into their budget that they have much more free-time and will want to spend more money than they might normally.

  9. funancials says:

    Jeremy-

    Cool analysis. The # you’ll need definitely varies depending on your lifestyle (more specifically your retirement lifestyle). Sam had an interesting post about this a few weeks ago – I believe at age 25 one should range between 42-70k in their 401k – according to his article. It’s interesting to see the different figures because both calculations are difficult to argue against.

    • There are so many variables in this that it’s difficult to pin down a number. I think the points Sam raised were good.

      The most important thing is to save early and often and then actively manage your portfolio to get the best return you can.

  10. Great analysis! I’m looking more at my retirement more from a cash flow perspective than lump sum. I will still be contributing to long term retirement funds, but if I can have a steady 40-50k from passive income, I would not ever have to sweat running out of money.

    With that said, seeing these figures is encouraging as I am only 24. It even motivates me to work harder so that I can put more away for the old age period of my life. 🙂

    • I totally agree. By retirement I hope to have enough passive income that I don’t have to worry about the money in my retirement accounts, but I’m going to save for retirement as though my 401(k) and Roths are the only thing I will have.

  11. This is great timing as I was just wondering yesterday how to figure out what I could expect to have in retirement at my current level of savings. All the variables make this kind of number crunching a little overwhelming for me, but hey, life is unpredictable so you have to go with some data and some educated guesses. Thanks so much for sharing this tool!

  12. Terry says:

    I earn minimum wage when employed. (Currently I am unemployed.)

    How much shouyld I have saved for retirement by age 30?

    • Hi Terry – The first priority is finding work. Saving for retirement doesn’t matter if you can’t meet your immediate needs today.

      Next, take care of any debt that you have. You’re fighting a losing battle if you try to save for retirement while you’re still in debt.

      Once all that is taken care of, I recommend putting 15% of your income in retirement. Plug that into the spreadsheet that is linked at the bottom of the post and it will give you an idea of where you will be at retirement.

  13. David says:

    Hi Jeremy, nice write up. I’m doing a similar analysis on my portfolio. A few comments/suggestions:

    * It’s not safe to assume 12% or even 9% in perpetuity. You could in theory do that, but your Beta (i.e., risk profile) would increase substantially and outweigh the likelihood of any success. Unless you are Warren Buffet, most people nearing retirement need to preserve capital and have a very steady income stream, versus the high risk/high rewards of equity. I’ve built in a declining return into my analysis (drops about 1/2% – 1%) every five years as I get closer and closer to retirement and become more focused on dividends/interest/income investments than pure equity growth.

    * That said, assuming just 4% return on your retirement portfolio is pretty conservative. I like to approach this challenge using a different 4% rule (Many of retirement sites use this as well). When I retire I plan to take out 4% of my entire investment portfolio every year (increasing every year at rate of inflation). Under most “normal” scenarios that 4% rule should last you in perpetuity provided you are able to build a retirement portfolio that can reliably earn you steady investment income (4-6%) in most normal market environments (based on recent history that is easier said then done). That 4% withdrawal then becomes my retirement salary. Now I just decide what I want that salary to be, divide by .04, and now I pretty much know what my target retirement portfolio is in Present Value dollars. You can adjust that “salary” rate up or down for social security benefits, pensions, other investment income, etc.

    * On a related note, and as another poster mentioned, don’t forget to take into account the time value of money for all of these calcs. $5.5M in 35 years will only be worth about $2.3M today (at 2.5% inflation) and if you apply the 4% rule you can really see the difference in retirement “salary”: $220K ($5.5M/.04) vs $92K ($2.3M/.04). When I was your age I thought $2M was my walk away number (when I hit it I retire). Now with a wife, two kids, a money pit for a house, inflation, and no longer living a bachelor lifestyle, I’ve basically had to double that. Being a “millionaire” just isn’t what it used to be!

    * Finally, I have one tweak on the above statement on debt. It all depends on what the financing rates are on the debt versus what you could earn on your investments. If your cost of debt, or interest rate, is less than 8% then you could very well be probably better off in the long run off not paying it off early as you can earn a higher % in equity. As an example, I have student loans at 2% that I will never pay off early. That’s as close to “free” money as you can get. That being said, there are plenty of other factors that go into paying down debt (cash flow, credit scores, etc), but I just wanted to clarify that debt is not always a “losing battle”.

    Best of luck!

    • David says:

      PS – sorry for the novel. It didn’t feel that long when I wrote it!

    • Hi David – You raise some good points. I don’t disagree at all. With retirement planning there are a number of ways to skin the cat. I chose to keep my analysis straightforward and simple. Though, I like the method you outlined as well.

      Regarding debt, I’m actually a bit split on the issue. On one hand, math says that it’s ridiculous to pay off a student loan at a 2% interest rate when you can easily put that money to work in more profitable ways. On the other hand, if I didn’t have the student loan today, I wouldn’t go out and get one so that I could use the money to invest. I think there’s valid points on each side. Personally, I haven’t come to a final decision on the issue.

  14. Andy says:

    So you can just put that 40,000 in a retirement account now and not add another dime, and get 6 million dollars when you are 65??

    • Technically yes. However, it will still take good management on my part to maintain strong returns. Obviously a 12% rate of return isn’t guaranteed. Though it is possible by making smart choices.

  15. Jason says:

    I’m 31, my company doesn’t offer 401k, but I opened a Roth IRA last year and have it at $10k now. I have about $50k in my regular savings account, any good tips on what to do with the money just sitting there?

  16. james says:

    If you read the recent Bill Gross (PIMCO) editorial in WSJ. The Death of Equities, the last 80 years or so had a historically very high returns from this point forward we will be lucky to get a couple percentage points per year. A similar situation happened in Japan over the last decade. In this environment several adjustment have to made.

    http://blogs.wsj.com/marketbeat/2012/07/31/bill-gross-were-witnessing-the-death-of-equities/

  17. Mr Steve says:

    I agreee with eyebrows (Jeremy).
    Too many variables.

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