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“Getting rich is nothing more than sticking to a systematic savings and investment plan,” writes financial advisor David Bach in his book “Smart Couples Get Rich.”
How Much Money Do You Need Saved To Retire
“You don’t have to have money to make money,” he writes. “You just need to make the right decisions and act on them.”
How Much Money Should I Save By The Age Of 30?
To illustrate the simplicity of building wealth over time, Bach created a chart (we’ve recreated it below) detailing how much money you’d need to set aside per day, month, or year to save $1 million by age 65.
You can start by investing in your employer’s 401(k) plan—an easy, automatic contribution—then consider contributing money to a Roth IRA or traditional IRA, individual retirement accounts with different contribution limits and tax structures.
While the numbers in the chart below aren’t exact (for simplicity, it doesn’t take into account the impact of taxes, and 12% is a high rate of return), a commitment to saving — even just a few dollars a day — can make a big difference in the long run.
The next time you’re considering a drive to Starbucks for a $4 latte, consider this chart to divert coffee money into your savings:
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Please refresh the page or go to another page on the site to log in automatically. Personally, I love them because I feel like I can sit there and look at people of different ages and compare myself to them, but there’s one major problem – they’re all terrible!
As I mentioned, many of these charts have goals that are always the worst advice. It drives me absolutely crazy. For example, check out these two charts:
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The first says you should have 10x your salary at age 65, the second says 8x your salary at age 65. What I like is that this is a super simple number to calculate. The problem is, it’s also super wrong!
Here’s the thing – let’s say you and your spouse both totaled $100K, or $200K, that’s a lot of money. That means you need $1.6 – $2.0 to get 8-10x your combined salary of $200k/year right?
Well, using the 4% rule, that means you’ll be able to make $64K – $80K every year! Now, being able to consistently draw without any fear of running out of money sounds like a pretty big amount to me, but if you’re used to drawing $200K in salary every year… not so. be happy.
The same is true of low wages, but I think it’s actually even more harmful.
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If your salary was only $50K and you were single, you’d save $400K, meaning you’d only get $16K each year.
You see, I like simplicity, but they are so, so, wrong. People look at charts because they look bright and it’s easy to remember that you need x 10 your salary or something along those lines, but that’s just terrible advice. But these are not the only charts that confuse me.
You see, all you know is the amount you should have. You don’t know how much money you have or don’t have in savings, the interest rate, the age at which you’ll retire if you have that amount… I mean, you really don’t know anything. With that, right?
Oh this makes me so disappointed. The abundance of inaccurate, misleading and incomplete information is incredibly disappointing.
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Now let me tell you some charts I found that I really like. One of the graphs is shown below:
What I love about this chart is that I can find my age range and see where I fit in with other people my age. A millennial can be anything from someone who is a senior in high school to someone who has been in the workforce for nearly two decades, so I wish the age range wasn’t so wide, but it is.
But there is no conjecture about this – only facts. And the facts are complete. That way, I can make sure I’m at the top of the chart, and if I’m not, I can work to find a better plan to make sure I can move up.
It’s a super simple chart that does nothing but use the 4% rule I mentioned to show you how much you need to save to achieve a certain annual retirement income.
How Much Money Should You Save To Invest?
What I don’t like about this chart is that it seems really overwhelming to someone who doesn’t understand the importance of compound interest and how it can completely change your life.
For example, if you earn $100,000 a year, the most you’ll earn in 40 years is $4 million, right? There is no way you can save that much money. To withdraw $100,000 a year in retirement you would have to save 62.5% of your money, or $2.5 million, assuming you didn’t invest any of it.
Or, you could invest some of it, a small amount, at an 8% rate of return (when the rate of return is much higher in all reality), and you could easily get $4 million.
As you can see, investing $14,300 a year for 40 years will get you there. Not too ugly, right?
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Or, if you want to get to that $2.5 million number I mentioned, you can invest less than that:
It is the power of compound interest and if you are not using it, you should change it soon.
You can easily do the same exact math I do using a complex interest calculator, my favorite from Moneychimp.
But you know? Some charts are good, some are good, some are terrible…but sometimes I’m whiny and can’t please.
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I decided to create 5 different charts showing different time horizons from 20-40 years in 5 year increments to show you exactly how much money you need to save to reach a goal of $1 million, $2 million, or $5. 10 million dollars. I also assumed the 8% rate of return I mentioned above, so if the real returns from investing in the market are higher, you’ll be able to reach your goal faster!
The purpose of these charts is to break down exactly where you expect to be when you want to retire.
So, let’s say you want to retire with $2 million in 20 years and you haven’t started saving. Do not bother! At the end of the first year, you need to save $43,705 for retirement.
Yes, that’s a pretty lofty goal, but saving $2 million from scratch in 20 years is a pretty lofty goal! So, it will require some serious motivation and commitment on your part, but that doesn’t necessarily mean it can’t be done.
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Now, if the only time you fail to make $2 million in 20 years is three years of travel, you’d be better off saving at least $141,885 for retirement! If you don’t, you could be in for some trouble down the road.
One thing I want to point out is that when I use an 8% return, the return is applied evenly every year. So, if you think that the stock market will give an average return of 8%, some years may be a 20% return and some may be a drop from the previous year.
A good example is in 2019, when the S&P 500 rose 30% in 2019, or a big year of 16% in 2020. Actual contributions to your retirement goal may actually be lower. There will be a few years where your value drops, I’m sure, and a few years where you explode.
I mean, if you were sitting there in ’17 and you had a 30% increase in your investments and that
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