When people talk about their investment plans, one of the first topics that invariably comes up is how much they should be investing. Should they be investing 5%? 15%? 50% of their income? Today I thought I'd look at the number that comes up most often as being conventional wisdom when it comes to how much to invest – 15% of yearly income.
Investing 15% Of Your Income Into Post-Tax And Pre-Tax Retirement
For many folks the discussion of how much to invest is a moot point as they're still struggling to get rid of debt, and get to the point where they're able to start saving for their future. If you're beyond that point, congratulations, you should be applauded. For me getting to the point where you really start to save and build wealth for your future is so exciting! A variety of financial gurus suggest saving 15% of your household income in good solid long term investments in order to have enough for your future. So why is that number brought up?
Why Should I Save 15%?
To give a visual demonstration of why some folks suggest that you save 15% for your retirement, I went to Dave Ramsey's website and used his investment calculator. I put some numbers into the calculator based on these factors:
- Making $100,000 a year
- Saving 15%
- Starting at age 30
- Saving for 30 years
- 10% return on the investments
If you were to keep it going even for 5 more years until the age of 65, the account would grow to over 4.8 million dollars. That's not half bad!
So how much money would you really need in order to have a comfortable retirement? Assuming that you would want 80% of your pre-retirement income to live on as many suggest, and a withdrawal rate of 4% per year and a 30 year retirement, you would need to have about 2 million dollars. If you invest 15% of your 100k income, that would allow you to withdraw $112,000 a year for 30 years. (which assumes the money would still continue growing at a rate of at least 8% while you are withdrawing) That is 12% more than your pre-retirement income! 4.8 million would allow for $192,000 per year!
Now if you were to invest 10% using the same assumptions you'd end up with substantially less money, 1.5 million over 30 years, and 2.4 million over 35 years. Still not bad, but maybe not as much as you might want to have that comfortable retirement. At the 30 year point you'd have enough to withdraw 60% of your income, and at 35 years you'd have 96% of your pre-retirement income.
All of these numbers are of course assuming that you don't have money coming from social security. I have my doubts it will last until my own retirement. That is obviously up for debate, and hopefully the system will be fixed. But why depend on it if it might not be there? The point of all this to me is that 15% is usually going to be more than adequate to get you to where you need to be. 10% may not be, depending upon how much of your previous income you want to live on, and how much time you have until retirement.
The longer you have until retirement, the bigger the gains you'll see through compounding interest! Play it safe and start saving 15%. You won't be sorry!
Another caveat – if you're older and have less time until retirement you may need to be investing a higher percentage than 15%. You started late, so you have some ground to make up! Starting earlier? You might not need to invest all of the 10%. But why not do it anyway!
What Should I Invest In?
Once you've decided on how much you want to invest, the next step is to decide on what types of investments you should be holding. What to invest in will vary greatly on your situation, but here's what we would do:
- Company 401k or other plan up to the match
- Roth IRA for you and your spouse (Where to open a Roth IRA)
- Back to the 401k or other plan
When choosing what types of funds to invest in I would highly recommend doing your research first, however, for us we prefer investing in low cost index and retirement target funds through companies like Vanguard where the costs remain low (Try a 3 fund portfolio!). If you want an option that costs a tiny bit more than DIY, but is less work, Betterment or Wealthfront may be good options (after maxing tax preferred investing).
What do you think? Will 15% be enough for your retirement? Do you think you should save more or less?
|Account Minimum||Mutual Fund Commission||Stock Commission||Annual IRA Fee||Review|
|Betterment||none||Included in 0.15-0.35% annual fee.||Included in 0.15-0.35% annual fee.||none||Betterment Review|
|Wealthfront||$500||Included in fees. FREE up to $10,000. 0.25% annual fee for balances over $10,000.||Included in fees. FREE up to $10,000. 0.25% annual fee for balances over $10,000.||none||Wealthfront Review|
|TD Ameritrade||none||$0||$9.99||none||TD Ameritrade Review|
|Kapitall Generation||none||$7.95||none||Kapitall Review|
|Etrade||none||Up to $19.99||$9.99||none|
|Motif Investing||none||$9.95 (per motif/bundle of stocks)||Motif Investing Review|
|Capital One Investing||none||$19.95||$6.95||none|