How Much Should We Save

A few Sundays ago, I sat back and thought about how much should we save. You might blame this on the several cups of coffee I’d consumed that day.

In a rare state of boredom and curiosity, I went ahead and cranked out the following in excel:

How Much Should We Save Graph
Based on a few assumptions, of which I’ll dive into near the bottom of the article, I set up 6 scenarios of people preparing for retirement and managing to max out their 401k every year.

The color columns correspond to degrees of success with blue being too much in savings and green being enough to afford a traditional retirement.

How much should we save depends on varying degrees of success from said 6 examples .

At 27, retirement costs* $231,837.

By 35, the liability begins to snowball to $369,513.

The snowball crosses half a million at 41, more than double the cost at 27.

At 27, we have 38 years to let compounding interest grow that account to over $2MM. Enough to theoretically supply us with $40,000 in income each year.

For us, we’re at 55% of what we need, which is crazy to think about. By age 30, we’ll no longer need to put anything towards our traditional retirement.

One might argue our high income affords us this opportunity. I, no doubt, agree that optimizing and maximizing our income has been a priority for us. To balance this view, if a 16-year-old decided to work part time and invest all of his/her income, then land a full time job after college, they could theoretically be set for traditional retirement by the age of 40. This is with only saving $18K in the first year and growing that contribution 10% each year.

Another positive observation I made was catching up is still possible at age 35. Based on my calculations, if someone who is 35 can max out their 401K and increase their contributions by 10% each year, then they will still be ready for early retirement by 62.

*Retirement Calculation

The calculations used for portfolio growth rely on a three key assumptions.

These 3 are; compounding growth at 6%, inflation at 2%, and dividends at 2%.

None of these factors have been steady over the past 38 years, but for our model, we will assume that they remain flat.

The last major assumption is an increase in retirement contributions by 10% each year. This appears reasonable early on, as year 15 is increasing contributions to 68K over the original 18K. Year 30 may be a bit more unrealistic and the model may need refinement on the later years.

Our expected needs in retirement are ~25 times annual expenses. (We could play it safe at say 28X or more.) At 25 times, we need an estimated $2.1MM at 65 to have an inflation adjusted lifestyle of over $40K to spend each year.

All these factors can be adjusted, so let me know if you wanted to see what it would look like with different numbers.

Oh, and if you haven’t already, make sure you’ve taken the time to find the best savings account rates to reap the benefits of your hard work. 

Now it makes sense why Warren Buffett got his start at age 5.

How much should we save?


For more on my approach to how much we should save, check out this recent podcast episode:

15 comments… add one
  • Mrs. Picky Pincher Mar 22, 2017, 8:12 am

    My, my, that’s some mighty fine spreadsheetin’ you’ve done there. 🙂 Compounding interest really is no joke. We’re hustling ourselves to pay off as much debt as possible so we can invest heavily. Thankfully we have time on our side, but I do wish we could start investing much more heavily.

    • Distilled Dollar Mar 22, 2017, 9:02 am

      We two share the same boat! 🙂

      I look forward to knocking out our student loans.

  • Millennial Money Mar 22, 2017, 8:39 am

    This is an eye-opening post Matt. It seems a lot easier to get retirement ready than most people probably realize and why saving early is most important of all. It would be cool to see more of our peers maxing their savings from 22-30 (at least 50% of their income) and then just sit back and let it ride (with smallish contributions after). They’d be set! Thanks for sharing.

    • Distilled Dollar Mar 22, 2017, 9:01 am

      Maintain the student lifestyle for a few more years and money will present us with more options.

      Thanks for the comment!

  • Brad - Mar 22, 2017, 8:45 am

    “Our expected needs in retirement are ~25 times annual expenses. (We could play it safe at say 28X or more.) At 25 times, we need an estimated $2.1MM at 65 to have an inflation adjusted lifestyle of over $40K to spend each year.”

    Your math is off… or I need more coffee. 🙂 If you really only need $40k, then you should be good with $1mm. with $2.1mm you should be able to draw down about $84k each year with a REALLY high likelihood of the money lasting at least 30 more years.

    • Distilled Dollar Mar 22, 2017, 8:59 am

      Thanks for pointing that out. The math is accurate but I should have clarified the 40k per year in spend is adjusting for inflation.

      In other words, 40K today is likely going to require ~70-80K in spend 30 years from now.

      I hope that clears it up!

      • Brad - Mar 22, 2017, 10:31 am

        Ah, yes, that makes sense! Being in “retirement” now, I hadn’t considered your situation of the future value of a dollar. Smart for you to calculate that into your projections.

      • Peter Mar 24, 2017, 5:04 am

        Still confused, the 25X based on the 4% rule mentioned in this old MMM post too ( ), right? Which is based on the assumption: “At the most basic level, you can think of it like this: imagine you have your ‘stash of retirement savings invested in stocks or other assets. They pay dividends and appreciate in price at a total rate of 7% per year, before inflation. Inflation eats 3% on average, leaving you with 4% to spend reliably, forever.” Does not that mean that basically if you go with the 4% Safe Withdrawal Rate then the rest of the growth and the inflation will handle each other so at a certain point you can start with 1m, go on with 40k annual spending and your investment will maintain itself to the level to be able to provide you the money you need?

        • Brad - Mar 24, 2017, 7:02 am

          DD can obviously reply but I have a thought or two on your questions. First, remember (or know for the first time) that the 4% rule is based on withdraws in retirement. So it is focused on the money lasting for approximately 30 years. People who retire early should actually consider a lower safe withdraw rate – likely 3-3.5%.

          Second, yes, if someone had $1mm today in retirement they could likely draw $40k/year, inflation-adjusted, for 30 years. But DD isn’t talking about “today” – he’s talking about when he is 65. So in that case he’d likely need $2mm+ to have the same amount of buying power that $1mm does in today’s dollars.

          Hope that makes sense. 🙂

          • Peter Mar 24, 2017, 7:34 am

            Thanks for the clarification Brad. Meanwhile I came to the same conclusion about present value vs future value thing, I should read posts more carefully when math is included (and probably not before the first coffee) 🙂

          • Distilled Dollar Mar 24, 2017, 8:42 am

            Thanks for this! It helped me from needing an extra cup of coffee this morning! 🙂

            I might change that sentence now to clarify the ending. I could have it read, “At 25 times, we need an estimated $2.1MM at 65 to have an inflation adjusted lifestyle [equivalent to] $40K [in today’s purchasing power to] spend each year.”

  • Steven Goodwin @ MyFamilyOnABudget Mar 22, 2017, 4:46 pm

    It’s amazing, that compound interest, isn’t it? I love that we are starting to see it work for us and help us grow finally. Glad to be out from the other side where it was building against us! Great read and some great things to ponder! Although we are still a little behind, we are getting more and more aggressive as we dive further down the FI rabbit hole.

  • Frugal Mainer Mar 25, 2017, 9:10 pm

    I am retired and have been for 12 years (I retired at 60) and, yes, I have enough money to not worry that I might be homeless or scraping bottom in the future (my primary fear during my working years was that I would end up a “bag lady). However, and this is a point that too often gets lost in retirement discussions, I still save approx. 10 – 15% of my retirement income. Why? Inflation. Even in these so-called low inflation years (compared to the 70’s and parts of the 80’s) I can see inflation beginning to eat away at the buying power of my base income. Property taxes are raising faster than income growth, food keep going up (and I don’t eat out very often), clothing, shoes, natural gas, normal wear and tear maintenance of my car, the occasional repair to the inside of the my place, you name it and it’s going up. I have no debt and I own my condo. I am and have been a budgeter for decades, which is how I stay the course. But my life would be a lot more pinched if I didn’t save. I hate debt with a passion! So I am saving for the eventual replacement of my 12 year old, low milage car; I am saving for a much needed new kitchen counter; I am saving for what little traveling I do to see my family who live out of state; I also save for the unknown and to help out when something(s) I budgeted for comes in over budget. And so on. If I were spending my income only on current expenses I would be really (albeit slowly, for now) sliding backwards — and I am expecting to live for possibly another 20 or so years. The other thing that isn’t discussed is the financial ramifications when a partner or spouse dies. My husband passed four years ago. Fortunately, we had prepared for the loss of two social security incomes by using the lower of the two for discretionary spending — like going to the beach in FL for a month in the middle of winter or buying a fun “toy” like an upgraded computer, etc. But… even with that advanced planning I found the loss of that money to be something I really had to adjust to. For example, the second SS income was our budgeted travel, entertainment and fun money. Since I still want to visit my out-of-state families once or twice a year, since I still like to occasionally go out to eat, I had to make some significant adjustments elsewhere in my budget. I guess my overall point is that retirement is not a static thing. We change, our needs change, yet our incomes can still fluctuate. Don’t lock so tightly on a number that is too close to the edge, plan on continuing to save. You won’t regret it. If for some reason you realize you really have saved way to much then have one heck of a good time. My feeling when I was younger was that I could cut lots of corners back then or I could work more — more hours, get a second job or, as it called these days, develop a side hustle. But once I got older, as I am now, once I no longer had that same energy, when physical issues started to crop up, then I truly did not want to be in a place where I couldn’t take care of my needs. I don’t regret my decisions for a minute! Oh, and I didn’t even start thinking about retirement and my future until I was in my early-mid 30’s. Life was just far too interesting and exciting in the 60’s…

    • Distilled Dollar Mar 27, 2017, 6:27 am

      Thank you for the comment Frugal Mainer. I just finished a book and documentary on RFK so I was immersed in the 60’s for a good ten hours the other week! Agreed on it being very interesting.

      I also agree with you on saving beyond the target. In some ways, the goal is transitioning from employee to investor, and then into philanthropist.

      Sorry to hear about your husband. I agree this is a critical topic that is often left undiscussed. I covered a book review of Smart Women Finish Rich which covered this topic as well. The statistics are a bit scary but they are the truth; women tend to live longer than men and tend to marry men who may be older. In my life, this has been a large driver of why I’m focusing on making sure my fiancee is developing a great money mindset.

      Thanks again for the comment!

  • Paul Apr 15, 2017, 11:15 pm

    I’m impressed that you understand the concepts of saving at a young age and have a financially secure future ahead of you. Also, as someone who has struggled as a single guy when in relationships with women who do not understand the concepts of saving, I’m particularly impressed that you have met someone who is sympathetic and understanding of your frugality.
    HOWEVER, life is about balance. So many people have nothing when they “retire,” so those folks failed at preparing for that certain date with destiny; yet others have had such a focus on money that they lose track of what money is for. Please be careful to listen to your girlfriend when she asks you to loosen up the purse strings, and as well, you do the same with her. The numbers clicking by as your accounts grow are moving toward certain amounts, but the monetary value of how much you own is a cold, soulless quantity, unless you are willing to celebrate the opportunities that the money brings. I’ll never forget going into a landlord’s home of a graduate student friend when I was also in grad school. The place was a hovel, uncomfortable to live in, with no amenities. Yet the landlord proudly told me that he was a multi-millionaire and explained how he had developed his riches. He was married and his wife had either adopted the same obsession with money or was passively accepting his obsession. He had so much in the way of assets, but he lived like a pauper, so in effect, he was a pauper.
    Again, try to find a balance, and always remember that loosening the purse strings along the way helps you to remember why you are saving in the first place. Again, my compliments to you and your girlfriend :).

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