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?

-Matt

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

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