The golden rule of saving money for retirement - July 17, 2019

The golden rule of saving money for retirement

“How much money should I save?” – the age-old question that is becoming more and more important as we get older. Now a new study gave us a super easy answer: 10% of your salary. That’s the amount that you should save every month to cut the chances of running out of money while retired. Let’s see why!

A study came out by American organization, Employee Benefits Research Institute (EBRI). The Washington-based company is independent and focusing on fact-based researches and education to help both employees and employers. Now they created a study by asking millions of people about their financial habits. The study doesn’t tell anyone what to do exactly, as every person and situation is different. Instead, they created a golden rule to help people navigate through finances.

The 10% rule

Their idea of preparing for a successful retirement is pretty easy: save 10% of your salary every month. This 10% rule should be followed no matter how much you earn throughout the years. They also state that this 10% is a sum that’s divided between you and your employer. So if an employer sends 3% of your salary to your pension savings account, you should top that up with 7%. This, however, depends a lot on your country of residence as pension systems differ a lot.

One thing is common in most systems, though: They have serious problems (see: A pension crisis seems inevitable). This also means that self-care and personal savings are going to be more important by the day. Especially as life expectancy grows fast and expected retirement times are going to be longer than ever before (see: Retirement age is rising globally).

But why 10% exactly?

EBRI came up with the 10% rule after running some simulations. They found that no matter how much a millennial earns, if they start saving up 10% from their mid-20s, they cut the risk of running out of money during their retirement by approximately 30%. Saving up more than that can give them even better returns.

EN-Running-out-of-money-chart

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Running out of money while retired is a real danger for many. The reason is simple: expenses during retirement are usually higher than savings and Social Security (or other, country specific) benefits. Most people also miscalculate how much they will spend on things like healthcare and medicines when they get older.

Time is of the essence

The time when someone starts their savings is of the essence. EBRI’s calculations and returns for example are based on savings started at 25. If someone starts saving up money later, they may need to save more than 10% a month to meet their retirement goals.

EN-Returns-of-investment-visualized-Chart

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This simple graph above also shows how important it is to start saving as soon as possible. Investing $10 thousand for 40 years earns more than investing $20 thousand for 30 years at an 8% yearly return. Another thing to consider is to start saving even more at an early age, to retire early. Followers of FIRE do that by being extraordinarily disciplined in saving and investing (see: FIRE – the thing that leads to early retirement).

Anyhow, EBRI’s figures show us again that thinking forward and discipline (see: The importance of discipline explained) are among the most important things when planning an investment.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.