The new savings rate is more than 10% folks
I was inspired by this blogpost recently that argued we’ve been thinking about our savings rates all wrong.
“What if, instead of telling us how much to save, we grew up hearing how much we should live off of instead? What if your parents had made you save half of every paycheque you earned as a teenager? What if your teacher (of the personal finance class that only exists in my dreams) had told you the goal of budgeting was to live off half of what you earned as an adult?”
What if indeed…
Here’s what I know about our financial journey.
- If my wife and I save only 10% of our net income for retirement purposes, it likely won’t be “enough” money to retire on in our 50s like we want to. (This excludes any contributions to our pension plans as well). We figure we need to save more than 10% of our net income if we hope to a) retire before our mid-60s and b) fight inflation throughout retirement.
- My wife and I figure we need to save close to 20% of our net income for the next 15 years to hope to retire on our desired timeline.
- Focusing on a savings rate is a good idea, as long as this savings rate is balanced against debt repayments and other financial goals. I think it makes little sense for us to be saving madly without killing (the mortgage) debt at the same time. Being debt-free is essential to our plan.
- With lower projected financial returns from interest bearing products like bonds and GICs, I think you have few choices when it comes to earning more from your portfolio: you either take on more risk (own more equities) or you save and invest more money.
Most folks I’ve met that saved their “enough money” for retirement or for financial independence did so with a modest to high savings rate forgetting saving rules of thumb and simply saved what they could while enjoying life along the way. For the Gen X and Gen Ys out there reading my blog I think if you want retire in before your mid-60s you’ll probably need to save more, spend less, continue working or a combination of all three.
What do you think about the 10% savings rate? Is this enough for the modern retirement? Are you in retirement and did you save this much when you were working?
It’s not how much you save, but how much income your savings will generate. Focus on the future growth of your income and hopefully it’s a growing income, not a fixed one.
Very true Henry, but you have to save to invest – no? I hope our savings will generate lots of income, eventually, like yours has 😉
I follow mrmoneymustache ‘s philosophy. The math is straightforward ….live on 25% of your income, retire in 7 years…..live on 50%, retire in 15. Live a luxury life of friends, good food, fresh air & freedom. OR spend money on clothes, cars, Starbucks & work til you are 65.
Great points Slappy. I suspect most folks would find it very difficult to live off 50% of their income. We could not. We have a mortgage.
I will be retiring later this year or next year at the latest @48 years. I started working and saving in 1999, we bought our house in 2001, paid it off by 2007 and will retire with about 1.5MM investment portfolio. I have averaged about 200K gross income for last 8 years, my wife makes about 50K part time and will continue to work . I figure we have saved about 50% of our income over past 8 years, we didn’t live cheaply, just didn’t wast’e money on expensive cars or upgrade into a larger more expensive home. We have 2 children, I figure we can live comfortably on 5-6K month if no debts. My advice wou;ld be to have your own plan and don’y worry about what others are doing.
Great advice Ben, re: don’t worry about what others are doing. With a good paying job like that, it’s great you did not give in to lifestyle inflation. This has largely allowed you to realize your financial goals…and great on you. Congrats on the FI journey. I hope my wife and I get there too 🙂
50% makes sense, unfortunately, if zero percent real interest is a fair assumption, as indicated by the after-inflation yield on Government of Canada Real Return bonds. Why? Work 35 years from 25 to 60, then we need to plan on living 35 years till 95. So each year of work has to pay for two years living, 35 years work pays for 35+35 years eating and zero interest doesn’t help. We have to save half our pay, 50%, for that second future year. Sorry about that. I didn’t save 50% either.
Inflation is absolutely a portfolio killer Keith so thanks for raising that ugly but real issue.
Your back of the envelope calculation is close, every year of work must pay for two years in retirement IF inflation is factored AND it assumes capital drawdown every year. If you are living off your investment income vs. capital withdrawal I suspect you can even things out a bit and make your portfolio last much longer.
Nope. Just do all the calculations in real terms. Or think in ‘loaves of bread’. Zero real return rate means that in real terms there is no interest, whatever your investment statements tell you. It’s all capital drawdown, straight line to 95. A spreadsheet will give the same answer but more slowly.
I think this “savings game” is waste of energy. I read about all the strategies buried in the piles of percentages breakdowns etc etc etc… It’s exhausting. I think all anyone needs is a few guiding principles. Live within your means or Be mindful where your monies are going.
I ask you: What are you saving for? What is your end goal? Early retirement perhaps… The good life… What you are doing is ignoring today. Ignoring the best period of your life. Young, healthy, mobile. This may not last into your retirement. Life may throw you a curve ball into your 40’s or 50’s like a disease, cancer or a car accident. You’re sacrificing your life today for some future hope that things will be better.
Life is the vast accumulation of your experiences over a period of time called “YOUR LIFE!”.
If you are sacrificing living your life today in the name of savings… man that sucks/
Good points Billy, all very valid. We are saving for tomorrow but also living for today, including travel and other “fun” stuff.
My post was meant to infer if we want to “retire” early, then the savings rate for us, and likely for many others is much higher than 10% net income. If you’re willing to work until age 60 or 65 or 70, if there is employment for us 30 years down the road, then maybe just living it up today is fine.
Thanks for your comments!
I’m lucky in that my parents taught me the importance of saving money from a very young age. They taught me to consider how long I have to work to pay for the desired purchase and then deceide whether it was worth working for that number of hours – often it was not. I worked from my early teens through high school and university and tried to save a little along the way. It wasn’t until high school and university that I became fully interested in saving, investing, and general personal finance. I have since graduated and am in my early 20s. I don’t set a fixed percentage of savings, but rather establish annual net worth goals (quite arbitrary but gives me something to work towards, and brings a prudent investing strategy into the scope of my savings goals). My 2014 savings rate was approximately 40% of my pre-tax salary and I anticipate my 2015 savings rate to be similar or higher.
Nice work Canadian.
Nothing wrong with NW goals. I know for us, we try and make savings as automatic as possible, so from my spreadsheets, I can see what % we are saving each month.
If you’re in your 20s, saving 40% of pre-tax salary, that is very good and if you have intentions of ramping it up in 2015, even better. Good luck on your goals and hope to see you here on the site often to contribute.
Happy New Year.
Currently, I’m saving 10% of gross income while paying down debt (good debt) just to keep the habit going and to bump my savings a bit for peace of mind. After the debt is paid off in 4 months, my savings rate will increase to 40% with 20% going to my retirement savings and the other 20% to my general savings.
The 10% savings rate worked for me when I was younger as that was all I had left after my essential spending (junior pay of only $21,000 a year) but that little nest egg grew to $10,000 after 3 years and is now worth $35,000 5 years later. Ah, the power of compounding interest and DRIP!
That’s pretty darn good KC.
I figure after our mortgage is done our saving rate could be over 60%. Unfortunately we still have lots of mortgage debt…
The power of compounding is almost magical, the tough part of the process is leaving the money alone to do it’s thing and avoiding messing around with the portfolio. Thanks for the comment.
I like the 10% savings rate because its better than nothing and most people need something very quick to work off of. But really, people should sit down and look at many factors: debt, expenses, time till retirement, lifestyle wanted.
There are a lot of moving parts and to achieve their goals, people will need to put in time to learn about finance.
“There are a lot of moving parts and to achieve their goals…”
Absolutely. I think this is where folks need to be focused. Pick a few things and try to do them very well. Otherwise, things will be all over the place, finances, health and relationships included.
Thanks for your comment.
Great article, Mark! I think this is where financial literacy is important. If we learned in school at an early age the power of compound interest, we’d be a lot more likely to say our paycheque from our part-time job as a teenager than spend it.
Thanks Sean…hopefully time in the market is our friend.
Just to confirm and clarify, do you calculate your savings percentage per household and on gross or net earnings? I always saved 10% on gross income.
I consider our savings rate as a portion of household savings, after-taxes, meaning net income that goes to savings for my wife and I. I don’t use 10% gross for example because I/we have to pay taxes on that.
Including the money that is going towards our mortgage payment, we are saving 50% of hubby’s net income (if you look at a mortgage payment as forced savings that is!!!). I can’t wait until the mortgage payment is gone, then we will truly be saving 50% and can divert the mortgage payment to our taxable trading account and invest in more dividend paying stocks to reach FI faster!
If you include those mortgage payments as savings, 50% is outstanding Calgary Girl. We’re going to try and ramp up in 2015!
Once you’re diverting mortgage payments to investing, wow, you’re really cooking. I hope we get there in another 6-7 years by our mid-40s.
I always thought 10% was a little strange.
RRSP contribution room is 18%, TFSA on top of that.
The government hints that 10% is not enough. They are not even hinting anymore, literally telling people they are not saving enough.
If folks can max out their RRSPs, TFSAs and save for their kids and pay down their mortgages, well, they are superheros in today’s economy. 🙂
You’re right about the government…they have been hinting for years/decades. This is a huge liability waiting to happen…
I remember the days when the Canadian savings rate was TOO high.
That was a long time ago, in the early 1980s. I worked in economic forecasting, so we’d see all the numbers, all the time. Government wanted Canadians to spend more, in order to help the economy. We had one of the highest savings rates in the world.
Geez, far cry from today. I know my generation didn’t have to work through interest rates north of 10%, let alone for a few months of 18% I recall. I think many people think it won’t happen again at some point. I worry (financial) history finds a way of repeating itself – which is why I want to be out of debt sooner than later. Thanks for your comments Barbara.
This time is always perceived to be different, but it never really is… – Cheers.
So true eh? I suppose the (financial) triggers are always different though…but the fact that businesses make money, keep increasing prices, innovation continues…the stock market continues to make money. Might as well invest in it unless things really change.
How could they change, they are driven and ultimately controlled by humans, so as long as human nature does not change, it will not be “different”. We all must remember that every 80 years (give or take) those in the game will have completely changed, and repeat the majority of the same learning’s… – Cheers
Mark, I remember when 5 year GICs were paying 19%…..I had zero money to save then, so it didn’t affect me.
But my Mom phoned me one day and asked what to do, should she invest at that rate? or would rates go higher? I told her to put everything she had into savings at that rate!!
Sadly she died young, before those GICs would have matured, and I wished she would have spent more on herself, rather than being so frugal. It is hard to know the right trade-off.
Thanks for sharing the story. It’s another reminder we have no idea how things will work out, but we can only make the best informed decisions at the time.
I remember those days… I had this Canada Trust “T-bill” monthly savings account back then. I was saving up for several years to buy a house so I had a lot of cash. The account would literally pay me $400.00+ a month, so when I get offered by banks or hear commercials for CSB’s (or any interest bearing product i just laugh). What is the point?
As for the savings rate – I save 30% if not more than that a year. I don’t just want to survive in retirement, I want to maintain the standards I have today and not have to sacrifice and make hard choices later on. As we get older don’t we all hate change more and become a little stubborn? 🙂
30% per year is great Paul, impressive. We’re not there yet but maybe someday after the mortgage is killed we will be.
Your comment about the ‘standards’ made me smile, I think this is why I want to save more…
Thanks for sharing. Keep up the great saving rate.
Was the 10% number ever meant to fully fund retirement? I think that number was commonly quoted in the days of defined benefit pension plans. Those were supposed to be your “rainy day” savings, I think, not dedicated to solely support you in old age.
I do know that for someone working at minimum wage or only a bit above, 10% is a great savings rate. It’s very easy for me to save over that but that’s because we make well above minimum. The fixed costs of having shelter, food and necessities for a family are about the same regardless of income which is why the more you make the easier it is to save (if you don’t think your higher income entitles you to spend more than necessary on the basics.)
We’ve never calculated our savings rate but we are fortunate enough that we haven’t had to.
You know, great point. The 10% number was probably never meant to fully fund retirement…just to supplement assuming you had other savings and would take advantage of government programs such as CPP at 60 or 65 and OAS when you reached eligible age.
There is no way 10% savings could support a retirement today, unless you were making good money today and always, saving that for 40 years, say $6,000 per year every year.
Starting with $100, saving $6,000 per year for 40 years with 7% return provides the investor with a nest egg of close to $1.3M.
If you never calculated your savings rate, I suspect it means you are saving enough, which must be a great feeling 🙂
I believe that when you are young and told to save 10% of your income that they should also provide a chart showing you if you save 25% of your take home pay, save 50% take home pay, or save 75% of your take home pay the significant difference in time that it takes you to become financial independent. This would really drive home the point that Cait argued “What if, instead of telling us how much to save, we grew up hearing how much we should live off of instead?” Right now we are roughly saving 75% to 80% of our take home pay with a goal of becoming financially independent within the next four years.
I think folks that can save 50% of their are certainly living well below their means and are on the fast-track to financial independence. We’re simply not there yet but maybe someday..when all mortgage debt is retired this will be our savings rate.
If you are saving 75% to 80% of your take home pay, that is absolutely incredible.
Don’t let life’s numbers game box you in… More is almost always better in the savings game, but what will really make a difference is learning to live on less than is coming in, and learning to not over-consume. Realize that once you are done paying others for the use of their money that’s when the true fun begins… Having money is great but knowing how to get it, and what to do with it once you have it to keep it growing is sometimes more important…
Well, we spend less than we make for sure, probably 10% net goes to RRSPs now, trying to max out TFSAs every year and then trying to save a bit on top of that. I hope to have my RRSP maxed-out in another 2-3 years. Then I will be need to save and invest in the non-registered account. We hope to be mortgage free in another 6-7 years, in our mid-40s.
Your point about knowing what to do with the savings is very important, so much work to earn it and yet so easy to see it gone if not managed properly!
Saving 10% is about right — and a nice, round number too — if you start working and saving in your early 20’s and aim to retire in your mid-60’s with an income a fair bit below what you had in your working years. If you start later, want to retire earlier, or want to spend closer to what you did in your working years, you have to save more!
Even when starting a career without education debt in your 20’s was common, I’m not sure saving for retirement right out of the gate ever was. So it’s strange that this rule became so engrained in the collective mind.
Good advice John. I think the challenge with the 10% rule is it’s not linear. I know of very few people if anyone who could afford to save 10% net income in their early 20s and continue on that pace. Once most folks have their career established they could save 10-20% in their 30s and 40s, if their lifestyle didn’t get out of hand.
I tried to save almost half my pay when I was in my late twenties (after grad school and a couple of years of working), but that was saving towards a house, not for retirement.
It definitely gets easier to save for retirement once the children don’t cost you so much. My three are all at university, but my expenses are limited to paying for their food and medical expenses (my choice to pay this for them) as two live at home with award money paying their basic tuition and the other is fully funded for his studies.
I’ve been tracking spending this year; can’t wait to add it all up and see where the money goes.
Saving half your pay in your 20s is phenomenal Barbara. Most 20-somethings could not do that today unless they lived in their parents basement. 🙂
No doubt based on previous comments you seem to have a great handle on your finances. It’s always neat to hear from folks how well they budget and forecast expenses. Takes discipline and I respect that.
My dad told me to save 10% back in the 80’s when I first started working, but I figured out about 10 years ago that that wasn’t going to get me where I wanted to go, so I upped it to 30 and then 50%. I am set to be FI by the age of 50 in 1.5 years.
Great work Tara. It seems most early retirees I know had a savings rate of at least 25% for 15-20 years.
Agree that 15% savings target is more ideal than 10% today, especially if you’re not part of a pension plan. Also agree with Michael James that paying off your mortgage faster is an excellent part of a savings goal that will improve your financial flexibility.
My husband and I achieved financial freedom in our mid fifties by following that strategy plus a few more…saving a very high percentage of “windfall” or unexpected money (cash gifts, bonuses, salary increases etc), paying attention to taxes, and spending very carefully.
I guess our RRSP contributions are around 10% net and then we need to save on top of that, AND aggressively pay down our mortgage making some lump sum payments. So, I hope we can make our savings rate outside our extra mortgage payments in 2015 to be around or over 20%. That’s the idea anyhow, thanks for the comment!
10% is not enough. Our investment % probably is pretty low, but we try to only live on half our single income. Then we can use the rest to put extra payments against our mortgage and meet other financial goals.
I grew up hearing 10% too. If we wanted to work for 45 years I think it would probably work out ok. But I don’t want us to HAVE to work that long.
I think the ability to work 45 years must be factored in. You may want to work that long, and need to work that long, but health issues or complications could derail those plans. Thanks for your comment!
Work until you are 45 would be amazing, instead of working FOR 45 years 🙂
Sadly I only have 7 more years to get there and it does not look like I will get to retire at 45…
I don’t think I’ll be able to retire at 45 either Daniel, unless my wife and I wish to make some drastic lifestyle changes. We hope part-time work into our early 50s is doable. We will see. So much depends on our savings rate to be honest.
Retiring at 45 would be amazing. We might be technically FI by then, but I doubt we’d stop working all together so early. I’d like to have extra so we could live somewhere nice for our last days!
Same for us…my wife and I will continue to work at something for many years, we’re simply striving to work on our own terms. That will be freedom Emily 🙂
This is why I always encourage people to take on automatic investment plans even if they are financial illiterate. It forces you to put a little bit away every pay period and you just become accustomed to how much you have left over. ]
Great article and I wish I saved more as a teen as well! Hell I musta spent 100k on candy alone!
Yes, whatever folks can do to make their savings automatic, take it off the top if you will, is a great thing. Pay yourself, plenty, first.
I think it makes sense to think of principal payments against a mortgage as part of savings. I definitely agree that a sensible saving rate is much higher than 10%.
I know to reach our goals Michael, our savings rate needs to be at least 20% for the next 15 years or so. It will help when the mortgage is paid off, that’s for sure.
10% is definitely not enough but people have this number engraved in their mind due to all these articles and books. Live below your means and try to save as much as possible.
“Live below your means and invest the rest” should be the mantra. We’re trying to do that more Tawcan.
Hi, Mark. Me and my wife are entering the 40’s and I know for sure that 10% is not even close to the optimal. But it is still better than nothing, and current salaries situation is not helping a lot.
Anyway, it’s good to have something to think about…
Great point Dan, about current salaries stagnating in comparison to inflation. 10% is good but not enough.
Yes! advice for the masses… live on less than you have coming in, and as your income rises, challenge the status quo and continue to live on less and invest the rest. Perfect long-term plan to financial independence… – Cheers
Thanks Phil, great to learn from folks like you who have been there, done that 🙂
We are currently saving at 35%. We are in are forties and are trying to catch up so we can retire around sixty. We also currently have no debt which helps a lot.
Are current savings rate is 35%. We are trying to catch up in are forties with limited saving but are moving ahead very steadily. We currently have zero debt.