Savings Rate For Retirement

From section “Estimating Retirement Needs” we take a baseline SWR of 4%, so you need to save 25 times the portion of retirement income that comes from your portfolio. Assume that in retirement you want to keep your current lifestyle but no longer have to save — roughly $\frac{8}{10}$ of your current income. The required savings rate is then:

rate = 25 \times 0.8 \times \frac{i^{n - 1} (g - i)}{g^{n} - i^{n}} \times 100 %

(2.5)

The Figure 2.6 and Table 2.4 below demonstrate how the savings rate is influenced by various variables, highlighting the necessity of maintaining a savings rate close to 20% in typical scenarios.

Note, that it is linearly dependent on fraction of your desired income to your current income.

Table 2.4: Savings Rate for Various Investment Growth and Inflation Rates

Inflation Growth Years to Retire Savings Rate 3.2% 8% 25 44% 3.2% 8% 30 32% 3.2% 8% 35 24% 3.2% 8% 40 18% 3.2% 8% 45 13% 4% 8% 25 49% 4% 8% 30 36% 4% 8% 35 28% 4% 8% 40 22% 4% 8% 45 17%

3.2% inflation 8% growth
4% inflation 8% growth
1223344501234567891YS505050500000000000ea0avrisn4g%tos RinRafletatetir,ie%on 10% growth — Figure 2.6: Savings Rates Calculated For Various Investment Growth And Inflation Rates

Making predictions about market growth is a thankless task. The honest forward estimate is humbler than the historical record: roughly 7% nominal, a touch under what investors enjoyed in past decades. Nick Maggiulli, on Of Dollars and Data, ran simulations to estimate realistic portfolio growth. He found median real (inflation-adjusted) growth after 10 years of 1.35x for a Global 80/20 portfolio and 1.5x for a U.S. 80/20 portfolio — an annual real rate near 3–4%. That is the same story as the 7% nominal figure above: strip out inflation and you land in the same place. Extending the analysis to longer horizons with consistent investing (Dollar-Cost Averaging, DCA), you can reasonably expect, in real terms: 1.5x your money after 10 years, 2x after 20, 2.5x after 30, and 4x after 40.

Given this state of affairs, you should plan on some combination of saving more and working longer. Another argument that you need to start saving now.

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