One of the biggest challenges many of us face is how to save for retirement when so many other things are competing for our hard earned dollars.  How much of your income should you save for retirement?

Wealthy Barber author David Chilton suggests you should save 10% of your gross income for retirement.  Any other savings, like for a down payment on a home or for a dream vacation, should be made on top of your core 10% retirement fund.

Related: Why The Best Time To Start Saving Is Now

Saving 10% of your income for retirement is a good rule of thumb.  Unfortunately that’s become tougher to do these days when the high cost of housing eats up a good chunk of our take home pay and wages aren’t rising at the same rate as inflation.

In 1990, the average family saved $8,000 per year, which was about 13% of their gross income.  By 2010, household savings had dropped to $2,500 per year – just 4.2% of gross income.

Today’s 20-and-30-somethings likely aren’t too concerned about saving for retirement when they’re saddled with huge mortgages or massive student loan debt.

That’s why the majority of us neglect our retirement savings – it always gets put off until after we’ve paid off our consumer debt, our student loans and our mortgage.  Sometimes it gets put off forever because we’ll never run out of financial priorities to look after.

Related: Why Baby Boomers Aren’t Prepared For Retirement

You’ll have kids and then you’ll want a bigger car and a bigger house (or a renovation).  Then you’ll need to take a big family vacation every year because you deserve to get away.

The problem is that the longer you put off saving for retirement, the more you’ll need to save later on.  That’s fine, you say, because once your mortgage is paid off then you’ll ramp up your savings and take advantage of all your unused RRSP contribution room.

That’s a great idea in theory, but it doesn’t always work out in practice.  Just because you’ve paid off your mortgage early doesn’t mean you’ll direct all your extra cash flow to retirement savings.

The psychology of money is fascinating.  Much like the people who spend their tax refund instead of saving it, many people who’ve paid off their mortgage early just end up spending the extra cash.

So there’s no guarantee you’ll have the time (or the will) to save more for retirement down the road.

You’ll need to start saving early, but how much of your income should you save?  That depends on your age and stage of life, but you’ll want to start with something – even if it’s just 3 or 4 percent of your gross income.

Related: Why Do We Save?

The key is to make it automatic – have the money come directly off your paycheque and into your RRSP or TFSA.  Save what you can afford and increase your contributions every year whenever you get a raise or a bonus.

Once you’ve reached a financial milestone, such as paying off a loan or saving for a car, it’s important to continue saving that amount toward another goal – like your retirement.

When I started tracking my finances in 2010, I was still in the midst of paying off student loans and a line of credit.  Most of our extra cash flow was earmarked toward paying off those debts quickly.

I was barely saving any money outside of my work pension.  Once those debts were paid off, however, our goals shifted from debt reduction to saving for the future.

Related: Our Fast Track To Financial Freedom

Take a look at the chart below, which outlines how much of our income we’ve devoted to saving.

  2010 2011 2012 2013
Extra mortgage payments n/a 1.47% 8.67% 10.61%
RRSP 0.47% 2.44% 3.10% 9.93%
Pension 10.06% 9.18% 6.20% 8.40%
TFSA/Savings n/a n/a 7.54% 4.82%
RESP 0.71% 0.59% 1.05% 1.93%
Student loan/HELOC 13.98% 12.45% n/a n/a
Total 25.21% 26.12% 26.56% 35.68%

As you can see, we’ve always tried to direct a quarter of our income toward saving or making extra payments toward our debt.

Our focus for the past two years has been to pay off our mortgage faster and to increase our RRSP contributions.

This year we’re on track to save over 35% of our income.  We’ll save more than 18% of our gross income for retirement, while another 10% will go toward extra mortgage payments so we can be mortgage free faster.

We’re having trouble saving for both our RRSP and TFSA so we’ve decided to focus more on RRSP contributions to reduce our taxable income.  There’s only so much money to go around so you’ll need to prioritize your goals.

Related: Should You Pay Off Your Mortgage Early Or Invest?

How much of your gross income do you save, and what percentage do you allocate toward retirement versus other financial priorities?

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