How Much Of Your Income Should You Save?
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?
Our goal is to save 50% of our after-tax income this year. We were close last year, but my wife and I are 25 and have relatively few expenses other than rent ( we have no mortgage and paid cash for our cars). Once my wife graduates with a masters, we might be able to bump up the savings rate to 70% or higher!
Most of the savings are in retirement accounts, but when we buy a house, we’ll likely use some of that savings, it’s only in those accounts because they are tax advantaged.
@Daniel – That’s awesome! I wish we were that disciplined when we were 25.
I am attempting to live on 50% of my very modest income and put 40% to debt and 10% to savings and most of that is RRSP and my work pension contribution. It is a struggle.
In just over when year, when I am debt free and turn 50, I will commit 50% to savings and I am painfully behind in my retirement savings do to a late restart of my financial life.
I don’t think a lot of people are even saving 10%.
@Jane – A 50% savings rate should help to significantly boost your retirement savings.
That’s great that you’ll have your HELOC paid off in a year!
In “A Sensible RRSP vs TFSA Comparison,” you state, “Obviously for high income earners who expect to retire in a lower tax bracket, it makes more sense to contribute to an RRSP. For low income earners, or for young people with higher income potential later on in their careers, TFSA contributions make better sense.”
It seems to me that Jane Savers [… very modest income …] is not a high income earner, so she should be directing her funds towards a TFSA, or, perhaps, I’m missing something.
There should not be any limit to saving. Any amount you can save accumulates over the years and 10 or more years later, you would see a big amount in your account. The best route for me is to save and invest using dollar cost averaging and diversification.
@Shafi – We’re only limited by our finite resources. There’s only so much money to go around – which is why most of us put off saving for retirement.
I think that the key is like you’ve said, to have goals and also to automate. We plan to continue to autodeduct an amount equivalent to our mortgage payments, plus have annual targets, some of which will be nice and concrete like maxing out TFSAs.
I tend to think of our incomes as gross and our savings as net, so I’m not sure how well that plays out as a percentage. Net/Gross it’s probably around a third, but gross/gross it’s more like 50%.
@Anne – That’s a great savings rate, whether you use gross OR net.
When I started paying close attention to finances I tracked our gross income and then included taxes and CPP/EI in our expense column. So I’m used to thinking in terms of gross income and percentages.
I am currently saving 30%, but I’m going to try to get that to 40% this year. I saved in my 20’s, but that was to put a 30% down payment on our house. Now i need to put away more to catch up.
@Bryan – Nice work, thanks for sharing!
I save 35% of our gross income. It all goes into retirement savings. I have savings on top of it, but it is between 5-10%.
I’m a little surprised that you would prioritize the RRSP over the TFSA. For me the flexibility of the TFSA and the fact that withdrawals do not affect means tested government benefits make it a clear winner. Of course the RRSP will be the winner if you know what your tax rate will be in 25 – 40 years (or whenever you plan to make withdrawals) and that rate is lower than your current rate.
@Biggoof – Our income increased last year and so our tax rate is pretty high. We chose to put more into our RRSP to reduce our taxable income.
We’ll have to come up with a strategy to withdraw the money at a lower tax rate. I’ve got some ideas about how to do this, but that will be for another post 🙂
I personally save approximately 10% of my gross towards all the accounts I have. I have automatic savings based on my pay but I also save on top based on bonuses and stocks when we have them. With that said, our mortgage payments are highly accelerated (35% over the initial amount) which somewhat falls into savings as well without going towards a specific account.
Every time I get a raise, I increase my mortgage payments. It’s a way to ensure we live on a modest income and avoid a lifestyle inflation. I know that somewhere I could possibly come on top by investing rather than paying down the mortgage but it’s a safety net in case I lose my employment. With more paid, I could adjust the amortization if necessary.
We have kids and balancing between providing for them, enjoying today and planning for retirement is a nice juggling act.
@Passive Income Earner – You’ve got a really nice balance there, which is something I’m striving toward. I might have to scale back a bit on the extra mortgage payments in order to max out my TFSA.
For years after we graduated (and before we met) my husband and I both continued to live like only-slightly-better-than-starving students. Even now we don’t lead a materialistic/experiential-extravagant lifestyle. So we’ve always saved way over 10% of our gross. Our biggest lifestyle inflation has been that we do give a lot now to charities, which has grown from our early days because we have found lots of ways we can make a difference for others. But our hobbies and interests are very affordable, luckily.
I would recommend if at all possible that people set up an automated saving of 5% of their gross to a TFSA and also if possible 5% of their gross to their RRSP which should come out of a pay cheque before or the second it hits the bank. I think most of us mentally budget based on net. If you don’t see it, it’s like taxes, you just assume you don’t have it. Then you’ll pick a rent level or mortgage that you can afford AND still be putting your long term savings away.
@Bet Crooks – You’re right, when your savings comes right off your paycheque you barely notice it’s gone. I remember thinking one month last year that our cash flow was pretty tight and then I remembered that we’ve basically doubled our mortgage payments.
Psychologically, I’d rather just go on thinking those extra payments are fixed and that I can’t easily adjust the monthly payment down so we can spend more.
I love that we posted on this topic the same day, haha. I had built my spreadsheet right after I filed my taxes (hey, the numbers were at hand!).
Nice steady increase you’ve got there, then bam! +10 percentage points so far in 2013. Next year, 50%?
@PK – Great minds think alike?
The interesting thing about this year’s numbers is that our income won’t be as high as it was in 2012 but we’re still saving a bit more than we did last year. That’s what is boosting the percentage.
“How much of your income should you save” is the kind of question that should be asked to people as early in life as possible. I remember reading an article that showed that if you start saving when you’re in your early 20’s you would never need to save more than 5% of your income to accumulate $1 million by the time you retire. Naturally, the later you start, the more you need to save to achieve the same goal.
I don’t remember the assumptions they made regarding income level or rate of return, but the point is self-evident: the earlier you start saving, the less you have to save per year during your working life.
I wish had read that article ten years before I actually did.
My wife and I are saving around 60% of our income. We live in Charlotte, NC where the cost of living is very reasonable. Also, we are a young couple with no kids which helps tremendously.
It KILLS me when people think that they will save more later. Overconfidence in your future-self….
It’s great to see that you’ve managed to increase your savings rate consistently over the last few years! Usually I try to aim to save anywhere from 40-45% of my income myself, though most months I manage around 35% only.
I like the article. While I don’t have kids I’m trying to save more than 50% of income after tax. I recently got engaged, so we’ll see how this works with the fiancé.