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By Andrew Brown, CFP®

Our team has the opportunity to see many different paths to financial stability. One of the most common – and effective – paths is a disciplined, long-term savings program. There often is simply no substitute for saving toward a goal over time. This can look very different from person to person. So how much is the right amount to save, and are you above or below average?

One of the most telling signs to quickly see if a person is likely on track for their long-term goals is to take a look at their savings rate. The savings rate, or your annual savings percentage, is the calculation of the amount you save per year divided by your income. Would you be surprised to learn that the average person in the United States only saves an estimated 4-5% of their income? This is a shockingly low number. Our goal for most clients is to save closer to 25% of their income. There are a few reasons we like to use a percentage to measure a client’s savings program and not the actual dollar amount. One of the most important is that it truly helps level the playing field when considering people with very different household incomes.

For easy math, consider Client A making $100,000 a year and saving $23,000 a year into their 401(k) through work. Client A is saving 23% of their income. Now consider Client B making $500,000 a year. They are currently saving $23,000 into their 401(k) and $27,000 a year into their brokerage account, for a total of $50,000 a year. Even though Client B is saving more dollars, their savings rate is only 10%. Assuming no changes, and investment returns will be equal, Client B will have more money saved up at retirement age. Unfortunately, this does not always translate to long-term success in retirement.

There are many variables that go into a successful retirement plan. Anticipated retirement age, post-retirement income, and health concerns are a few. One of the most significant is the monthly or yearly spending goal for a client in retirement. This level of desired spending heavily influences the amount of money you need saved up for retirement. A person’s savings rate gives insight not only on their savings percentage, but also for their spending rate. If you are used to living your lifestyle based off 75% of your income, this can help understand the spending level needed in retirement. You can see that a higher savings rate has a positive impact on the amount of money you have saved to start retirement, but it also can help those dollars last longer once your income from work stops.

Please reach out to your Wealth Coach if you would like insight into your current savings rate. Constantly benchmarking and tracking that number is an exercise that can have huge long-term benefits as you work towards your goals!

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