Play the Percentages: 30-Something

Retirement Planning Article

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Play the Percentages: 30-Something
by Rande Spiegelman, CPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research
March 15, 2005

In How Much Should You Save for Retirement? Play the Percentages we looked at the percentage of your pre-tax salary you should be saving now to have a good chance of maintaining your lifestyle over a 30-year retirement.

We started with these assumptions:

No previous retirement savings—you're starting from zero. If you already have retirement savings (and you're a Schwab client), you can log in and use the Schwab Retirement Planner to run your own numbers.
You plan to spend 80%* of your pre-retirement, pre-tax income in retirement, adjusted for inflation and highly likely to be sustainable for roughly 30 years (assumes retirement at age 65).
Social Security or other income will provide 25% of your retirement income needs each year. Your portfolio will have to provide for the rest of your spending needs in retirement. (We assume a conservative-to-moderate portfolio allocation in retirement, with no intent to leave a portion of the portfolio to any heirs.)
Your pre-retirement income will grow (at least enough to keep pace with inflation) during your working years.
You average a compound annual return of 8% on your pre-retirement investments, with 2.5% inflation.

Here's a recap of our broad recommendations for how much you should be saving.

Saving for retirement

Age when saving starts	% of salary to save each year
20-something	10%-15%
30-something	15%-25%
Early 40s	25%-35%
45 and older	OUCH! See Play the Percentages: 45 and Older

30-somethings
Let’s take a closer look at the numbers if you're in your 30s. Again, the sooner you start, the lower the percentage of your salary you need to save for the rest of your working years, provided you stick with it. And remember, these are minimum targets—if you can save more, all the better.

What 30-somethings should be saving for retirement

Age when saving starts	% of salary to save each year
30	16%
31	17%
32	18%
33	19%
34	20%
35	22%
36	23%
37	25%
38	27% (22% for 70% of pre-retirement income)
39	29% (24% for 70% of pre-retirement income)

Note that if you're just starting to save at age 38 or 39, when the percentage really starts to climb, you can save a little less if you plan to retire on 70% of your pre-retirement income, instead of 80%.

Advice for 30-somethings

The house payments and the kids’ college fund may take up a big chunk of your income, but the clock is ticking on your retirement.
Track your spending to find ways of cutting back. Do you really need to spend $3 per day on a double mocha latte? Could you live without the SUV, opting instead for a car that costs less and gets better gas mileage to boot?
Take full advantage of your employer’s 401(k) or other retirement plan, at least up to the point of any matching contribution. Consider the benefits of a traditional IRA or Roth IRA, if you’re eligible.
Even if you can’t afford to funnel 15% to 25% of your income into retirement savings, get started with whatever percentage you can afford—every day you procrastinate means a bigger struggle down the road.
Next time you get a bonus, don't immediately spend it. Try to put most or all of it into your retirement savings.

Again, keep in mind these are only general guidelines to help you plan for a secure retirement. Everyone’s situation and goals are different. If you'd like to take a closer look at your unique circumstances, .

*For people 40 or older who have not yet started to save, the retirement spending goal is 70% of pre-retirement, pre-tax income—a higher level would require an unreasonable percentage of current savings.

The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information should not be construed as an offer to sell or a solicitation of an offer to buy any security. The investment strategies and the securities shown may not be suitable for you. Investors should consult their own tax and investment advisors about their specific situation prior to taking action based on this article. We believe the information provided is reliable, but Charles Schwab & Co., Inc. ("Schwab") and its affiliates do not guarantee its accuracy, timeliness, or completeness. Any opinions expressed herein are subject to change without notice.

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