How much savings by age should you have? Maybe you are like me and you have less than you should. Or you are like my friend who has £80k+ sitting in their bank account. I also know many people who have no savings at all. And I can understand them!
Personally, I have always been the person to have an equal amount of savings irrespective of my age. Largely, because retirement always seemed so far away (and it still is). You may struggle for the same reason. There are so many needs in the present and there is still so much time in the future. Yet, when asked, people will almost always reply that the best day to start saving was yesterday.
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Savings are often not a priority
The majority of young adults (53%) have no savings at all. And the lack of savings is not only a problem for young people. Only 67% of people aged 35-44 years have more than £100 in their savings account. According to Money Statistics, 9.79 million households within the UK are without savings. Finder has a brilliant graph that neatly highlights the fact that savings are decreasing:
If you are aged 18-29 you can find out how well you compare to the average here.
Why savings are important
Savings are important for a number of reasons, particularly to
- plan your escape from the nine-to-five office life and retire early
- be able to afford weddings, holidays, etc
- avoid financial difficulties during illness or if made redundant
- be able to live comfortably in retirement
- feel safe and reduce money-related anxiety
- build generational wealth and leave your children an inheritance
How much savings by age should you have?
Emergency fund and general savings
Savings in your emergency fund (money reserved for emergencies) and general savings (for once-a-year costs, holidays, purchases, etc.) are not age dependent. However, keep in mind that you need these savings in addition to your retirement savings which are detailed below.
As for your emergency fund, you should have three to six times your monthly expenses saved up. The exact amount depends on your preference and your individual situation. For example, if you are self-employed, or have no family you can rely on, you may want to save more than six times your monthly expenses.
The amount of general savings really depends on you! Do you want to go on a fancy holiday every year? Do you want to buy a new car or a shiny TV? Many people also save for important life events such as their wedding. If that does not appeal to you, you may at least want to save up for Christmas to buy presents. Personally, I stash £75 each month away to cover future expenses that are not emergencies.
Fidelity, an American financial services corporation, recommends looking at your salary to determine the amount of savings you should have for retirement. At age 67, you should have 10 times your pre-retirement income. This sounds unachievable (I would need £290,000!), especially taken into account that most people have other priorities than saving for retirement. University fees, weddings, cars, childcare, etc, are often more urgent. However, amidst all of this, you should set a certain amount aside for your pension pot. To make this easier, Fidelity offers a guideline of how much savings you should have by age (see image).
How can you save up such a gigantic sum?
Fidelity provides clear milestones that help you achieve your retirement goals. At age 30, you should have one time your annual salary set aside for retirement. For example, I should have £29,000 (this is pre-tax). At age 35, you should have twice your annual salary. For me, that would be £58,000. Spoiler: I have a lot of catching up to do.
Presumably, many of my readers are in a similar boat as I am. If you are not, congratulations! The good point about my situation is that I now know how much I need and, more importantly, how much I am lacking. I have five years to make up the missing ~£35,000 so I will need to save £7,000 a year to get to my target. The actual amount I need to save in this period is slightly lower as I will gain interest on my retirements savings.
Note that your retirement fund also includes your workplace pension contributions (and employer match). Maybe you have more than you think!
The 25% rule
To save ten times your income by age 65, Fidelity recommends you save 25% of your income per year if you start aged 30. This, again, includes your workplace pension contribution. You can make this even easier by saving 25% of your monthly income every month. This way you can factor in your pension contribution into your monthly budget. Should you start later than at 30 years, you have to save a higher amount to make up for the previously missed saving installments.
If you are in employment, calculate the amount you need (25% of your monthly pre-tax income) and subtract your pension contribution. You may need to look at your pension documents or ask Human Resources to find out how much your employer is contributing every month. The result will be the amount of money you need to contribute to your pension in addition to the automatic contribution to your workplace pension.
Which savings can you include for the purpose of this calculation?
We are looking at savings for retirement only. Therefore, only savings in a pension account and other investments that you plan to keep until retirement count. You do not include your emergency fund, your holiday savings or money invested in high-risk stocks. I also would recommend to not include state pension because it is not guaranteed that there will be any in the future. It is always better to be prepared for the worst.
Fidelity provides no information on whether to include property. Personally, I would include it. This is because you could sell your property and the profit would clearly count unless you plan to spend it otherwise. You can also keep your property and either make rental income or live in your property to save rent.
Limitation of this savings recommendation
Fidelity’s retirement recommendation is a model and as such, should be used carefully. Your salary may increase over time (which is good), but can also decrease. For example, you could take time off work to care for children or due to illness. Or you could discover that you want to work in a lower-paying but more fulfilling job. Life is not predictable so I recommend saving more than 25% in good periods to be prepared for the bad times.
For some, having to save “only” 25% of their annual income may be an excuse to waste money once they have fulfilled their savings quota. This will mean these people will remain trapped in the rat race and have to work until they are aged 65, when in fact, they could have reached financial independence and retired in their 30s or 40s.
Another limitation of Fidelity’s savings model is that it is based on today’s circumstances. It may seem unlikely but in the future, living costs could increase dramatically so that today’s 25% would not be enough. Equally, living costs could decrease and you may not need all that money you saved for your retirement (a good problem).
Lastly, Fidelity’s savings model is hugely age dependent. If you want to retire at age 30 rather than 65, this model may not work for you. Instead, you need another way to find out how much savings you need.
The 4% rule
This method is commonly used by people who work towards financial independence and early retirement (FIRE). It acknowledges that age is not always a deciding factor when planning your savings for retirements and gives you the freedom to set your own retirement date. For example, you could be able to retire with 30, rather than 65 as Fidelity suggests.
To calculate the amount of savings you need, take your desired annual income post retirement and divide it by 0.04 (4%). If you are unsure what your income should be, take a look at your current annual expenses. This is the minimum amount of money you need to save. You may want a little more if you plan to travel a lot or take up a new hobby.
The 4% rule works because if you withdraw 4% from an investment that earns around 5% interest (after inflation), you will, in theory, never run out of money. Note that although 4% is the commonly quoted number, a withdrawal rate of 3% may be preferable so you have a safety margin. For this, divide your desired post-retirement income by 0.03 (3%).
Reality is often more complex and the 4% (or 3%) should be seen as an approximation rather than a set-in-stone number. Over time, you will likely need to make adjustments to your final FIRE sum. Some people may also prefer to use different rules altogether.
How much savings should you have by age summary
The takeaway message from this post is that you should save as much as you can and start as early as you can, no matter what age you are now. Each day brings you one step closer to retirement and you will be there in an eye blink. So do not waste your time, start saving!
More realistically, you should always have three to six times your monthly expenses in your emergency fund plus additional general savings according to your circumstances.
For your retirement, you should aim to have ten times your salary at age 67. How you get there is less important, but you may want to follow the milestones provided by Fidelity. Alternatively, you can save 25% of your income every year for retirement so you will be ready by 67. Be aware that Fidelity’s model is not free from limitations so I recommend saving a little bit more.
If you are like me and do not have enough in your retirement pot, you may wish to consult my comprehensive list of 100 ways you can make money and create a regular income stream from side hustles to supplement your pension.
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