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15% of Your Gross Income is What it Takes

Jun 25, 2013

By: Evan D. Bedel, CFP®

All it takes is 15% of your gross income to make a huge impact on your standard of living and choices during retirement. We all know that saving is boring and spending is fun, but take a minute to think about the benefits of saving 15% of your annual income.

The Goal

Through my experiences, I find the ultimate goal for most young professionals is to have choices during retirement.

  • The choice of when to retire.
  • The choice of where to live during retirement.
  • The choice of where to vacation during retirement.
  • The choice of standard of living during retirement.
  • The choice of who to gift your assets to during retirement.

The Process

Our recommendation is to save at least 15% of your gross income into a tax-friendly retirement vehicle.

  • You are 30 years old.
  • Your family earns $100,000 per year.
  • You save $15,000 per year.
  • Your income and savings increase with inflation at 3% per year.
  • You earn an average investment return of 8%, annually.
  • At age 65, you would have nearly $3.8M.

Where Should the 15% Go?

Saving into a tax-friendly retirement vehicle allows for tax-free or tax-deferred growth, giving the power of compounding interest time to work its magic. When untaxed earnings are added back into your principal investment, the percentage of your investment return has a larger impact on the dollar value of your portfolio. Examples of recommended tax-friendly retirement vehicles:

  • Roth IRA
  • Roth 401k
  • Traditional IRA
  • Traditional 401k

How to Save 15% of Your Gross Income: A good place to start is a budget. My recommendation is make retirement savings a non-discretionary, fixed item. If you make it a priority to save first, then you can spend the rest! Again, by saving for your goals first, you have the ability to spend your leftover monthly cash flow, which allows the remainder of your budget to be more flexible. One important goal for everyone should be to have an emergency fund of around 3-6 months worth of living expenses saved inside a liquid, non-retirement savings vehicle like a personal savings account.

It’s simple. If you sacrifice a little now, you will have many more choices later in life. Save for your future today.

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