Something in between an ad and an informative email landed in my inbox this morning, from Vanguard. It recommended I save 5% or more of my income for retirement.
Fire Up your Retirement
A key ingredient to a well-done retirement is for you to contribute 5%, or more, of your pay to your retirement plan. Then try to increase your contribution rate by one percentage point each year. Little increases like that can really stack up over time.
We in the FI/RE community very well know that 5% is a ridiculously small amount to save. People in the early retirement blogosphere typically save somewhere between 30% and 75% of their income after tax, either by being frugal or by finding ways to increase their income, often a combination of the two. My household saved 66% of our after-tax income last year.
don’t get me wrong. Vanguard are pushing the 5% number because they very well know it’s close to the average savings rate in the US, so this is probably where their audience is. I also happen to not use my vanguard account to the max, and maybe that’s what triggers that kind of email from them.
There’s this great graph that I’m shamelessly copy/pasting from mrmoneymustache showing you that a household saving 75% of their income can retire within 7 years. Without going into such extremes, a 50% savings rate lets you quit your job after 17 years. Conversely, someone saving only 5% of their paycheck will pretty much have to rely on social security to live comfortably in retirement.
Interestingly though, I still got slightly frustrated by the Vanguard email, where they say “try to increase your contribution rate by one percentage point each year”. I recently wrote that it’s become difficult for us to increase our savings moving forward. We’ve done so much in 2015, and sadly so far 2016 isn’t looking as good. We’re still way above 50% savings rate, but will probably not be able to go from 66% to 67%.
What’s your savings rate?