Observations: What Percent of Income Should High-Income Earners Save For Retirement?

Here's another easy-to-use graph that suggests the percent of your income to save for retirement depending upon the age you start saving. It's based upon the commonly used 4% withdrawal approach to retirement savings, and is designed for a high income wage earner planning to receive Social Security in retirement. Earlier posts targeted a typical social security recipient, and those without Social Security.

Some Benchmark Percents of Income to Save for Higher Income Earners with Social Security, by Starting Age

Retirement planning: what percent of salary should I save yearly (higher income w social security)

Annual Retirement Savings Percentage Needed (higher income)

Most people are not saving enough for retirement! Because of the way Social Security is designed, those with higher salaries need to save an even higher percentage of their salaries than the average person. Waiting too late to start planning & saving for retirement, or not saving enough, can be the difference between having a secure, comfortable retirement and a drastically reduced standard of living.

High Income Earners Should Plan to Start Early, and Save A Larger Percent of Their Annual Salary -- Even With Social Security

The previous post in this series benchmarked savings percentages needed for a typical worker with Social Security (and no pension). Unfortunately, the percentage of your salary that Social Security will replace decreases as your salary increases. As a result, higher income earners need to accumulate more years of salary in savings by their retirement date. Therefore, they should plan to save a larger percentage of their income than those with average salaries in order to reach the higher targets.

For this post, I've assumed a salary of $100,000/year; using 2011 data, that would put you in the top 20th percentile in the United States. Based on current rules, Social Security will replace about 26% of your yearly salary instead of the more typical 40% replacement rate (for those earning about $40,000). Partly as a result, in order to retire in the style you are accustomed to:

You will likely need to save more than 13% of your salary each year, unless you start before you are 30 and/or earn a higher than average return on your investments.
If you wait until age 30-35 to start saving for retirement, you'll probably need to save around 13-26% of your salary each year.
Wait until age 40-45 and you may need to change some of my assumptions.... (see below)

How Much Should You Save for Retirement Yearly, in Dollars

Assuming you earn $100,000/year, start your retirement savings at age 30, and earn the 8% nominal (5% real) return often assumed by retirement planners (the middle line on the graph), you'll need to save at least 13% of your salary each year. (See nominal vs. real returns for an explanation of the difference between the two.) That's $13,000/year or about $1100/month. To keep up with inflation, you'll need to increase your contribution each year to 13% of that year's salary.

Start after age 30, and you will need to save more. Earn a lower return? You'll need to save more. And, remember, this is just retirement savings. Saving to buy a house? for your kids' education? That's extra!

Note that, even at these low salary replacement levels, qualifying for Social Security is still very beneficial. At these salary levels, a few percentage points reduction in your needed contribution each year adds up to big bucks over your working career.

Your Results May Vary: Some Key Assumptions

I've assumed that you:

Start with no retirement assets. (Already started? see How Much Should I Have in Savings?)
Have only one income earner in the family
Invest a constant percentage of your then-current salary each year until retirement
Earn the assumed pre-retirement rates of return (3, 5, or 7% after taxes, expenses, and inflation)
Retire at age 65, receiving 75% of your current annual income (inflation-adjusted) in retirement
Start by withdrawing 4% of your assets your first year in retirement, and increase that amount by inflation each year thereafter.

For a more detailed discussion of the 4% withdrawal approach and my assumptions, see Assumptions for the 4% Withdrawal Retirement Graphs.

For an estimate more tailored to your specific circumstances, and to get a better feel for the impact of some of the variables, I encourage you to enter your own data into my simple retirement savings calculator. The "big picture" will probably remain the same; specifics of your situation, such as your expected spending level in retirement, can make a significant difference.

What If My Yearly Salary is More ( or Less) Than $100,000?

If you earn more than $100,000, you will need to save even more! For example, earn $250,000 and your Social Security income replacement rate drops from 25% to 11%. As a result, here are some sample starting age-savings percentages, assuming a 5% real return: age 25-13%; 30-18%; 35-24%; 40-34%. If you earn more than $250,000 your suggested savings rates will be between those rates and the suggested savings for those without Social Security.

Earn $40,000 to $100,000 and your suggested savings rates will be lower; they'll be between these rates and the suggested savings rates for a typical Social Security recipient.

For a more precise estimate, calculate your expected Social Security income (see related materials below), and enter your data into my simple retirement savings calculator.

What's My Target? How Much Will I Need to Accumulate By The Time I Retire?

For targeted savings levels for all salary levels, see How Much Money Will You Need To Retire? These are the amounts that the 4% withdrawal approach would recommend you have in order to retire at age 65 -- and the amounts the above savings rates are designed to achieve.

What If I Can't Save This Much of My Income?

We'll discuss some options in future posts in this series. For example, delaying retirement can significantly reduce the amount that you need to save.

Related Materials:

My SIMPLE Retirement Savings Calculator an interactive calculator tailored to your individual circumstances using these same concepts.

How Much Money Will You Need To Retire? Target savings when you retire for all salary levels.
How Much Should You Have in Retirement Savings? -higher incomes. Companion post to this one.
What Percent of Your Yearly Salary Should You Save For Retirement, by starting age: similar to this post, but for those without Social Security
A Personal Strategic Planning Example: A process for establishing your life priorities
Start Retirement With a 4% Withdrawal Rate A discussion of the 4% withdrawal concept, from Time Magazine. For a more detailed discussion, see Wikipedia.
Social Security Income Estimator : the official site. For an approximation, see this site, or my graph.

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