3 Reasons Saving 20% Of Your Income Is The Sweet Spot
Goal: Create a minimum of $1,000,000 in a portfolio of various investments that you will use to generate passive income later. That large a nest egg can easily generate $40,000 to $50,000 in annual income (on average) for your use and still allow your portfolio of diverse investments to continue to grow. It is the power of large numbers, time, and compounding interest that will create your passive income stream.
Below are annual salary ranges multiplied by 30 years (the average work career) to give you an idea of your expected total lifetime earnings. When we compare these numbers, it will give us a good idea of our job ahead.
$35,000 annually x 30 years = $1,050,000 $51,000 annually x 30 years = $1,530,000 $61,000 annually x 30 years = $1,841,160 (average income bracket) $85,000 annually x 30 years = $2,550,000 $110,000 annually x 30 years = $3,300,000 $150,000 annually x 30 years = $4,500,000
The average salary in America is just over $61,000 annually. That would equal approximately $1,841,160 in lifetime earnings (see above). Note that it is almost impossible to physically save $1,000,000 from your wages at this pay rate. Most people would have inadequate funds to cover everyday living expenses. That means we must invest our savings to achieve our goal.
Here are the reasons you should shoot for saving and investing 20 percent of your income now and more as you age:
Reason #1. Ageism is alive and well in the American workplace: You can expect to eventually be pushed out of your job to make way for younger, cheaper employees. This typically occurs a few years after the age of 60 and this is true for both men and women. Statistics show that on average, you must either find another job at a drastically reduced pay rate or simply retire. Let that sink in. Regardless of who you are, you are likely to be pushed out of your job when you are older. Sometimes these pushes are official, other times they are unofficial and they just make it uncomfortable for older employees to hang around. If you are a woman, you could very well be pushed out before your male counterparts. This means the work forever plan is not actually a viable plan. Get control of your finances now and work to achieve your 20 percent savings goal as soon as you can.
Reason #2. Your lifetime earnings are limited: Of course, salaries are rarely static. Most people travel through the income scales. They start off when they are young at a lower wage and continue to earn more money as each year passes. I call this phenomenon the lifetime earnings arc. You make more each year until you are in your early 60s, then your salary levels off—likely because you are at the top of the pay scale for your career field. When you age, your goal should be to save more in your later years, when your expenses are naturally lower. This will help you make-up for the years you could only save a smaller amount of your salary due to a lower wage.
Reason #3: You need only save and invest one-third of $1,000,000 to create your nest egg: I can prove that concept with a compound interest calculator. You input the number of years you have to save and at what interest rate you anticipate receiving on your investments. For my calculation, I kept the interest rate a relatively conservative six percent, although my wife and I actually ended up doing better than six percent. According to the Million-Dollar Savings Calculator, 30 years at six percent would require you to save $995.50 a month, which will be roughly 20 percent of your salary in the average pay range.
The cost of total savings in actual dollars equals you will put will be $358,200 over a 30-year period, which is roughly one-fifth or just under 20 percent of your lifetime earnings total of approximately $1,855,740).
If you can’t save 20 percent of your income, at first, I totally understand. You can, however, work up to that amount and even more over time. My wife and I worked up to 50 percent of our combine salary before we left our jobs. By then our salaries were larger, so saving that much was not such a hardship for us. The sooner you start saving, the easier this entire process becomes.