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How much savings are enough?

She's saving nearly half of her income but still worries that she's falling short on the retirement front. How does a person figure this out?

By MSN Money Partner Jan 17, 2012 10:08AM

This post comes from J.D. Roth at partner blog Get Rich Slowly.


Get Rich Slowly on MSN MoneyMany of the reader questions I get at Get Rich Slowly follow a familiar formula. The person sends me a breakdown of her income and expenses, also sharing how she's allocating her savings. From these figures, my correspondent wants to know if I'd make changes to her budget.


Unfortunately, I'm not qualified to answer questions as specific as these. (And I don't have time to answer them all!) That said, there are often certain themes, such as: "Am I saving enough?"


For instance, Kailey wrote recently with the following question. To me, it's clear she's saving plenty -- but how should she allocate what she saves? That's the question. Here's her email:

I'm 25 and about three years into my professional career. I'm pretty diligent about savings and contributing to my 401k. Of course, I never feel like I'm saving enough, even though I'm fairly confident that I save much more than many of my peers.
One-third of my income goes directly into my ING account for my emergency fund (which is fully funded for approximately one year of living expenses) and now is being used to accumulate money for a down payment on a house/condo. Unfortunately, I live in Southern California, and in an area where that 20% down payment doesn't seem to be within reach in the next couple of years. In addition to the 33% of my income being directly saved, I also contribute 8% to my 401k. This 8% allows me to take full advantage of my employer's generous matching contribution each year. I also have an automatic annual 1% increase to my 401k contribution.
The problem lies in that I never feel like I'm contributing enough to either my savings or my 401k. How many GRS readers actually max out the federal contribution limit of $16,500? I don't feel that this even seems realistic or attainable on a decent lifestyle. And is it really a good idea to increase that amount by significantly decreasing the amount going into my savings each month?
Taking advice from GRS, I opened a Roth IRA a few months back with $3,000 of the $5,000 limit. This definitely increases my percentage of income saved. However, it would still be interesting to hear other readers' percentages and/or thoughts on my progress given my age.

First of all: Wow! Kailey is saving almost half of her income. That's awesome. Although she's fretting over how to maximize her money, I think she should congratulate herself for what she's been able to do at such a young age. If she continues down this path, she'll be in great shape 20 years from now. Post continues below.

So, Kailey's problem is a good problem to have. But if you were in her position, it'd still be a problem. How much should she save for the near future? How much should she save for retirement? These sorts of decisions can be perplexing, and unfortunately, there are no easy answers. Because we can't know the future, we can't know what the best choice is for our individual circumstances. Instead, we have to make best guesses based on who we are and what our goals are.


That last part is important. I always praise the merits of conscious spending -- the notion that we should spend lavishly on the things we love while cutting back ruthlessly on everything else -- but I think there's something to be said for conscious saving also. (In a way, this is why I'm a fan of targeted savings accounts.)


When you have specific goals, goals that mean something to you, you're much more motivated to save. If I have a trip planned, I'm more diligent about saving than if I'm saving for some undefined future, for instance.


In Kailey's case, it sounds as if buying a house is important to her. That's a good goal, and it will help keep her motivated to save. If I were her, I'd stay focused on that. She's already putting 8% of her income into her 401k, plus $3,000 a year into her Roth IRA. That's a good start, and if she can maintain those contributions as she saves for a home, I think she'll be fine. Then, once she's accumulated enough for a down payment, she can attack her retirement saving even more aggressively. (Should you rent or buy?)


Really, though, I don't think there's any one right answer in this case.


What do you think? If you were in Kailey's position, would you save more for retirement? Would you save more for the down payment on a house? How do you find a balance? And, at the same time, how do you make sure you're not depriving yourself in the present?


More on Get Rich Slowly and MSN Money:

Jan 18, 2012 11:50AM

Not every article on the Internet can be targeted at everyone.  If you're struggling to make ends meet, this article does not have good advice for you.  Despite what you think, not everyone shares your situation.  In fact, believing that doesn't help you, it only contributes to your sense of helplessness.


That being said, I think the advice about targeting your savings goals is excellent.  Saving for some uncertain future is not motivating.  Saving for a new car is.  I've used that strategy many times in my life to psyche myself out.  And often I've found that after all the hard work and effort to put away the money for some toy or luxury, I realize I don't even want it all that bad and end up buying something more practical.  It's amazing how something being unattainable makes it more desirable.  Once you realize you can have it, it isn't that big a deal.

Jan 18, 2012 1:07PM
I was able to hit the $16,500 401k maximum in 2011.  The secret?  Nearly 2 decades of hard work in my chosen field along with always living well beneath my means.

I saved for a house for 10 years while living in decent but unexciting apartments.  My current house is not the fanciest, nor is my neighborhood, but I'm happy.  My income qualifies me for a mortgage loan that is literally $150,000 more than what I ended up with.  I'm able to take nice (but not extravagant) vacations, drive late-model cars (paid for with cash), eat at restaurants, and enjoy life in general.

With a few rare exceptions, of course you're not going to be able to save a ton when you're 25.  I wasn't able to at that age either.  But keep at it.  Keep working, keep saving, keep living within your means.  As time goes by, you will see your goals eventually being reached.  Patience, patience, patience.
Jan 18, 2012 12:00PM

We make good money so i am lucky (for now) not to be in a situation of "just making it".  I think what has become obvious is that the lifestyle for  most of Americans is going to have to be thought anew.  Priorities will have to be redone and attention paid to what's important.  It's not what people want to hear but i believe it is the future, like it or not.

Do you need (really afford) that second car, boat, karate lessons, expensive vacations, the newest gadget, the "right " labels, etc...  AND more importantly do they bring you true happiness or security?

It is my belief that happiness comes from a sense of connection to family, friends and community... a sense of security from a position of good financial status...a sense of passion about something important

Material things can not bring about any of those internal ideas and may actually separate you from them.  There is nothing wrong with material things, if they are affordable (really) and assist you in reaching(enjoying) the things that truly matter

Health, happiness, connection, security and passion = the good life

Jan 18, 2012 1:23PM
With the stock market the way it is, and the fact that she is so young, it would be smart to put  away as much as possible towards retirement. She has the advantage of lots of time for that money to grow. When she is ready to purchase a house, she can slow down retirement savings to no less than minimum match on her 401K and maximize savings for a down payment. Living arrangements and lifestyle can be altered to save more/less, but you can never get back the time component of interest. The more you save when you are young, the less you have to save later.
Jan 18, 2012 2:16PM
It's always better to save too much early while you can. You never know what life will throw at you later on and you have to slow down savings. Kudos for the girl for not being in debt up to her neck after getting out of college. That is a rare thing these days. She should buy a small fixer upper house to start with and then keep moving up. Too many young adults today want a house like their parents have, not realizing that they worked up to a nice big house. Always good to have goals.

Jan 18, 2012 2:52PM
Jan 18, 2012 10:08AM
I would make sure I maximized what I was earning on non retirement savings.  For example if you know it will be at least a year or two before you would buy a home; put the money in a certificate of deposit which will earn greater than the .5% you can earn on a savings account. 
 Banks do vary on their rates/fees - check out various banks that are convenient to you. Which one offers you the best rates for what you use?
Definitely spread your savings across the various things you are.  Look at your tax rate and learn more about how you can minimize your taxes within your situation.  Read books that explore and explain various choices to educate yourself on options.
Keep on honoring yourself by taking care of your future!
Jun 27, 2012 1:05PM

I liked Vanguard01's post below - great approach.


At 25 I did not have any retirement savings.  I'm sure paying for that now.  Rather, I was able to begin (or thankfully, realized I had better begin) at 30.  We did not live in So CA, so we bought (were able to) a home before even thinking of retirement, and fortunately when we sold our first home took, relative to our income at the time, a very nice gain.  So we sort of did it backward - if I had to do it all over again I would have done as Kailey has.  Congratulations!  Fast forward on our rather late start at retirement savings - yes, for the past 5 years I've had to exceed the maximum deductible 401k contribution amounts, so have some after tax contributions. But that is at a cost of about 32% of pay - so what we didn't save in the early days is coming out of our hides now.  Was not the only savings..when we purchased our current home, I continued to fund the gain realized on our first sale and that has become a great emergency fund that will easily cover us a year if the most dire situation happens.  We have just a few, about 5, years left on the mortgage and we'll retire early in about 14 years - no mortgage, a healthy retirement account, some separate stocks in accounts and as I said, early..young enough to enjoy it.  Last of the kids will have long since graduated and started their own life journey.  So, although what Kailey is doing is the 'most' right thing, there certainly are other creative and successful approaches.  Just takes active participation and maybe a little bit of luck and learning!

Jan 18, 2012 6:33PM

With interest rates at historical lows - nothing - forget saving, pay off your debts. Your return can be as high as your interest rate, with no tax hits.


Remember, when it comes to savings vs. debt, always throw money at the highest interest.

Jan 17, 2012 10:41PM
I think she could do better with an account with a higher rate of return, assuming the ING account is a just a savving account, but a little more risk with a mutual fund account or dividend earning stocks.
Jan 18, 2012 6:50PM

Takes a lot of calcuating to determine this.  Is there savings in realestate producing income, businesses, stocks, bonds, etc.  Retirements, SS, other.  How much do you give, owe and the biggie is the standard of liviing expectations?


If you put it under your matress, etc. and did not invest it, well sorry brother.  Don't just save, invest and you will be fine.  Even someone as stupid as me put away 2% in stock for 30 yrs and at age 60 i was in good shape and not at 75 it is still growing.  Don't even try to live on negitivity. 

Jan 18, 2012 4:33PM
Holy cow, Oldman....why not go for an even better 'return' by keeping those funds in your rental fees!
Jan 18, 2012 3:38PM
Yea, right! That dollar you saved in 1963 will be worth 10 cents today! If you got, blow it, it won't be worth anything tomorrow, especially with Obama running the country down!
Jan 18, 2012 2:43AM

"There are 300+ million people in the U.S.  The total value of everything in this country is $60+ trillion." Actually it's closer to $190 trillion so you're off by a factor of 3 from the get-go.


Then there's the fact that approximately 27% of those are under 20 and presumably someone's dependents and not employed. An additional approximately 14% are 65 or older and presumably NOT saving for retirement, but actually retired. There are approximately 83,000,000 people between 0 and 20 years of age not in a position to save for retirement and an additional 40,000,000 sixty-five and older who are presumably already retired and no longer saving for retirement. That's 41% of the US population either not saving because they're too young or not saving because they're in the spend-down phase.


IOW, your numbers suck. Furthermore, it's only people who are actually retired or about to be retired who need the money. The rest can be in the accumulation stage or be too young to even consider thinking about saving retirement because they're just flat out too young.





Jan 17, 2012 10:48PM

Here's a thought:


It is impossible for everyone to "save" enough for retirement.


There are 300+ million people in the U.S.  The total value of everything in this country is $60+ trillion.  That's roughly $200,000/person.  If every American were to set aside a mere $200k for retirement, then those Americans would own all of America.


Doesn't seem  very likely, does it?

Jan 18, 2012 9:09AM

Mostly, people are just trying to survive and all this allocation of income to different savings accounts and investments doesn't apply. 


Get your head out of the financial clouds, get a clue what real life people are dealing with day in and day out and offer some more realistic advice.

Jan 17, 2012 9:49PM
You're really posting a "problem" story about someone who doesn't know how to best allocate the ONE THIRD of her income that she has available to save "somewhere"?   So many families are struggling these days, that by extension, charities are struggling now, too.  Anyone that can save a third of their pay should continue to save toward their retirement and toward the purchase of a home....  after all, "charity begins at home"....   but if anyone in this day of extreme need can sock away a third of their pay, then maybe they should look beyond themselves....   maybe the world would be a slightly better place.
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