3 Reasons to Save More Than 15%

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How much do you need to save for retirement? The consensus from the financial industry is around 10-15% of your income. Personally, I think this saving rate is way too low. This standard advice is a disservice to young people. A new graduate who is starting a full-time job will look at this recommendation and try to save 15%. Once it becomes a habit, it can be very difficult to increase your saving rate unless you make a huge effort. Okay, saving 15% will probably be enough to fund a comfortable retirement, but is that all you want? Do you really want to work for 40 years and then retire when you turn 65? Saving more will give you a lot more options. It’s unfortunate that most young people don’t know about the reward of saving more.

When I started my first engineering career in 1996, my dad encouraged me to sign up for the 401K plan. At 22, I didn’t care about retirement and I wanted to put any extra money in a saving account. This is a terrible way to save because the money is too easy to access and the interest is low. Luckily, my dad kept pestering me to save for retirement and I did. I started off slow, but increased my contribution to the maximum in just a few years. Consistently maxing out my 401k has been the best financial decision I’ve ever made. That account is the biggest part of our net worth and I owe it to my dad. Unfortunately, I didn’t keep careful track of my finance in those early years so I’m not exactly sure what my saving rate was. It was probably around 25% of my income for most of my 20s.

Anyway, I think 25% is a much better target to shoot for. When you’re starting out, you have a pretty simple lifestyle. You’re used to living like a poor student and you don’t need a lot of money to be happy. My lifestyle improved immensely even while saving 25%. It didn’t take a lot of money to beat the starving college student lifestyle. That’s the first reason to save more than 15%.

1. Control lifestyle inflation

Lifestyle inflation gets a lot of people into financial trouble. Saving a bigger percentage of your income from the start will help you control lifestyle inflation. The more you save, the less money you will spend. That’s why it’s the 401k is a great way to save. The contribution is automatically deducted from your paychecks and the money isn’t very accessible. It’s much harder to get that money than from a saving account. When money is easily accessible, you will probably use it.

Of course, some lifestyle inflation is inevitable. We can’t live like starving students forever. Well, some of us can, but most of us want to live more comfortably as we make more income. I feel that saving 25% or more is a good compromise. If you’re making a good income, then saving 25% shouldn’t be a big problem. Actually, our saving rate kept growing as we increased our income. When I realized I wanted to retire early, I was able to push it into overdrive and saved about 75% of our income during my last 2 years of full-time work. I was saving all of my W2 income and we lived on our other income during this early retirement trial run. This acclimated us to our current lifestyle and my early retirement has been relatively smooth.

2. Become wealthy

You will never become wealthy if you save just 15% of your income. You will have enough to fund your retirement, but probably not much more. Of course, the definition of wealth is different for everyone. For me, it means living a comfortable lifestyle, travel extensively, and having a little left over to pass on to my kid. Also, I think $3 million net worth is wealthy enough.

Can you become a millionaire by saving 15%? Theoretically, it is possible. Dave Ramsey said you just need to save $35 per week to become a millionaire in 40 years. Of course, in 40 years, a million bucks won’t be worth much.

Saving a bigger percentage of your income is the ticket to wealth for the regular worker. If you can save 25% of your income at the start and then increase it to 50%, you will be a millionaire in much less than 40 years. I estimate 15 to 20 years.

The Secret to Saving 50%.

3. More options

Saving more will give you more options when you get older. You may love your job now, but it might not stay that way forever. Saving a bigger percentage of your income will enable you to reach financial independence earlier and you will have a lot more options then. You can continue to work in the same job, but be pickier about your assignments. You could change your career to something better. You could even retire early and become a stay-at-home dad/blogger like me. The possibilities are endless when you are financially secure.

If I knew about financial independence when I was 22, I’d ramped up my saving rate earlier. Those early years make a huge difference due to compound interest. Working for a corporation was fun for a few years, but life is so much better now after 10 years of early retirement. Early retirement really agrees with me.

Save more than 15%

Lastly, saving more doesn’t necessarily mean living super cheaply. A better option would be to increase your income and keep your lifestyle the same. We are still saving more than $50,000 per year even after I retired. That’s around 50% of all our income. We have many sources of income now and our investments are paying off.

My recommendation would be to start saving 25% and try to increase it to 50%. This shouldn’t be too difficult if you just graduated from college and are starting a new job. Your lifestyle will still be much better than when you were a student. It’s much tougher to cut back if you’re already accustomed to living a nicer lifestyle.

Can you think of other reasons to save more than 15%?

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*Passive income is the key to early retirement. These days, I’m investing in commercial properties with CrowdStreet. They have many projects across the United States. Go check them out!

Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.