Rules of Thumb – Fidelity and Dave Ramsey Say Save 15%; We Say Save 20%
Rules of Thumb can be painful. No, we’re not writing about arthritis here, but planning for retirement, or as we like to say, “Financial Independence (FI)”. For most of the time I’ve been an independent financial planner, 17 plus years, I’ve sung the song, “Save 15% of your income for retirement”.
Why am I changing my tune? Well, most people we’ve seen over the years couldn’t save 15% each and every year like they planned, because stuff happened. Babies, divorce, expensive childcare or schools for children, elderly parent support and other financial challenges thwarted or diverted the retirement saving effort.
The answer: “Save 20% for retirement” and plan for financial independence as soon as practical. Why? Because with a focus and goal like 20% it takes real attention to spending and budgeting for most middle-class folks who seek our advice. It also allows for some “stuff” to happen and still make it to the retirement goal line.
We’ve seen that the secular Protestant Work Ethic of “delayed gratification” can work. In fact, the latest research compilation published in the Journal of Business and Psychology (Oct. 2016) showed that millennials are displaying the same work ethic as previous generations. We’re encouraged they can save at the 20% rate and even if their savings are deferred periodically, they can still make it to the FI goal line well before the full social security retirement age of 67.
What sacrifices do you have to make to save 20% of your income? I’ll list a few with a tip of the hat to David Bach (The Automatic Millionaire) and Trent Hamm (The Simple Dollar):
- Pay yourself first, automatically at work and automatically from your checking account
- Give up fancy coffee drinks
- Look for free fun activities, like hiking
- Make gifts, don’t buy them
- Clip coupons
- Write your list before you go shopping
- Invite your friends over rather than going out
- Don’t buy videos, music, books; use the library
- Buy used when you can
These and hundreds of other ideas are available in blogs and Pinterest to show us how middle-income earners can do just as good a job of saving for retirement as those high-income earners like stockbrokers, doctors, and entertainers.
We encourage you to sing the new song: Save 20%. Fidelity and Dave Ramsey will catch up someday. Don’t wait until they do.
