retirement

How Much You Need to Save Annually to Build Your Own Wealth (and Where to Stash That Cash)

Here's the minimum we recommend putting aside to meet your (possibly early) retirement goals. Of course, if you're especially ambitious, it never hurts to aim even higher.

In my financial planning practice, most of our clients are young (in their 30s and 40s), making good incomes (usually $200,000 or more as a household), and ambitious with their savings goals (like the ability to choose whether or not they work at least a decade before they hit the official retirement age of 67). They’re also “first generation wealth builders,” meaning they’re the first in their families to actually have the ability to create and generate significant wealth in their lifetimes.

In other words, they weren’t born wealthy — and they can’t count on a big inheritance coming down to them later in life. They need to build up the assets they need to fund the lifestyle they want on their own.

Considering this, we have a lot of conversations about the importance of building up savings and investments for the long term. For these clients — and for anyone with big financial goals who can’t count on a rich aunt to leave a pile of cash behind — it’s critical to save a sufficient amount of money from their incomes now in order to enjoy the financial freedom they want later.

But what is a sufficient amount? And if you have money you know you want to put away from the long term, where should it go?

The Minimum Amount to Invest for Long-Term Wealth Building

While everyone’s situation is different and there are no universally “right” answers in financial planning, we do have some common rules of thumb we use when determining how much to save for long-term needs and goals (like retirement or financial freedom).

The minimum we tend to recommend is putting aside 20% of gross income into investment vehicles. These funds are designed to stay invested for the long term; that means over the next 10, 20, even 30 years, that cash shouldn’t be pulled out of the market and used for something else or spent.

It’s important to set your goals in percentages rather than dollar amounts, because it keeps your finances relative. Regardless of income, you have a clear benchmark for your savings this way. Working with a percent as a goal is also a good way to guard against lifestyle creep; if your income goes up, your savings should too. Similarly, if you experience a drop in income, you don’t have to kill yourself trying to keep up with a sky-high rate of savings that’s outsized for your earnings.

Twenty percent is the minimum savings rate I recommend, but if you’re highly ambitious and have a lot of goals you want to accomplish (or a lavish lifestyle to maintain), then you may want to set your sights higher. We most commonly help clients come up with savings plans to get them putting away 25%-30% of their gross income into long-term investments to grow wealth.

This isn’t just talk, by the way; I follow my own advice in my personal life. My wife and I strive to save 40% of our gross business revenues each year, and we funnel this money into long-term investment vehicles we know we will keep invested into our 50s at least. It’s not always easy to do this and requires careful management of expenses, spending and budgets today.

But because we value freedom and autonomy, allocating such a large amount of our income to investments (while keeping other expenses, like rent and shopping, in check) aligns with those values. We’re motivated to stick to the plan, even when it’s hard or tempting to spend more money today, because it means getting closer to what’s most important to us in our lives.

Where to Stash the Cash Designed to Fund Your Life… Later

We use the term “long-term savings and investments” a lot. But what exactly does that mean? With money you have that you want to save “for the long term”... where does it go?

This list provides a good baseline of long-term investment accounts that you may be able to access and use:

  1. A 401(k) or other employer-sponsored retirement plan that may provide matching contributions.
  2. IRAs — either traditional or Roth IRA — depending on your goals, income level and desire to do backdoor Roth conversions.
  3. Health savings accounts, if you use a high-deductible health plan and can access an HSA (be sure to check with your employer if you have this plan, too; some will provide a contribution to employee HSAs, which will make it easier for you to max out this account).
  4. Non-retirement investment accounts (aka, taxable brokerage accounts).
  5. 529 plans, if you have children and funding some or all of their college education is a top-priority goal for you and your family.

Very generally speaking, you could start at the top of this list and max out each account if you weren’t sure where to put your money first. If you find you have more money available after maxing out your 401(k), for example, you could continue down the list and fund an IRA next.

Of course, the specifics of your situation may mean it makes more sense to fund these in a different order — or to not max out one account if that’s all you can fund, and instead fund a mix of accounts. It’s very important to also consider how these accounts are taxed, and how much cash you have going into something that will be taxed later versus how much money you put into accounts that have already been taxed. You want to make sure you balance the taxability of your assets; for my clients, I typically advise using a mix of tax-deferred, Roth and taxable accounts.

There isn’t a single, strict plan or a rule you must follow to achieve long-term financial goals ‐ but committing to saving at least 20% of your income (and up to 30% or even 40%) will help you build the foundation you need to enjoy a lot of freedom and flexibility down the road.

About the Author

Eric Roberge, Certified Financial Planner (CFP) and Investment Adviser

Founder, Beyond Your Hammock

Eric Roberge, CFP, is the founder of Beyond Your Hammock, a virtual financial planning firm that helps professionals in their 30s and 40s make mindful decisions with their money and strategically use their incomes to achieve financial freedom. Eric is one of Investopedia's Top 100 most influential financial advisers and is a member of "Investment News' " exclusive 40 Under 40 class of 2016.

Most Popular

12 Costs of Owning a Cat
how to save money

12 Costs of Owning a Cat

Housecats may be known for their aloofness and low-maintenance attitude, but they're not cheap. Here's what you can expect to spend if you plan on ado…
October 16, 2020
How to Pick the Right Medicare Plans for You
Healthy Living on a Budget

How to Pick the Right Medicare Plans for You

As you're signing up for Medicare, you must learn the basics of Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and even doug…
September 30, 2020
26 Things Home Buyers Will Hate About Your House
real estate

26 Things Home Buyers Will Hate About Your House

As a home seller, you don't want to let the small -- or big -- fixes around your house that have added up over the years sabotage your bottom line dur…
October 16, 2020

Recommended

Managing Your Money in an Uncertain World
retirement planning

Managing Your Money in an Uncertain World

As you return to work after being away due to the COVID-19 pandemic, there are some financial basics you need to make sure you have covered.
October 19, 2020
States With Scary Death Taxes
inheritance

States With Scary Death Taxes

Federal estate taxes are no longer a problem for all but the extremely wealthy, but several states have their own estates taxes and inheritances taxes…
October 19, 2020
Don’t Let Low-Interest-Rate Fatigue Push You into Taking Too Much Risk
retirement planning

Don’t Let Low-Interest-Rate Fatigue Push You into Taking Too Much Risk

Investors searching for safe short-term places to park their money that offer decent returns have been coming up empty for quite a while. Instead of s…
October 19, 2020
12 Costs of Owning a Cat
how to save money

12 Costs of Owning a Cat

Housecats may be known for their aloofness and low-maintenance attitude, but they're not cheap. Here's what you can expect to spend if you plan on ado…
October 16, 2020