- Budgeting and saving are the principal mechanisms of wealth accumulation. Please reference “Budgeting process” and “Retirement needs planning considerations” topics for further refinement.
- An approximate heuristic to determine minimum annual savings rate for retirement savings: age at which you begin saving for retirement minus 10 ≈ minimum percentage of annual realized income to allocate towards retirement savings. The validity of this approximate heuristic progressively declines for individuals who begin accumulating retirement savings later in life (e.g., beyond age 40).
- Expected wealth accumulation = annual realized income * age / 10
- High wealth accumulation ≥ expected wealth accumulation * 2
- Low wealth accumulation ≤ expected wealth accumulation / 2
- Generally, save at minimum 15 to 20% of annual realized income. This recommended minimum savings rate assumes individuals begin accumulating savings for retirement between ages 25 to 30 and continue accumulating savings until retirement begins at age 65 (accumulation of savings over a span of 35 to 40 years) and does not account for contributions from Social Security retirement benefits or pension plan benefits during retirement.
- Generally, accumulate at minimum 25 times your estimated annual retirement living expenses for a comfortable retirement. Alternatively, accumulate at minimum 18 times your annual pre-retirement gross income (assuming a 72% wage replacement ratio in retirement). These recommended minimums do not account for contributions from Social Security retirement benefits or pension plan benefits during retirement.
- The power of saving and investing early and consistently: $568 per month ≈ $1,000,000. Contributing $428 per month in today’s real dollars, or $568 per month in inflation adjusted nominal dollars, to a S&P 500 or total stock market index fund within a Roth account beginning at age 25 is projected to result in a retirement account at age 65 valued > $1,000,000 tax free in today’s real dollars, or > $3,592,000 tax free in inflation adjusted nominal dollars, assuming an average annual inflation rate of 3.2%, investment compounded annual growth rate (CAGR, or annual geometric mean return) of 10% (approximated from historical U.S. inflation and U.S. equities returns data), and reinvestment of all dividends and capital gain distributions. All values represent median or 50th percentile estimates.
Comparing wage and benefit offerings between for-profit and governmental employers
Employers and business owners engaged in for-profit enterprises are afforded greater latitude in selecting and implementing retirement planning solutions than those in the governmental and
Bentley Makkar
December 14, 2024
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