We all know that we need to save for our golden years, but it can be difficult to know just how aggressive our savings goals need to be in order to fund a comfortable retirement. For many savers, it’s easier to simply put enough into the 401(k) to get the employer’s matching contribution and call it a day, but it is unlikely that this strategy will be adequate to sustain even an average retirement lifestyle.
The fact of the matter is that you will most likely need 10 and some say even as much as 25 times your annual expenses as a nest egg in order to enjoy financial security in retirement. But how do you get to that benchmark?
According to the research firm Hearts & Wallets, the best method for ensuring a comfortable retirement is burst savings. In a recent study, the research firm found that 64% of savers using this method were able to put together a nest egg at least 10x their salary. What’s most interesting about this study was that it found burst savers were likelier to reach this goal than non-savers, no matter what age they started their savings.
Here is what you need to know about burst savings and how to implement it in your life:
The 15% for 10 Years Rule
While the name “burst savings” may sound like you will be adding to your savings in fits and starts, that is a little misleading. The basis of the burst savings program is accumulating a large asset base over the course of 10 years. Your goal during that time is to save at least 15% of your income each year over a decade.
Clearly, a 15% savings goal is a lofty one for some workers. However, you can still take part in the burst savings plan even if saving 15% of your income each year is currently out of your reach. Save as much as you can afford the first year, and increase that savings by at least 1% each year. You will still be aggressively growing your asset base without feeling the pinch of 15% all at once.
Timing the Bursts
Once you have this savings plan in place, you’re ready to start taking advantage of changes in your income or expenses. For example, receiving a raise is the perfect time to ramp up your savings. You avoid lifestyle inflation by sending that extra money to your retirement accounts, and you won’t feel deprived since you are still living on the same amount you were bringing in before.
Similarly, you will have opportunities to send more money to your retirement whenever you lower your expenses. Examples include events such as becoming an empty-nester or downsizing to a smaller home are both good opportunities to increase your retirement savings.
And of course, windfall money should always be at least partially earmarked for your retirement accounts. Even if you only send half of any bonus, tax refund, inheritance, or other windfalls to retirement, you will still feel the positive effects of a burst of savings on your nest egg.
Motivation and Follow Through
One of the best ways to ensure you have enough money for retirement is to set a target for yourself. You are much more likely to save for retirement if you have a concrete number in mind than if you allow it to be a vague goal.
Even if you are motivated to save aggressively, however, it is still easier to do if you take the decision out of your own hands. If your employer allows you to automatically raise your savings rate each year, take advantage of this opportunity to raise your contributions without having to think about it. Even if your employer is not yet that automated, make yourself a yearly appointment with your HR department to increase your rate — and put it in your online calendar so that you automatically receive a reminder email.
Making these decisions for yourself ahead of time will make it that much easier to follow through.
The Bottom Line
Burst saving is not an easy way to retire with a million dollars. However, it is a feasible strategy for any saver to ensure there is enough money to retire on—even if they are a little late to start saving.
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Luis,
Alexandra is not quite accurate regarding Aust’s superannuation scheme.
All Australian workers are encouraged, nay, must be a member of a superannuation fund. The 9% Alexandra refers to is paid by employers into employee nominated super funds. This is a legislative requirement and is an impost on employers. It is not paid by the employee nor is the 9% derived from the employees salaried/waged income, but based on the employees income during each pay period (week, fortnightly or monthly). The employee can opt to contribute personal income into their super fund if they wish and there are benefits to doing this, most especially if you are a low income earner.
Presently and for the past 6 years or so, the Federal Government has offered low income earners (earning up to a figure of $61K+ gross) an incentive scheme of matching dollar for dollar contributions up to a figure of $1,000pa. It is a graded co-contributions, depending upon the employees annual gross income. The rules regarding this generous incentive have been changing at various times. However, low income earners are still benefiting from this scheme. It is not a ‘forever’ incentive, so it is to the employees benefit to personally contribute to the scheme while the offer lasts. Any extra money which the employee does not have to personally contribute to their retirement savings is a welcome bonus. In good times, the principal invested compounds in interest and must be weighed against losses of investment by the super funds.
Like most other investments since 2008, superannuation funds have suffered heavy losses as the funds invest their members money in shares, stocks and so on. The funds, in the main, are as good as the funds investment managers in their ability to ‘pick the market’! Members of super funds have the right to choose in what areas they want their super funds invested, eg Australian Share Market, Overseas Bonds and so on, so the member investor has choices of the investment type but not the specific companies or commodities. I am guessing that many super members do not have much of an idea about financial investing and opt for investment product with mixed investments.
I am sorry if I appear rude, as you have not addressed your questions to me, but to Alexandra. However, I will answer your questions to the best of my knowledge and hopes this helps your understanding.
Regarding your question related death and beneficiaries: Super fund members are requested to nominate beneficiaries in the event of the members death at the time of applying to the fund for membership. In most cases, the funds will honour the members nomination, but they are not required to after the member’s demise. This a matter for the super funds to decide and will in most cases go to immediate family members – as I am given to understand! Attempting to circumvent the super power and making a Will with respect to a super members funds will have no bearing on the outcome of who benefits from super funds after the members demise. Super members may change their nominated beneficiaries at anytime throughout their membership.
With respect to whether or not the funds held in super will match the income earned prior to retirement depends on a number of matters. If the member has been contributing sufficient funds over the course of their working life; how much the average income has been for the member; how well, or not, the super fund have invested the member’s funds and how long the member remains employed. Retirement income required is estimated in Australia using the ’20 years post retirement’ time scenario and the average cost of living comfortably based on today’s cost of living for a 12 month period. The CPI of 4% is added to the mix to determine how much the average person can live a comfortable lifestyle in Australia. An income for a comfortable lifestyle for a single female is currently estimated to be around $42,000pa for the next 20years. ‘Comfortable’ in terms of lifestyle means, meeting day-to-day expenses, some modest luxuries and the ability to take a modest overseas holiday every year or so. Of course all this is relative and not truly scientific. It gives an approximate ball-park figure to aim for or aim higher or indicates how well or not the member may be traveling in relation to their super balance. – Superannuation can be paid as a lump-sum once the member attains retirement age or the member can opt to take an allocated pension (a proportion of their super at regular intervals over a period of time for as long as their are members funds available).
Relative to you question “does it increase slightly to keep up with inflation”, well, no, not really as far as I can tell. As explained earlier, while ever member funds remains within super, the funds are invested. The investments make or lose money. However, on retirement, as stated above, if the member wishes to take a lump sum payment, the member can reinvest their super elsewhere or keep it in a high interest cash account which most often keeps pace with inflation (but may not be the wisest decision for retirement funds which need to last more than 20 years for some). The decision is best judged by the person and their circumstances.
Hope I have helped your understanding. I apologise for the long post.
Judith
Huerta saving is a great way to supplement but starting early with a decent % going to retirement is the best way to amass he multimillions I will need to retire.
As rule of thumb…is this 15% of your gross income, or 15% of what you receive in your paycheck each period?
This is a good approach.
Pretty early in my career, I was working in M&A. I had a salary, but I also received a bonus for every transaction I completed. Because the bonuses were inconsistent both in amount and in timing, I couldn’t rely on them.
So I set my expenses at a level that my base salary could support. When bonuses came in, I saved them. Actually, I didn’t save all of them. Sometimes, I splurged.
But because my recurring expenses were lower, I was able to save quite a bit of my salary, pay off student loans, and build a capital base.
Good for you to be able to save so many of those bonus checks. I’m sure it was hard sometimes to keep the temptation to spend at bay, but now you can enjoy the fruits of your labor because the cushion you’ve built is giving you peace of mind.
I found this very interesting. Our savings stagnated for a few years as I was working only part time and hubby was having salary cuts at work, but that’s the way things are sometimes. We own our place, have no car, and live fairly simply – our main expenditures are travel, which could become less expensive on retirement since we’ll be able to go off-season then, unlike now.
Now I’ve got a decent job, albeit possibly temporary, and it’s good timing, is all I can say – we can save almost everything I make (there are a few extra costs involved, namely commuting and clothing).
Theoretically, if one started out saving 15%, let’s say at 25 years of age, and attempted to add 1%/year, by the time our theoretical saver was 60 they’d be saving 50% of their income. If you can do that… you shouldn’t be having problems saving, anyway!
You are playing this game the right way Wendy.
By keeping your expenses the same even though your household income increased, you’ll bank a bunch of money in a jiffy and that will propel you towards financial independence at a much more accelerated pace.
Congrats!
In Australia, they make us (whether self-employed or employees) put away 9% of their salary into a superannuation fund to ‘retire’ to when we hit that age.
Unfortunately for Australia, the age keeps going up… from 60yo to 67yo for men… and 65 for women…. so by the time we get to that age (or if we get to that age)… we won’t even be able to enjoy it. Sad, isn’t it?
The money that goes into Super is paid for by your employer, not by you. It s money you would never see, therefore it is money that you would never of had.. Most people live past age 67 and it is a painless way to save for your retirement. I know, I am now 72 years old and received all my Super 5 years ago.
Dear Alexandra,
That’s a very good system in Australia. Too many folks remain oblivious to retirement planning if there is no such system in place.
Questions:
1) Does all that savings go to the beneficiaries if a person dies before or soon after retirement?
2) Does the superannuation income match what you were making before retirement?
3) Does it increase slightly to keep up with inflation during retirement?
Luis
You need ten to twenty-five times your annual expenses to retire? That is insane. I have been saving 17% every year for the past seventeen years. With my employers match it is another 10%. I still will not even come close to what you are saying. But I believe I will be comfortable.
Hello James,
I guess how much you have saved at 17% depends on your income as to the value of your savings after 17 years + 10% your employer matches. It does however, amount to 27%pa of you income. It sounds to me a significant amount, but again, it is relative to your income. Of course, if you have your savings + 10% invested well and relatively safely (most especially in these volatile times) you should have a substantial retirement nest egg, particularly if you own your home.
I am not au fait with the American social security system, but here in Australia, many if not most people who retire (currently) have access to a Government Aged Pension. It does, however come with caveats – limit on assets, which is reasonably generous. A Government Aged Pensioner is permitted to own their own home and have reasonable cash assets (must pay tax on the interest earned). However, their is a reduction in the pension for assets above what is permitted and those with considerable assets are not entitled to a Government Aged Pension. All persons who receive any form of Gov’t Pension are deemed to make 4% (when I last heard) on ANY cash assets for the purposes of taxation.
A recipient of a Gov’t pension is able to work without losing some of their pension, but the amount is somewhere around $200gross per fortnight mark. For those able to work, $200 can top-up hefty bills, afford some small luxuries or help with home maintenance.
Cost of living is climbing again here in Australia and utility bills are particularly high relative to a pension only income (minimum wage equivalent). A pensioner without other forms of income struggle to meet day-to-day expenses. Frugality is a way of life for them. So, being able to save as much as possible for retirement while working has to help. Many people in Australia will never have much in savings by the time they retire and rely on their Super to provide some help for a few years after retirement. It is a fact most will have less than $100K in Super by the time they retire – especially ‘Baby Boomer’ females!
Great idea! We’ve also earmarked a single month a few times when we never eat out or buy anything frivolous. Whatever’s left at month-end gets put into the savings account. Every time we want to do something, we tell ourselves: it’s only one month. Do without. It gets old by week 4 🙂 but it works!
This is a great strategy to curb your spending and also save aggressively. I really like how you do it. We’re currently trying to use some similar strategies, but never thought about burst savings. It does make a lot of sense though, the first 10 years will have a HUGE impact on our retirement funds.
I do not think it is possible to save as much of the current economic crisis we are in.
Thanks for clarifying! Much appreciated. I’ll make adjustments next quarter when my employer allows. Thank you.
No problem Kat,
Once you are comfortable with 15%, I encourage you to continue adding to the pot by upping the saving percentages by 1% every year.
At the end of the day, you get to keep what you don’t spend!
Sorry but we totally missed the original question Kat posed. We are comparing gross salaries in the examples in the article so we will need to save 15% of gross income. If you want to figure out a multiple of take home income, then use the take home amount.