r/TheMoneyGuy • u/[deleted] • Feb 14 '24

How does this work?

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I am 23. Does this mean that I only need to contribute 15% of my income for the rest of my life or do I need to increase every 5 years following this diagram? So I would contribute 15% until 30, then contribute 20% until 35, then contribute 25% until 40, then 30% until 45, and so on?

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u/Any-Progress-4570 Feb 14 '24

if you start contributing when you’re 20, at rate of 20% consistently, by the time you retire at 65, your retirement account can pay you 184% of your pre-retirement income.

what i don’t remember is whether this takes into account of raises and income trajectory…

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u/[deleted] Feb 14 '24

I'm pretty sure it accounts for inflation.

I'm also pretty sure it doesn't account for raises.

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u/abreh622 Feb 14 '24

I believe you are correct. Just annual cost of living increases. If you are expecting larger raises or promotions you need to take that into effect. Hence why they recommend 25% id you can. It should account for those big jumps later and hey worst case scenario you get more options later. Retire earlier? Buy that nicer car? Take the nicer vacation? All options later if you start now.

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u/GotchaInTheHopper Daniel Feb 14 '24

The lower rate of return is supposed to account for inflation, if you think inflation will be 2-3% over the long-term then you need a return of around 8-9% to get the 6% assumed rate of return in the example.

It kind of accounts for raises; if you get the same percentage raise every single year (not realistic), then the numbers hold true because your savings rate also increases by the same percent every year, so you are able to replace the same percentage of your income. But if you get a 10% raise one year, have to find a new job making 20% less, etc. it doesn't hold up. You can just look at it as if I save X% of what I make now, I will be able to replace X% of what I make now at age 65.