Chart of the Month: Savings Rates at Different Ages

Chart of the Month

Once a month, we will take a deeper dive into one of my favorite charts. The chart of the month will range from core investment philosophies to timely events. Overall, the goal of this series is to give investors a greater understanding of what goes can impact an investment portfolio.

Chart Breakdown: 

This chart shows how much money you would need to save each month to have $1,000,000 at age 65 assuming an average annual rate of return of 7%. The chart looks at ten age ranges: 25, 35, 35 and 55. The younger a person is, the smaller amount of money a person would have to save each month. Even waiting 10 years from age 25 to age 35 creates an increased savings need of $439 a month or $5,268 per year.

What is This Chart Telling Us?

This chart exemplifies the power of compound interest. The longer amount of time you get to save and invest the greater opportunity your investments have to build on themselves. Saving more money later in life is what must people do, but it may not be practical. Time is a larger factor in investment performance compared to the amount you save.

Why is this Important?

Most people have the mindset of “I’ll save when I make more money.” Unfortunately, by then it may be too late for most people. If you wait until age 45 to start saving towards retirement and you want to be a millionaire you’d have to save almost $2,000 a month. At a 15% savings rate (which is a goal you should have), a person would have to make $153,600 a year. At the average American’s savings rate of 5.7%, a person would need an income of $404,210. I’m sure the average American does not make over $400,000 a year. The best thing you can do is start saving at a young age. The next best thing you can do is start saving right now.

Derek Mazzarella is a Financial Advisor with The Bulfinch Group based in Needham Massachusetts.