Start the year right with a move toward financial independence

Let’s start the year with a tip that may help put you on the path toward financial independence in your retirement. Perhaps you’ve heard about the four percent safe withdrawal rate for retirement spending, but do you know how much you should be saving before retirement? Rather than waiting until the end of the article to share the answer (and at the risk of oversimplifying a complicated topic), you should save 16.62 percent of your income.

saving toward financial independence
Photo by Andre Taissin on Unsplash

With this level of precision, you’re probably already questioning how could I arrive at such a specific number? The truth is, it’s not my number but retirement researcher Dr. Wade Pfau’s figure. Just like the sustainable withdrawal figure looked at historical data, Dr. Pfau did a similar analysis to incorporate not only years in retirement but also working years to arrive at his conclusion.

Achieving financial independence: A formula for saving

This recommendation to save 16.62 percent was based on working for 30 years followed by a retirement lasting an additional 30 years and replacing 50 percent of pre-retirement income. Dr. Pfau also assumed a stock allocation of 60 percent throughout the entire period. Of course, if you start to adjust any of these assumptions, the required amount of savings may decrease or increase. For example, if you wanted to replace more of your income, you would need to save more.

Focusing on only replacing 50 percent of your income may appear too low but if you factor in Social Security and pension income once retired, the gap is much smaller. Contributing at least 16 percent to retirement savings also results in less spending which leads to a lower replacement rate too. For example, if you save 16 percent then you only need to replace 84 percent of your income to maintain your current level of spending. If Social Security covers another third of your income, then replacing 50 percent with retirement savings is reasonable.

Know your time horizon to retirement

The other variable with a significant impact is the amount of time you have to save before retirement and the length of time in retirement. No surprise, the shorter length of time to save requires a higher saving rate while a longer period in retirement also requires accumulating more money. Based on Dr. Pfau’s research, waiting until 20 years before retirement to start saving (age 45 for someone who plans to retire at 65) increases the savings rate to over 25 percent.

I am not suggesting there is one correct savings amount for everyone but too often I talk to people who are paralyzed by the magnitude and complexity of this decision resulting in no action. At a minimum, targeting this rate will get you headed in the right direction. So rather than setting a vague New Year’s resolution to “save more,” how about setting a more specific goal of saving 16.62 percent for 2022? That is a step in the right direction toward your financial independence.

Justus Morgan is a fee-only financial planner with Financial Service Group Inc., a registered investment advisory firm at 4812 Northwestern Ave., online at

As seen in the Racine Journal Times | January, 2022

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