The 20% Savings Rule

LadyCoconut

Morning,


If using the 20% of your annual salary as a guide for saving then should that include your pension contributions?

Currently my pension is 7% but I could go to 11% but figured I should build up some cash.

I'm 41 - debt free - £11K in a medium risk stocks and shares ISA. I was putting £1000 a month into this up until September but have been holding back since then just because I needed a little fun and had some holidays etc. (you need to live right?)

£500 into a work savings scheme (split over 2 schema) of which one will mature next August and will go into the ISA.

Annual bonus goes into the ISA.

With 2020 coming then I want to re-evaluate some of my savings and just wondering what I should count towards the 20%

Regards and thank you.

Happy Holidays :-)

BoGoF

I think you should think less in terms of % you save and more in terms of how much you need to live on in future retirement.

Your 7% pension contribution tells us nothing about what/when that will pay out. You need to work out what your goals are and pay what you need based on that.....not some arbitary %.

colsten

I have never heard of a 20% savings rule - have you got more details?

As a rule of thumb, I would keep about 6 months of living expenses in an emergency cash fund. That would be in addition to any savings for holidays / presents / special occasions etc.

In terms of pension, MSE recommends you "take the age you start your pension and halve it. Then put this % of your pre-tax salary into your pension each year until you retire.". Your 7% contribution sounds very low, tbh. If you can go to 11%, or higher, that would no doubt have a positive effect on your income in later life, especially if your employer contributions also increase.

Have you got a forecast for how much pension you can expect to get a month? How does that forecast compare with how much you expect to need to live to the standard you hope to have?


https://www.moneysavingexpert.com/savings/discount-pensions/#need-3

Bravepants

Or....


https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

LadyCoconut

Thank you all that is most helpful.

7% is what I'm doing now but I've had a pension since I started working in my 20s.

Something to think about in the new year.

MDMD

colsten wrote: »

I have never heard of a 20% savings rule - have you got more details?

I believe it is part of the 50/30/20 rule - the idea that you allocate 50% of your essentials to necessities, 30% to discretionary purchases and 20% to savings.

https://www.thebalance.com/the-50-30-20-rule-of-thumb-453922

I personally prefer to include pension payments (not employer) in the 20% but also include income tax and NI in essentials (as I use salary sacrifice so as one goes up the other goes down).

I think the “official” way is to use after tax income though.

Eco_Miser

MDMD wrote: »

I believe it is part of the 50/30/20 rule - the idea that you allocate 50% of your essentials to necessities, 30% to discretionary purchases and 20% to savings.

https://www.thebalance.com/the-50-30-20-rule-of-thumb-453922

Note that it is no more than 50% on needs, no more than 30% on wants, and at least 20% on savings and debt reduction, and needs is defined narrowly.

If you're on a good income you should be spending considerably less than 50% on needs, and saving considerably more than 20%. And yes, pension contributions are savings.

Bravepants

I notice the rule was proposed by a US Senator...it's a fine line between spending and saving, but the cynic in me notices that this line is definitely widened in the "spending and keeping the US economy moving" zone, with a nod to saving so that you're not too much of a drain on the economy in retirement.

jonnygee2

If using the 20% of your annual salary as a guide for saving then should that include your pension contributions?

I would say - no shouldn't be included if using this rule as your pension should probably be closer to 15% anyway, and for many 5% wouldn't be enough to save. So much depends on your situation though. The rule assumes 50% of stuff is going on essentials - there have been periods of my life where my rent alone was more than 50%!

Basically save what you can. But, if using this rule and you have a decent income, I'd be applying it to your take home wage after pension etc.