Comments on: What should my savings rate be?

By: What is your number? How much do you need to live on? « Simple Living in Suffolk

Tue, 12 Apr 2011 11:43:48 +0000

[...] Monkey retired at 56, and he saved about 25% of his income. This roughly squares with ERE’s calculations when you add in the State pension later on and he also seems to be saving more than he had [...]

By: Jacob

Jacob — Wed, 02 Feb 2011 01:23:57 +0000

@terry – You’re in the company of people who actually do save that much. For those working for decades, the instruments do matter.

By: Jacob

Jacob — Wed, 02 Feb 2011 01:19:39 +0000

@shaun – I believe Shiller uses trailing ten years.

By: seventhgirl

seventhgirl — Wed, 02 Feb 2011 01:15:38 +0000

This really puts it simply. If anything, it is useful for lighting a fire under me to increase my savings.

By: terry

terry — Wed, 02 Feb 2011 01:13:22 +0000

I think the formulas presented here are a little simplistic. it is not just the percentage you save. and let’s be realistic- who can save that much anymore? the cost of health insurance is ridiculous as well as medical bills.
more important is the instruments used in saving.
i diversify with mutual funds and long term annuinities that give at least a 4 percent return annually. very conservative but it fits my personality.

By: shaun

shaun — Wed, 02 Feb 2011 01:00:16 +0000

hi jacob

how do you get a 12x historical PE? From most sources I’ve read (most recently from Yale prof Shiller), its 15x?

By: deegee

deegee — Tue, 01 Feb 2011 22:25:30 +0000

Interesting post, Jacob. But how would you factor into a savings rate inflows such as company matching dollars for a 401(k) or additional shares of company stock in a similar savings plan which grow over time? I had lots of both of these, especially the latter, which did more for me to be able to retire 2 years ago at age 45 than my personal savings rate of after-tax dollars which was around 40% for my working years.

By: Carol@inthetrenches

Carol@inthetrenches — Tue, 01 Feb 2011 21:31:49 +0000

So simple and basic yet easy to get side tracked with all the things that we probably don’t need but seem catch our attention.

By: Jacob

Jacob — Tue, 01 Feb 2011 21:12:54 +0000

@retirebyforty – The good news is that you only need to acquire around 30 years of savings. Then interest rates will take of the rest. So you only need to extend it to 50, so (50-20)/50 = 60%.

By: retirebyforty

retirebyforty — Tue, 01 Feb 2011 21:02:25 +0000

That’s interesting. So to extend it out 90 years and say I start working at 20. If I want to work only 20 years, I would need to have a saving rate of (70-20)/70 = 71%. That’s pretty high.

By: krantcents

krantcents — Tue, 01 Feb 2011 17:17:29 +0000

My strategy is to max out my 403B, IRA and Roth IRA. I try to do this on a regular monthly basis through a payroll deduction. That way I am using dollar cost averaging into the market. I recognize that I can not control or forecast inflation or future return. That is one of the reasons I max out my investments savings for retirement.

By: JMK

JMK — Tue, 01 Feb 2011 14:53:09 +0000

We’re treating our retirement plan as a two phased approach:
PHASE 1 – the part from 65 onward which will be subsidized by a small pension plus goverment benefits (a reasonable expectation here in Canada). We’ve done the calculations of our income requirements from 65 onward and the amount of savings we’ll need in addition to the pension and government funds and that has been saved up. Phase one is done. We know we can retire comfortably at 65.

PHASE 2 – how far ahead of 65 can we retire. This is a little trickier. We are madly wacking down the mortgage and socking away retirement funds in various accounts/plans. Similar to your calculations, I see every $X saved for retirement as another month sooner I can stop working. Having a very clear idea of what our expenses are means I know precicely what I need to save for the months/years of retirement before the pension/govt funds kick in. At this point we’re planning to retire in Dec 2020 at 57/60, but every couple of months that date moves a month closer.

The agravating thing for me is our house. Yes we’re madly paying off the mortgage as quickly as possible to reduce our monthly expenses. On the other hand now I see it as a giant albatross. At the moment there is about $400k of equity in it. My DH has no interest in moving from this house until he’s carried out in a pine box. To him the equity is irelevant. I however see it as the key to retiring tomorrow if we wanted. I’d be prefectly happy renting a small apartment and giving up 3000sqft house on 3acres in the woods. Yes it’s lovely. I’ve enjoyed it for 20+ years but now I’ve done a complete 180 on what’s important in my life and it’s no longer living in our “dream home”. Problem is we’re married and need to come to some consensus. We built this house with our own 4 hands and planned to live here forever. Back in my early 20s I was all for that plan. Now at 47 I could care less about the house. My change of heart has even caused family and friends to ask if I’m all right. After years designing, building and decorating I can see how my “sudden” willingness to chuck it all and downsize would seem bizare.

Hopefully we’ll figure out a compromise, but in the meantime I see no harm in killing the mortgage as quickly as possible. It either moves up our retirement date by getting us to a much lower level of monthly expenses, or it increases the equity for when we sell.

By: Frugal Confessions

Frugal Confessions — Mon, 31 Jan 2011 10:03:16 +0000

[...] You Are Living Paycheck-to-Paycheck How to Not Save for a Downpayment The Saved Quarter Challenge What Should my Savings Rate Be? Are Our Spending Habits the Product of Biology or the [...]

By: Simple mind games to stop passive investors hitting self-destruct

Simple mind games to stop passive investors hitting self-destruct — Tue, 21 Dec 2010 08:02:23 +0000

[...] Measuring my savings rate as a percentage of income (or in pounds and pence) gives me a number to fight for. When the monthly number goes up, another battle is won. [...]

By: Jacob

Jacob — Mon, 15 Sep 2008 01:08:48 +0000

@jason – oh yeah, that did not make much sense. I have corrected it in the text now.

By: Jason

Jason — Mon, 15 Sep 2008 00:56:46 +0000

Hi, Jacob, what the heck does “(1.5 generational average, you definitely are! – Currently, the value is around 17 which corresponds to an earnings yield of 5.8%. This means that future returns are not going to be as impressive as historical returns)” mean???

By: SimplicityinKansas

SimplicityinKansas — Sun, 14 Sep 2008 11:37:27 +0000

I like the model and logic behind the thinking. From my vantage point for every year I am working, I am in fact ‘reserving’ a year of other activity (utility of working verus enjoyment – I will take the later) and in fact bring back in real terms one year of retirement age from my target if I save 50 percent of my income. Makes total sense to me as well as working on a rate of return that is in the mid single digits over time to be converserative with my math and lifestyle and realistic with my ability to generate a ‘real’ economic return.

So, for me each year I save 50% of my gross income, I can substract one year from 62 years of age as my new retirement point given similiar lifestyle.

Very thoughtful post and thank you for sharing.

By: George

George — Fri, 12 Sep 2008 00:23:55 +0000

The logic in this post leaves me confused. Most people cannot simply stop working for a year at a time at arbitrary points during their career, and still expect to return to their career as if nothing had happened.

Yes, people can take sabbaticals here and there, but most employers aren’t willing to tolerate extended leaves of absence in their employees. If you’re self-employed, the problem is compounded, since taking a year “off” from your business is likely to cause your profits to vanish in that year.

The only conclusion I have is that the above calculations assume you’re talking about saving for retirement. Assuming a 30-year-long retirement at age 65, one would have to save 50% of your income for a 30-year-long career just to manage to “retire”. Somehow, the math doesn’t seem to add up.

That said, I take your point that reducing expenses and increasing savings (two things that are always under your control) allow financial freedom at an earlier point in time.

By: Paige

Paige — Thu, 11 Sep 2008 19:17:49 +0000

I couldn’t agree more. The more you save, the more you can invest. And the more you invest for the long term, the greater is your return. Whether it be through tax savings or the magical compound interest. Thrift is very important to building great fortunes, especially for normal middle class people.

By: claire

claire — Thu, 11 Sep 2008 17:15:47 +0000

yeah i’m sick of reading on other pf blogs “shares are on sale, so buy, buy buy!” “get those index funds topped up”

No thanks – i think i would prefer to buy another high interest fixed rate bond.