Savings Guidelines

So I am going to make a stink about this article I found via Hedonic Adjustment.

The article is from a trade journal for financial planning professionals. The story is about finding the right savings rates for people. They go through different income levels and different scenarios. I especially love the Monte Carlo analysis. (Table 6, math nerdery that merits its own sidebar at the bottom of the page. Read it if you are a numbers geek like me.) Table 6, Panel A says, guesstimating my salary and age, that at 65 I should have about $603K saved up. I think that is actually low and I am gunning for more like $1 million dollars. (Yes, secretly that is my Number, but I just made that up because I think $603K is not enough. See the next income bracket? The one to which I aspire? That says $903K, so we round up to $1 cool million.) However, that is only at 50% confidence numbers. More realistically, I’ll have only $523K at the 90% confidence number (i.e. more realistic results).

The study shows the importance of starting to save no later than age 35. It shows how higher-income people will have to save more to offset the impact of Social Security, which has a larger impact for low- and moderate-income people. Lower-income individuals who are more dependent on Social Security will also be most vulnerable to political changes in the system. Those who have failed to accumulate adequate savings will need to delay retirement or take a substantial reduction in their retirement standard of living. Finally, it suggests that those whose income increases faster than inflation will have to save an increasing amount to “catch up” so as to be able to provide for the higher assumed standard of living in retirement.

Ok so this means that everyone should start saving before they are 35. How lucky we are to be in a crazy volatile market now. Sounds like a lousy time to jump in, right? But not so. You can start socking away cash for right now. Even that will get you farther than doing absolutely nothing.

Read Table 1 of the article carefully, for 80% income replacement of a $20K annual salary in your 20’s, you can save as little as 6.8% a year. That’s not a lot. I admit, that’s pretty tight, but as your income rises over time, saving more should be come possible with cost control. Remember, spending less than you make?

The closest scenario to me would be 30 at $40K. I think when I turned 30 I was making just over that amount. Sadly, I wasn’t saving nearly 12.8%. I think I was saving 3% with 1.5% in matching funds, so a total of 4.5%. Now that I’m older, and making 70% more than what I was making at 30, I am proudly socking away 19.5% (17% and 2.5%). It’s still less than what I need for 80% replacement, but well over 60% replacement. I’ll take it. The reason is that 60% replacement assumes that your mortgage is paid off. And I certainly could do that if I stay in my little studio for the rest of my life, or upgrade even to a 1 bedroom someday.

Read the article. Think about your financial goals and where you are headed. Are you going to need 80% income replacement or 60%? There was a big stink about oversaving in the US this past spring, but I think that’s related to the assumption about our expenses in old age. I would like to play it safe and have 80% replacement and stuff leftover than 60% and money run out. Jebus only knows that the 20% difference could easily be eaten up by medical costs at that point.

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