What is "saving enough"?

[thekid]

For people that think their personal finances through, I think this is a key question.

Ultimately, it will depend on your goals.

I think being able to afford a decent standard of living in retirement is (or rather should be) the base goal. If you want to retire earlier or leave a significant inheritance, then you have to be more agressive.

It's mathematical. Plug in an end figure, realistic extected return and time frame and you get the discounted present day value you need to save.

You guys think your savings level in such a manner or are you more of a saver on principle (by nature)?

My goal wasn't at all well thought out at first. I'm prudent by nature, so I just maxed my tax sheltered space as soon as I started working (I was lucky to start off earning well). My wife is fairly similar. More explicit goals came as a result of prior actions, it was kinda backwards. Our goal is now to retire fairly early and protect capital for our daughter. We've been lucky. But that's an open ended goal. Our current savings rate is about 25-30% of gross (since we paid off the house). That's not based on an actual end goal number. It's basically what our lifestyle (which naturally incorporates a fair dose of frugality) adds up to. I can run projections and see where that leads, but I find that "unplanned" to an extent. It's like what we do dictates what we want, not the other way around. I'd be curious at how others do it.

[bjl584]

The quick dirty answer is to try to save 20 to 25 times anticipated annual expenses in retirement.

For me,
I just save as much as I can. Which is currently around 30%. I keep saving and investing and keep increasing that number while trying to maintain a balance in life so that I still have disposable income to live a little.

[thekid]

The quick dirty answer is to try to save 20 to 25 times anticipated annual expenses in retirement.

For me,
I just save as much as I can. Which is currently around 30%. I keep saving and investing and keep increasing that number while trying to maintain a balance in life so that I still have disposable income to live a little.

That's pretty much what I do.

The thing is I could be more frugal or less frugal. I didn't establish a target retirement date and work towards it, my target retirement date comes at me as a result of my lifestyle.

I'm just wondering if people work it backwards or frontwards....or not work it at all and just save by nature (my inlaws are the latter, save compulsively as a way of being).

Other than retirement, does anyone have as a goal to save significantly above retirement needs to accumulate "family wealth"?

[snshijuptr]

We have a pretty specific long term savings goals list (pay off student loans, buy a house, send kids to college, pay off house, retire, etc), but at our current age/salary there is no way for us to be saving at the levels we would have to to meet all goals. Instead we currently save 35% of our take home pay so that we have enough money leftover to meet our current needs/wants. This was inspired by the 50/30/20 budget with major adjustments for our life and priorities.

[thekid]

what's the 50/30/20 budget, i'm curious?

also, i'd think you have to consider your curent savings rate in relation to where you are at in life (take into account reasonable future salary growth and future level of expenses).

[disneysteve]

what's the 50/30/20 budget, i'm curious?

This comes from a book by Elizabeth Warren. It is 50% for needs, 30% for wants and 20% for savings. I think that is a great baseline for everyone. If the entire country was doing that, the vast majority of financial problems we face wouldn't exist.

Some people may need to save more than 20%, particularly those who are getting a late start on the savings game. If you are 45 or 50 and haven't saved for retirement, 20% isn't going to cut it. As I said, though, if every single person started following 50/30/20, the world would be in great shape.

[thekid]

This comes from a book by Elizabeth Warren. It is 50% for needs, 30% for wants and 20% for savings. I think that is a great baseline for everyone. If the entire country was doing that, the vast majority of financial problems we face wouldn't exist.

Some people may need to save more than 20%, particularly those who are getting a late start on the savings game. If you are 45 or 50 and haven't saved for retirement, 20% isn't going to cut it. As I said, though, if every single person started following 50/30/20, the world would be in great shape.

Thanks. Does this not mostly boil down to savings level? I mean, needs and wants intermingle. Housing is a need. Level of housing is a want. I'm guessing housing goes into the 50% needs category.

[MKKShah]

The quick dirty answer is to try to save 20 to 25 times anticipated annual expenses in retirement.

Is there an underlying assumption about the retirement age for the above figure? How about the life expectency? For example, is the above target for someone retiring at 60 and living until 90?

For example, my expenses in retirement will be around $3000/mo (in today's $s). So based on the above rule or thumb, I could retire at 900K in todays dollars?

Does this take SS into account? For example I get letter from the SSA saying that I will get around $2200 per month when I retire. that definitely changes what one needs from savings.

[riverwed070707]

Thanks. Does this not mostly boil down to savings level? I mean, needs and wants intermingle. Housing is a need. Level of housing is a want. I'm guessing housing goes into the 50% needs category.

You are correct it does, but if your "needs" exceed 50% then you probably have more house/car/etc than you can afford.

ETA: GRS just did a post on this topic earlier this week. While not the primary topic, it explains the model pretty well Ask the Readers: All I Ever Worry About is Money

[bjl584]

Is there an underlying assumption about the retirement age for the above figure? How about the life expectency? For example, is the above target for someone retiring at 60 and living until 90?

For example, my expenses in retirement will be around $3000/mo (in today's $s). So based on the above rule or thumb, I could retire at 900K in todays dollars?

Does this take SS into account? For example I get letter from the SSA saying that I will get around $2200 per month when I retire. that definitely changes what one needs from savings.

It's more of a guideline. In your example, if you can achieve a 5% return on your nestegg of 900,000, then it would yield 45,000 a year. That, plus your social security should sustain you for the rest of your life no matter how long you live. You should, in theory, be able to live on the interest and dividends alone and never touch the principal if you don't want to.

[bjl584]

The above depends on your lifestyle of course. You may need more of a return, more of a nestegg, to draw the principal, or some combination of all of these.

[thekid]

It's more of a guideline. In your example, if you can achieve a 5% return on your nestegg of 900,000, then it would yield 45,000 a year. That, plus your social security should sustain you for the rest of your life no matter how long you live. You should, in theory, be able to live on the interest and dividends alone and never touch the principal if you don't want to.

In an ideal world, you'd want to achieve returns that net of taxes and inflation, allow you to live decently on. That way your capital is protected in real dollars for the kids. Assuming 5% returns, 3% inflation and that you want pretax annual income of $50k, you need $2,5M.

[bjl584]

In an ideal world, you'd want to achieve returns that net of taxes and inflation, allow you to live decently on. That way your capital is protected in real dollars for the kids. Assuming 5% returns, 3% inflation and that you want pretax annual income of $50k, you need $2,5M.

True. You can lessen the effect of taxes though. Roths, tax advantaged funds, muni bonds.
Inflation you can't do much about except that in retirement your expenses should be less than they were when you were working. But, if you have a large enough nest egg, then there is nothing wrong with taking some principal. There is also something to be said for reinvesting part of your dividends in retirement to keep your nestegg growing in an attempt to keep up with inflation. There is also the issue of SS that can be factored in.

[thekid]

True. You can lessen the effect of taxes though. Roths, tax advantaged funds, muni bonds.
Inflation you can't do much about except that in retirement your expenses should be less than they were when you were working. But, if you have a large enough nest egg, then there is nothing wrong with taking some principal. There is also something to be said for reinvesting part of your dividends in retirement to keep your nestegg growing in an attempt to keep up with inflation. There is also the issue of SS that can be factored in.

Yeah, SS has to be factored in (and in our case we both have DB plans...we're still young but at least should consider earned annuity).

[snafu]

My parents were surprised by how modest their expenses were once all of the children left home and were financially independent. The house was fully paid, they had savings, a modest pension, SS and OAS. While health permitted they traveled. When they found keeping up the house was too much, they sold it and bought an apartment.

We live in an older condo complex whose owners are nearly 50% seniors and I'm seeing the same formula. These folks seem to have defined pensions which are adequate since they don't have work related expenses [transportation, clothes, lunch, child care].

Statistically we're living longer and will need funding for more years than we may have anticipated. For those who do not have defined pensions, do not fully participate in employer retirement programs, fail to plan and therefore plan to fail. A retirement program needs the wonder of compounding over many [35] yrs. I'm reading about the issues in Japan whose growing numbers of seniors have not saved enough. Their government's GDP cannot afford to payout much more in senior subsidies. I doubt any government with quickly rising senior populations will be able to offer much support for their seniors.

Working in China, we quickly learned the culture requires children to take financial responsibility for their parents. Typically, parents move in with their children and take care of the grandchildren, housekeeping, shopping and meal preparation. Everyone works as there are no social assistance programs.