Are you saving enough?
Expand your gaze and look further ahead.
In a game of chess, it’s easy to get caught up in attacking early and achieving first blood.
Though, the more seasoned player develops his pieces and moves with strategic rigor. Teasing out the impatience of his opponent and picking him apart move by move.
The person who can zoom out and play with a more global vision wins.
In the game of financial independence, the rules are no different.
It’s easy to attack and deploy instant gratification with present day spending, it’s invigorating.
As you double-click on your decision making process, you uncover saving as a more sensible choice.
But saving is hard and not pleasurable.
How do you enjoy the unenjoyable?
Remember your why and remind yourself you’re the kind of person that does hard things.
Perception is reality.
The person who believes he can or believes he can’t is both right.
If you want to save, get crystal clear on why you’re saving.
While saving alone will not ensure financial independence, it's your most important first step.
A combination of saving and investing fuse into the sweet spot for wealth creation.
How much to save is directly tied into four factors:
Your rate of return from your asset allocation (mix of investment assets)
What your desired future spending lifestyle requires.
Other sources of future income (social security, pensions, rental income, etc.)
Inflation costs
Increase your precision
Saving alone means nothing with context.
The clearer you become on what level of spending you want, the more easily you can back into what savings amount is needed to build a nest egg to withstand your desired future level of spending.
Saving to reach a generic dollar amount is playing a losing game.
Everyone seems fixated on $1,000,000.
$1,000,000 sounds like a lot until you realize this means you could only spend $40,000 of that per year (pre-tax) to last 30 years. It’s relative.
This is based on safe withdrawal rate research from William Bengen in his seminal 1994 paper Determining Safe Withdrawal Rates Using Historical Data that concluded a 4% portfolio withdrawal rate adjusted yearly for inflation consisting of 50-75% stocks and 25-50% bonds could survive a 30 year time horizon..
Personal finance is personal. Your savings goal is specific to you, not what others perceive you should have.
Start at the end and work backwards.
Increased clarity > Saving more
What’s enough?
No need to dampen your current lifestyle with increased saving if you’re presently on track to achieving your future financial independence goals.
We’ll start with a back of the envelope calculation then move into more targeted ways to nail this number down.
Option 1: Take your current desired level of retirement spending in retirement and divide it by 4% (.04).
For $100,000 of yearly pre-tax spending this equates to a $2,500,000 portfolio value.
Working backwards, this is $26,466 per year in savings for 30 years growing at 7%.
You can pull the levers to save more, work longer, or earn a higher rate of return to achieve this value sooner. But be careful in assuming a growth rate above 8% as this is about the historical average of a globally diversified equity portfolio.
This option ignores other pension, social security, part time income, taxes, spending/saving flexibility, and increased salary through time.
Option 2: Use a rule of thumb to always save 15% minimum of your paycheck.
If you continue to utilize this method and your $100,000 salary grows by the rate of inflation each year (~2.5%) and your savings grow by 7% you’ll end up with a savings nest egg of $1,845,699 in 30 years.
Using that 4% rule you end up with $73,828 per year or 36% of your ending salary paycheck. 36% of your paycheck seems low until you can add in social security, pensions, or part-time work.
This approach yields more practical results with gradual increases to saving if option 1’s savings value was too high up front.
Saving 15% may be too little or too much. Get specific and adjust savings as necessary relative to your future spending needs.
Option 3: Use financial planning software to help yourself plan.
With more robust software, you can factor inflation-adjusted saving rates, investment growth assumptions, social security, pension, debt obligations, part time work, and withdrawal rates into the equation.
If you plug in desired spending, the software will show how your current saving meets (or falls short of) your desired future spending needs. The resulting shortfall (or surplus) offers insight into the adjustment required to meet your goals.
Personal capital has some great online free tools to utilize to get more granular with your savings goals.
Truth be told, wealth is what you don’t see.
It’s no secret that in order to build wealth you must save.
Expand your vision and play the long game. By being patient and following the process you give your future self the gift of security and freedom of choice.