Push hard to save or just let it ride and enjoy life?

[skinnyninja]

Currently 37 years old.  No plans on quitting work any time soon (I freelance a few hours per week and keep the bills paid).

Looking at a 10 year timeline for no particular reason.  Making a few assumptions here about my retirement possibilities. 

I currently have roughly 200K saved.  I live in MI and pay $425/month in rent. 

Normal market:
5% interest for 10 years = 298K
5% interest and $500/month deposited for 5 years, then 5 of no deposits = 342K
5% interest and $500/month deposited for 10 years = 376K

Good market:
7% interest for 10 years = 364K
7% interest and $500/month deposited for 5 years, then 5 year of no deposits = 415K
7% interest and $500/month deposited for 10 years = 451K

Bad market:
3% 10 years = 244K
3% + 5 years $500/month = 282K
3% + 10 years $500/month = 314K

360K could support current spending at 4% withdrawal rate.  In a good market with no contributions I could "retire" at 47.  In a normal market I would reach 360K at age 51.  In a bad market it would take until age 60 to reach the 360K. 

Right now I am not retired.  I don't have enough money banked to quit working forever.  On the other hand, I don't see how saving at my current income level will really affect my retirement much.  The only way to change the outcome significantly is to go find a job where I can bank at least $1,000/month or more.  Saving $500/month does not seem to affect things very much in relation to the current size of my savings.  A higher interest rate and/or more time added does a whole lot more than additional savings piled on. 

In order for more savings to make a real difference it needs to be at least $1,000/month for several years straight.  That is really hard for me to do from my current position and I am not sure the rewards are worth it.  When I am 55 to 60 years old what is the difference between having 600K versus 850K?  I don't have a frame of reference for what that difference will be or how much lifestyle it can purchase.

Right now if I average 5% until I am 60 and just keep my bills paid I will have over 500K.  If I consistently bank an extra $500/month this would be roughly 850K instead of 500K.  What then?  I don't see why I need the extra 350K in 23 years as opposed to just spending that extra $500 month now and getting a car, buying a house, etc.  Why scrimp and save in order to have 850K at age 60 versus having 500K at age 60?  My current spending is $1,200/month and under $15,000/year.  I need less than 400K to support that and I will reach that even without monthly contributions. 

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If I just keep my bills paid but stop saving additional money to make contributions this is what will happen at age 55:

return averages 3% = 311K
return averages 5% = 445K
return averages 7% = 637K

I don't see any of those as a problem.  The problem is that I currently earn 2K/month and I spend over 1K to live.  So I keep my bills paid and if I want to scrimp and save then I can reasonably add another $500/month in savings.

But why do this?  I am already going to hit my retirement goal without additional savings, and if I scrimp and save then I am just putting extra money into something that I presumably won't use.  Why scrimp and save now in order to hit my retirement goal (for example) at age 47 instead of age 52?  What is the difference there?  I realize it is 5 years but I don't have to work very hard at all to pay my bills as it is.  (Just do freelance work). 

Why sacrifice lifestyle now so that I can have 600K instead of 500K later on?  What is the difference in lifestyle that this would translate into?  I don't really see it.

The only way to dramatically accelerate things is to get a big bump in monthly savings.  Just saving $500/month is not enough to really overcome the effect of 200K compounding it's way up to 400K.  Even at a lousy 3% return the money compounds more efficiently than I can save.  Just give it time and keep the bills paid and it will turn into 400K-500K in 20 years.  Throwing the extra $500/month into savings does not decrease this significantly.  Nor does it seem to buy me more lifestyle later on. (What is the difference between 500K and 600K when you are 60 years old, in terms of how you live and what lifestyle you enjoy?)

Should I be pushing hard to save now?  It doesn't really seem like it will make much difference in the end.....

[unpolloloco]

Sounds like you're happy now and wouldn't be any happier in "retirement."  Why change what you're doing?  Healthcare costs may be a wildcard here though...

[ZMonet]

I think you have your answer and that retirement goals are a balance and everyone needs to figure out what the appropriate balance for them.  Many here seem to be working 40+ hour/week jobs and want to figure out when they can ease out.  For most of my life, I put an age on my retirement and not a number.  This website/forum has been refreshing even if I still make "wasteful" purchases or otherwise delay that retirement date (maybe to the number).

One question, are you factoring in inflation?

[SunshineGirl]

Perhaps buy a duplex, triplex, or fourplex that would allow to you live free, or even make some money. That would help. I looked at prices on realtor.com and there are certainly affordable ones to be had! (Having said that, I know nothing of the neighborhood.)

[arebelspy]

I freelance a few hours per week and keep the bills paid

That sounds to me like you're basically semi-retired.

In order to fully FIRE, you're 160k short or so, and since your savings rate is so low (due to rarely working), you'd have to work a lot more to make that up.

Sounds, then, like it's a choice between semi-ER (current situation) and eventual full FIRE in a decade or going back to full time work and doing full ER in a few years.

That's totally a personal judgement call.  I'd rather work full time 2-3 years than part time for 10, but I know that's not the case for a lot of people.

In any case, if you're deciding between saving $500/mo or spending it because you'll get close enough either way, you're asking the wrong question.

Do the level of work that makes you happy.  Spend what you need to (optimized).  Save the rest.

Simple, if not easy.

[skinnyninja]

Thank you so much all of you for your replies, really helpful stuff.  In particular I think Arebelspy is good enough to be a money coach.  But I appreciate everyone's comments.

As for the inflation question, I had not really calculated that in other than to hope that I can achieve roughly 3 to 5 percent interest on top of inflation.  I do not currently manage my own investments though.  On the plus side I am already pretty frugal (my rent is only $425/month).

I think what I am really experiencing is the concept of "hitting a savings wall." 

For example, if your portfolio is $10,000 then saving $500/month makes a big difference.  In less than two years you will have doubled the size of your portfolio to $20,000, even without any market returns. 

But my portfolio is not 10K.  It is 20 times that size.  So saving $500/month does not really make a difference.  This is known as "hitting the savings wall."  My investment returns are roughly two to three times greater than any additional savings I can kick in. 

I can either take on a second job and save more like $2,000/month, or I can just keep the bills paid and let time go to work and compound the returns for me (semi-retirement). 

If you are starting from zero then saving $500/month will make a huge difference.  But if you are starting from 200K then saving only $500/month has very little impact.  In order to truly make a difference with a 200K portfolio you would need at least $1,000/month in savings and ideally more like $2,000/month. 

So the question for me is:

Do I want to try to double my income, and thus inflate my future lifestyle?  Or am I content to be semi-retired? 

This is exactly what Arebelspy deduced.  He said I could go work full time and get it over with in a few years, or just keep doing what I am doing.  Very insightful of him.

But I just thought I would clarify the concept I am experiencing.  It is a "savings wall" due to my relatively low income compared to a larger nest egg.

[Use it up, wear it out...]

If you are starting from zero then saving $500/month will make a huge difference.  But if you are starting from 200K then saving only $500/month has very little impact.  In order to truly make a difference with a 200K portfolio you would need at least $1,000/month in savings and ideally more like $2,000/month. 

May I just suggest that $500/month has more than "very little impact"?

Assuming a 3% rate of return on 200K base over 5 years, with no savings, you end up with $232,323 - an improvement in your 'stash of 16%

If you save $500 in your 'stash every month, after 5 years you end up with $264,727 - an improvement in your 'stash of 32%

Also, don't forget, that spending and savings are the opposite sides of the hourglass. Supporting an additional $6K in annual expenditures requires $150K of additional savings at a 4% withdrawal rate. So, saving that $6K yearly not only gets you to your goal a little faster, it also makes for a smaller goal.

Actually, however, I also agree with everything Arebelspy said. :-)

[arebelspy]

Also, don't forget, that spending and savings are the opposite sides of the hourglass. Supporting an additional $6K in annual expenditures requires $150K of additional savings at a 4% withdrawal rate. So, saving that $6K yearly not only gets you to your goal a little faster, it also makes for a smaller goal.

This is a very astute point about lifestyle inflation.  If you decide your level of spending is fine, but you have extra cash (to the tune of 500/mo, or 6k/yr) and spend it rather than save it, it seems likely that after a decade of this you will be used to the higher spending, and thus need a larger stache to support it (approximately an extra $150,000 at a 4% SWR).  If you save that money, even though it doesn't get you FI that much faster, it keeps your lifestyle inflation down, so you don't need that extra larger stache to support it.

It's easy to say "I'll spend this money now for the next decade, then cut back," but harder to do.  Easier to just not spend it and get used to it in the first place.

Great point, UIUWIO.