Savings Rate Statistic from CNN Money Article

[arebelspy]

Okay, so we all know how important savings rate is as early retirees based on the math behind early retirement.

Seeing it different ways always helps, so I wanted to share a CNN Money article from a few days ago which had a statistic I thought was interesting.

Say you're 40, have $200,000 saved, with 60% in stocks, and are putting away 10% of a $100,000 salary (including company match). You have a 52% chance of retiring with 70% of your pre-retirement income, according to T. Rowe Price.

Boost your stock stake to 80%, and your chances improve modestly, to 57%. But if you boost your savings to 15% instead, you get to 69%.

   

Source: http://money.cnn.com/galleries/2012/pf/1206/gallery.wealth-net-worth.moneymag/2.html

Increasing your savings there improved your chances threefold over a slightly better asset allocation.

The amount you save is so much more important than eeking out an extra 1 or even 2% return.  Chasing yield can be fun (but also time consuming), but ultimately save more.  Even for those non-Mustachians in your life, convincing them to increase savings from 10 to 15% can be crucial.

I know you all know it, but I found the stat and reminder interesting, figured some here might also.

[Zoot Allures]

Definitely an important message, especially for those of us who mainly aspire to be lazy investors and would rather focus our energies on living mustachianly.

[sol]

The only thing more important than increasing your savings rate is reducing your needed expenditures in retirement.

When I started running the numbers through my spreadsheets, I was shocked at how much things improved with even modest reductions in retirement expenses.

[arebelspy]

The only thing more important than increasing your savings rate is reducing your needed expenditures in retirement.

When I started running the numbers through my spreadsheets, I was shocked at how much things improved with even modest reductions in retirement expenses.

The savings rate is dependent on two things: income and expenses.

You're right that reducing expenses is important, however I wouldn't say it's more important than savings rate.  I'd say increasing your savings rate is the most important, but the most important factor of your savings rate is expenses (rather than income).

[sol]

You're right that reducing expenses is important, however I wouldn't say it's more important than savings rate.  I'd say increasing your savings rate is the most important, but the most important factor of your savings rate is expenses (rather than income).

I thought about this very point before posting, and finally convinced myself that retirement expenses were more important than savings rate because ...

your retirement expenses do not necessarily equal your working income minus your savings

you have the power to cut your expenses even further in retirement

keeping your expenses in a lower tax bracket in retirement confers additional benefit on top of your existing nest egg that are not realized by increasing your savings rate while working.

[arebelspy]

Fair enough.

I'd still say savings rate is more important, because even if you cut your retirement expenses to almost nothing (say... 1k/mo), if you don't have a positive savings rate (like most Americans, who live paycheck to paycheck without any savings) you won't ever get to even that modest level of FI.

As an aside, I'm projecting my expenses to be quite a bit higher in retirement than they currently are.  So for now, I'm just saving as much as I can.  I'll cut there where appropriate/possible.

[skyrefuge]

The amount you save is so much more important than eeking out an extra 1 or even 2% return.

Yep, that should almost be a piece of header text that appears at the top of this subforum.

However, it's worth noting that that advice shifts somewhat over the course of a person's wealth-accumulation stage.  It's super-important to remember for someone just starting out, almost to the point where throwing money at anything could be better than putting it off due to fear of making the "wrong" choice.  But for someone closer to retirement (or even moreso, *in* retirement), then the returns become more of a factor.  Increasing return (or lowering expenses) 1% on a $2M portfolio generates $20k in a year, which could be more than the amount added to the portfolio via savings.

One of my favorite bits of "SAVE EARLY!!!" math comes from Vanguard:

https://personal.vanguard.com/us/content/SiteWide/FlashPgs/SWFlshPwrOfCompContent.jsp

In their example, Dawn starts investing at age 25, at $2000/year, but she STOPS adding to the account at age 35 and never puts in another penny.

Dave delays investing until age 35, at $2000/year, and keeps investing for the next 30 years (three times longer than Dawn), until he's 65.

Assuming the same 8% return for both of them, Dawn has $314k at age 65 (even though she only invested $20k), while Dave has only $244k (even though he invested $60k).  Even though I totally know the math behind all this stuff, I'm still surprised when I see that result laid out.

[arebelspy]

Yeah, I love those save early examples too. Dave Ramsey has a good one very similar to that. I'm not a fan of a lot of his stuff, but those save early examples are powerful, IMO.

I totally agree with you on cutting expenses on your portfolio close to retirement.  Your 4% SWR becomes a lot tougher when you're losing an extra 1% to an investment "advisor" - now you need a 3% SWR..  that's 1/4 of your retirement expenses going to that "advisor"!

But earning 5% on your money over 4% in the accumulation phase isn't that big of a difference compared to saving 10% versus 20+% (or heck versus saving 0%, what most people do).

And even more so for ERs.  A few percent compounded over 40 years can be a lot.  But over 10 years of working, it's much more important to save a lot and reduce expenses, and not worry about trying to eke out an extra small fraction of a percent.

[sol]

However, it's worth noting that that advice shifts somewhat over the course of a person's wealth-accumulation stage.

It's a good point, and I'd even go one step further and say the other end of the spectrum is an even more powerful motivator.

If you look at those savings rate vs retirement age graphs, it becomes pretty clear that you get diminishing returns at higher rates, like moving from 50% to 55% isn't as much help as moving from 15% to 20%.  But the flip side is that for people who are currently contributing some paltry amount, those first few percent are astoundingly helpful.  At the lower end, each additional 1% of income you can save shaves like two years off your working career.

I look at it like this:  Would you accept a 1% reduction in your current pay for two years of paid vacation?  How about a 10% reduction in your current pay for a twenty year paid vacation?  Because that's exactly what raising your savings rate from 5% to 15% accomplishes, it cuts twenty or more years off of your time to financial independence, at a cost of 10% of your pay.

For anyone still dallying with such tiny numbers, go play with networthify or one of the alternatives and have your mind blown. 

[gooki]

I look at it like this:  Would you accept a 1% reduction in your current pay for two years of paid vacation?  How about a 10% reduction in your current pay for a twenty year paid vacation?  Because that's exactly what raising your savings rate from 5% to 15% accomplishes, it cuts twenty or more years off of your time to financial independence, at a cost of 10% of your pay.

Love it. This is exactly what should be taught in schools.

[velocistar237]

The CNN list is almost exactly like a presentation that our retirement plan representative gave us at work. Is this going to be a bigger trend, or is it still only happening in a small corner of the personal finance world?

It also has a lot of overlap with the Bogleheads philosophy.

[Xtal]

I just got a 3% raise at my job (yay!) and immediately increased my 401(k) contribution from 10% to 13%.  I will never see that extra money in my paycheck.  :D

[arebelspy]

I look at it like this:  Would you accept a 1% reduction in your current pay for two years of paid vacation?  How about a 10% reduction in your current pay for a twenty year paid vacation?  Because that's exactly what raising your savings rate from 5% to 15% accomplishes, it cuts twenty or more years off of your time to financial independence, at a cost of 10% of your pay.

Brilliant "save more" example for young people.

I ran across another last night that I enjoyed.  Normally they compare two people (A and B), but this compared one person to himself.  Minor difference, but I thought doing it that way made the wording (the last sentence specifically, which I bolded) very powerful.

Imagine a 25 year old who invests $200 a month, and earns an 8% return on it.  By the time he turns 65, he’ll have $703,000 in his account.  However, if he waited to start until he was thirty, he’d have only $462,000.  By starting 5 years earlier, he makes $241,000 more off of only $12,000.

[mechanic baird]

Imagine a 25 year old who invests $200 a month, and earns an 8% return on it.  By the time he turns 65, he’ll have $703,000 in his account.  However, if he waited to start until he was thirty, he’d have only $462,000.  By starting 5 years earlier, he makes $241,000 more off of only $12,000.

There is a reason why they say compound interest is the 8th? wonder of the world!
Start early with a high savings rate is really the most powerful weapon to accumulate sizable assets. Too bad I pissed away my money in my early 20's  on toys I don't even see anymore.. What a waste!

[Mr Mark]

It comes back to MMM approach - save, lower lifestyle costs, asap.

And fully agree with the memory of all the money I pissed away in my younger days. Shocking.

[plantingourpennies]

Rebel,

Nice article. I'm fascinated by Jacob at ERE...he made the point that for extreme early retirement the rate of return (and compound interest) is basically irrelevant. If you are putting away 70% of your income, you'll be in a position to retire so quickly that compounding won't be an issue.

Of course, after Jacob retired, he spent a good amount of time learning how to invest to maintain his rate of return...

Best,
Mr. Pop

[arebelspy]

Rebel,

Nice article. I'm fascinated by Jacob at ERE...he made the point that for extreme early retirement the rate of return (and compound interest) is basically irrelevant. If you are putting away 70% of your income, you'll be in a position to retire so quickly that compounding won't be an issue.

Of course, after Jacob retired, he spent a good amount of time learning how to invest to maintain his rate of return...

Best,
Mr. Pop

Yes, over the (relatively) short period of time you are saving for FI (say, 10 years) the compounding rate is fairly negligible compared to the amount you are saving.

However over the (relatively) long period of time while you are FI (say.. 40+ years?) the interest rate you get on your 'stache is very relevant.