By Michael McKeown, CFA, CPA - Chief Investment Officer
This is not a piece to detail how eliminating the daily Starbucks trip or cutting down on dinner out will set you on the path to financial success. In fact, this is much simpler.
Generally, when talking about savings, the answer is more.
One place to start when looking at the question of savings is, “What is the savings rate to target?” The savings rate is calculated by dividing total amount saved by total income. This will mainly determine the ability to reach a long-term objective.
Let’s focus on the biggest liability most people face, retirement.
The Center for Retirement Research at Boston College published “How Much Should People Save.” It examines a scenario for a person retiring at age 65 and replacing 70% of earned income. If a person starts saving at age 25, a savings rate of 10% is necessary. If someone starts saving at age 35, the saving rate increases to 15%.
If one has not started savings, here is a table for the necessary savings rate to target based upon income and age.
For those that have started saving, here is a similar table to use a benchmark. Using the income and age, find the number to multiply by the total amount saved.
For the overachievers, there has been a movement that has gotten national attention. The “FIRE” community, or “Financial Independent, Retire Early” targets aggressive savings rates. While this may not align with many people’s savings ability or values, it is interesting to see how much less time is needed to achieve the goal with an aggressive savings rate. For example, a 50% savings rate and average portfolio growth would allow retirement in 17 years. An 75% savings rate would put this at 7 years.
The challenge is that it takes time. Regardless of the savings rate, we are talking in years and decades. People want the short cut of crypto currencies or that one stock that is going to make them rich. It takes patience and diligence.
Even Warren Buffett witnessed a friend named Rick Gurien lose nearly everything by taking on margin loans and nearly going bankrupt. He said, “Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry.”
We may not be talking in billions, but we are talking significant value. How to save at the right rate gives individuals the ability to spend our most valuable asset, time, the way we choose.
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