Thursday, 16 August 2018 -- It's What You Keep- Saving's Rate

Savings rate accounts for 74% of success in retirement.

Retirement planning is a thorny subject. The goal itself is far off and the mechanims of getting there are pretty boring. 401k for example refers to the Internal Revenue Code, which is tax law. And “tax law” is essentially the most boring two-word phrase in English– at least “SAT math” has an atmosphere of stress about it.

The good news is, despite the boring and complicated appearence of the subject matter, the results are mostly generated by a single practice– saving money. Let’s look at 3 people to see how.

Joe Normal follows convetional wisdom. He saves about 15% of his income, invests in standard index funds, and retires at 65 after working for 43 years. Warren Buffet we all know, and because he’s extraordinarily talented he’s able to see huge returns in the stock market and retires after 23 years at 45. Sally Saves, on the other hand, is the odd ball. She saves two thirds of her income. She’s not talented like Warren, but manages to retire a full 12 years before him and 32 years before Joe at only 33.

I’ve made a widget below to help illustrate this concept. All you need is your current savings rate, the percentage of your income that you save for retirement, and growth rate, the growth rate of those savings. From those two it calculates how long you’ll need to work to retire and how you’ll progress along that goal.

For reference, 15% is considered a ‘good’ savings rate and stocks grow at about 6.7% annually over a 10 year period after accounting for inflation.

A Saga Begins

To try and help others navigate the waters of retirement, I’ve put together a series of blog posts on the subject. This is the first. They cover everything from asset allocation to different tax advantaged accounts. I’ve designed them to go from the general to specific, so feel free to stop reading at any time.

The thing to understand about retirement is that all the fancy advice anyone, including me, can give is going to be the difference in a couple of percentage in growth rate and a couple percent in savings rate. Getting from a 15% to a 66% saving’s rate (and saving 32 years of working!), though, is about changes in habit versus changes in knowledge.