Savings Rates Discussion
May 29, 2008 – 6:02 amI think most people are competitive, and to some degree we want to know if we’re doing better or worse than our neighbors. I used to subscribe to Money magazine, and my favorite feature article each year was the one that listed various age ranges and key metrics from similar households. Am I saving as much as the rest of the people in my age group? Is my debt level less than someone 10 years older than me? I love to make comparisons to know where I stand.
If you’re reading a personal finance blog you most likely recognize that apperences can be decieveing when it comes to answering this question. Big houses and nice cars don’t necessarily indicate a solid financial standing. Savings rates, on the other hand, are one way to judge who’s managing their income AND expenses wisely.
I recently read the post from FMF titled “Do you save more than 10% of your salary“, and several of the comments stirred up a few thoughts I would like to discuss today.
Observation #1: a lot of people save a lot more than me!
FMF has a lot of regular readers, and I’m sure only a fraction of them decided to leave a comment. Especially after seeing some of the big savings rates people were posting. I know I felt a bit intimidated!
Observation #2: my retirement match is lousy.
My employer match on my 401k is pitiful! I’ve mentioned this before, but I only get a 2% match on my 401k. It jumps to a whopping 3% when I’ve been with the company 5 years. I do have a traditional pension as well, so I suppose that’s something to be happy about. I’d still like a better match though, and a Roth 401k if they’re taking requests. 
Observation #3: retirement can’t be that far away for some of these folks.
Some of the readers are saving 51% or more of their net income! This has several implications, the first of which is that those readers could easily live on less than half of their current salary. Assuming that most of their income is earned, cutting your income in half would reduce your tax rate, and therefore you would be able to keep more of your income due to a lower tax rate.
In addition, a 51% savings rate on net income means that you essentially pay for one year of retirement for every year you work. Or you could start working part time instead of full-time (1/2 the hours), and still meet your current income needs. Wouldn’t that be nice!
These readers could give away half their income, and essentially pay no taxes.
If these people are debt free and have a net worth of zero, it will probably take less than twelve years for them to be able to retire. Let’s say you earn 60,000 after tax and spend $30,000 and save $30,000. At a 10% rate of return you would have more that $641,000 dollars saved, which is well over the 20 times your yearly expense needs (not adjusted for inflation). And I would think most people would get at least a few raises over a twelve year period, which would hopefully offset inflation.
Sounds like a lot of these folks really have a solid savings game plan. Some additional information would really be helpful as well. I’d wonder if I could convince FMF to poll the readers anonymously to know:
- income
- single or dual income
- # of kids
- age
- region of country (NE, SE, NW, SW, North, South, Midwest)
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2 Responses to “Savings Rates Discussion”
You make some excellent points. That’s why I think it’s counterproductive sometimes to boil PF principles down to simple statistics and phrases. One person’s 10% is another’s 1%.
By KMC on May 29, 2008