I went down this rabbit hole before. How much do I need to save now to retire some day? Which requires me to ask how much do I need in the future. This is probably my second blog post on this topic (retirement and minimal spending). What I suggested before was am extreme look but it is neither wise nor practical.
Whatever, you read here, take it with a grain of salt because I’m not a financial advisor. They are just some thoughts I have.
I spent some time (like over two weeks) calculating. My conclusions from the excercise are as follow:
1. it takes a lot to save now for a small future amount. Like for me, saving a 20% income now will get me a 70% income at retirement. Plus ton of assumptions that might not be true 20-25 years from now. In a sense that is a good deal right, you have 3.5x the output? But it doesn’t feel that way. It feels you put in a lot now and get very little back. No one wants a 30% pay reduction. And saving 20% feels like a big cost.
2. it is obvious the more being saved the better
3. what is not obvious is we assume income just comes in, with very little work. It requires some financial knowledge like which stocks or mutual funds to invest in. That’s work.
4. kind of follow from 3, retirement is not the end of work but is a new beginning or transition to a new form of work, generally this is investment. You got to learn how investment works to get the most from it
5. I think a false conception I had before was saving for retirement is like putting money in a piggy bank and at the time of retirement, you spend from it. Money will run dry one day with this kind of thinking. There is no big enough piggy bank even of one saves 100% of present salary. The reason is we likely live longer than our working life could save. Also there is something calls inflation. Though most understand that they expect their money to make more money (e.g. to invest). One has to have to knowledge and actively manage it, otherwise, money will disappear.
My point is it is okay not having a big enough balance, if one knows how to generate income from somewhere
6. financial experts think we don’t save enough, which is true if only looking at just the saving side. The reason is people have various other source of assets other than a retirement saving account. Mainly it is their house. 49% millenials own a house or condo. They can down size when they retire. Also real estate is an investment because the price of property appreciates (and at recent times, greatly).
7. Not sure how many do this, I think a lot do. When people retire they move to a state that has a lower cost of living. People move to Florida not just because of the warmer climate but because the state has no income tax. Wait, retire people has no earned income! or so we think. A lot of retirement incomes are still taxable!
8. The more extreme type, like me, would consider moving to a different country. In my travel, I saw other countries generally have a lower cost of living. I have only been in Chile and Peru, (and Australia and Canada as well, but those places are not “cheap” to retire to). I felt I could live in the cheap places. There are popular destinations, like Taiwan, Thailand, and other asian countries or eastern european countries.
9. Use the time now to prepare for retirement, means more than purely setting aside the money. It means learning a new skill and language to adapt to the life after retirement. Why skills? Mainly for me, financial/investment skills are what I need to be good at, for others it might be starting a second career like a business or be an artist or musician or a writer (or a blogger or streamer). I read writers don’t retire because they love what they do.
10. I delved into life expectancy too and its calculation. I don’t think it matters but many retirement planning guides think it is important. My advice is whatever the life expectancy is, add a few more years.
Long form for those who care to read.
The deal with retirement is you never know exactly how much to save today. Generally, the more the better. The flip side of the question is how little is too little? I ran the numbers, to save 3% or less per year of my present salary is too little for me, though some (maybe many) of my coworkers are saving just that because that is the maximum our company used to match to our contribution (but they have stopped matching the last two years). 9% is the national average for my age of those who do have a retirement plan. I watched a video from the MoneyGuy, and they showed saving about 20-25% of ones income is preferred (with their math, not saying they are wrong, but whether it is realistic for everyone). The FIRE people (financial independence retiring early / young) aim to save 50% or more to retire as soon as possible. There are people who could do it. There is a range because everyone accept or see the risk differently.
For a while, I was aiming for that the FIRE goal, though I never got up to the 50%. What is FIRE? There is a movement to save a whole lot so one can retire young. It stands for Financial Independence Retiring Early. This year got me into investing apart from my workplace retirement plan (and I opened a Roth IRA and a Robinhood account). I came away that investing and retirement is really the same.
My personal advice (imho) is fund it up to the tax benefit limits the government sets (for 401K and IRA) and you are likely good. The reason is that will give the greatest tax benefits. However, not many normal people will or could do it. I myself have not “maxing” it either.
Most retirement planning videos don’t look at the cost of saving. Imagine if you are making $50,000, it means saving $25,500 away (based on my age and tax limits), and that is more than 50% going toward retirement. Even if one is making $100,000, it is still a lot to save 25% for retirement.
The biggest challenge for people and myself too is people don’t have that humongous amount of “left over” money for retirement. Obviously it is a tradeoff – how much money is needed today vs how much is needed in the future. So the question is how to balance that?
For that I do not have answer what is the right amount. I think as a society, in the macro economic sense, people are making the most logical choice, and are at a perfect equilibrium of how much we should be saving.
I used to base my saving off the social security taxes as a ballpark estimate of how much to save. My rationale, though flaw, is the government set 12.4% as a society of how much set aside for caring for the elderly, so I should copy and set aside that amount and I will be “minimally” set. The problem is social security was never a retirement plan, though we all think it is. By copying its number, I am building on that false assumption and it might not work. There is no underlining reason why 12.4% is the ideal amount. I was really into finding that “minimal” number to save.
A way to balance the tradeoff is a need to understand the risks and benefits. How much I put away now will give me such and such benefit (and what implicit costs). As for me, like I only am getting 70% of my income in the future, that seems like a “lost” or disinsentive to save and it takes a lot now to get there. The risk is, at least one of them, will I live to enjoy it. I haven’t seen many videos or blogs talking about the risks or tradeoffs of oversaving/undersaving and how to measure that risk.
A take away for me is we think of retirement as to work now, play later, especially for those who follow the FIRE movement! In a sense, it is a motivation to save. But if over doing it, you end up giving up or limitting what you can do while you are young. Some think I don’t spend it now, I will spend it later but there are certain things we can only do them now (say I put off that ice cream now and eat two in the future, but what if there is no ice cream). For me, it is running.
Also, some (of my peers) can expect having an inheritance that help them in their retirement, which most likely will be houses/land, everyone biggest asset. It is a taboo to talk about our parents like we expect them to die so we can have their assets. It is not a definite retirement strategy but that is something that could help. Sure it has risk that the inheritance is split among sibblings and their parents might live for a long time well into your own retirement.
In conclusion, there is no magic number to how much to save. We looked at it from a tax perspective. I threw out some numbers. There are guides available online. In the end, it is really a gut feeling. Many I know, don’t save (or have very little saving for retirement, at 3% or less per year) and this reflects our society, and I think they should be fine as our parents were (at least for now). As for my running friends – I think they are a poor lot, races drain their finances, yet they might be living the best of life and making the best choice. So don’t judge.