Week 23: Save More, Tactic 6

What can you do this week?

• Determine your current savings rate.

• Run a retirement projection at lower assumed rates of market return.

• Consider if you’re able to now or in the future raise your savings rate if needed.

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Why Is A Personal Savings Rate So Key?

• You can’t control the market, tax laws, and other factors.

• You can control how far below your means you live.

  

How Do I Find Mine?

• Here’s one calculator to make this task simple.

• If Sarah needs to, she can save less in future months for an emergency expense or unexpected life event. This provides her some security knowing she has a built in margin or buffer in her spending.

• She’s living $1,000 per month or $12,000 annually below her means currently.

  

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A Savings Margin Of Safety

• The higher your savings rate, the higher your margin of safety.

• This simply means that if the market doesn’t deliver returns or other factors hamper your progress, you still have a good chance of achieving your goal.

• In the below example, assuming an 8% rate of return only needs a $20,500 annual savings amount to reach the goal in 20 years.

• If you’re conservative and want to assume a lower rate of return in case things don’t go well in the markets, it takes $29,000 per year instead at 5% rate of return to reach the same goal in 20 years.

  

What Amount Is A Healthy Savings Rate?

• There are a variety of Rules of Thumbs

• 20/30/50 is one example, 10/10/20/60 is another.

• Your situation may require much more or much less savings.

  

Rules of Thumb Can Help, Sorta

• Like making a health assessment based on one part of the human body you examine, a rule of thumb lacks a comprehensive view.

• If you need a framework for how much to save, a rule of thumb is better than nothing at all.

• If you have specifically unique factors in your financial planning journey, especially like stock compensation, an early retirement goal, a business you own, or are significantly behind the curve in progress, a rule of thumb is almost worthless.

  

Tilt The Odds In Your Favor

• Since there are so many unknowns in life, the best way to improve your odds of success, is not using a particular investing strategy, advisor/money manager, adding alternative investments, lowering the fees you pay, and other factors that can help. Overwhelmingly your savings rate can impact your odds of success more measurably.

• If you can save a healthy margin, consistently, and grow it over time, you will have more flexibility to enjoy life with less stress while more likely reaching your goals.

  

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