It wasn’t long ago that I blasted the traditional 10% savings plan advice given by financial gurus that recommends you work until traditional retirement age (65+), save 10% along the way, and then sip pina coladas and play golf for the rest of your thrilling days.
For starters, who wants to wait until age 65?
Many folks do, surprisingly. It’s the most common objection that I hear to the concept of financial independence and early retirement, and it usually goes something like this,
“Early retirement is not for me. I want to work until the day I die. I can’t imagine sitting around and doing nothing for all those years.”
To each his/her own (and for the record, “sitting around” is not part of my early retirement agenda).
My opinion? There’s more to life than working on other’s agendas. And even for ambitious life-long workers, there are just too many flaws and things that can go wrong with the 10% plan:
- health problems
- decline in income
- an increase in expenses
- poor economy
- poor market returns
- the need to take care of a family member
- bad economy
- etc. x 1,000
In other words, there is no room for error. No room for life to unfold in unpredictable ways. When you retire might not actually be your choice.
However, you shouldn’t just take my word for it. These realities were recently validated in a survey from Voya Financial of retired U.S. workers, where 60% of the 1,002 surveyed recent retirees retired sooner than planned – and not by choice. 29% of survey respondents said the timing of their retirement was “somewhat unexpected”, while another 31% said the timing was “very unexpected”. 33% of those respondents said they left their jobs involuntarily.
What were the reasons given?
- 16% had to retire because of health challenges
- 11% lost their jobs
- 3% had to stop working because they needed to care for a spouse or dependent,
- 3% retired involuntarily because of their age
Sometimes life happens, despite our best intentions for it not to.
And none of involuntary retirement scenarios even begin to cover all of the semi-voluntary retirements that happen due to:
- subtle forms of discrimination or devaluing of workers because of their age
- inability to get hired into new jobs due to age until giving up
- buyouts accepted with the threat of layoff if not “voluntarily” taken
- no further career opportunities or potential to stick around for
And none of those involuntary or semi-voluntarily retirement scenarios account for the very real possibility that at age 55 or 60 your opinion on work and life might actually shift a bit from what it was at age 25 or 30. That ambitious “work til death” mantra that jived so well with your youth could change as you reach your later years.
So, how much should you save? As much as you freaking can! And then find ways to save even more. Why limit yourself? And with the time value of compound investing returns, the sooner you save, the better. Build up a cushion so that when life smacks you in the face, you have the freedom to counter with a jab of your own – “You want to pay me to leave? Where do I sign?”
I never understood the idea that I could only save 10% of my income and have a happy retirement.
No matter how I play around with my income amounts, nearly every single retirement calculator online estimates that it should be closer to 20% or even 25%… so, needless to say, I’ve upped my savings.
We should definitely save as much as we can! There is no proper amount.
I don’t buy into the 10% camp either. The simple fact is that everyone early in their career should be saving as much as they can for retirement. Unfortunately, there is so many other items that drag down the ability to do so (e.g. kids, house, student debt, etc.). I started at 14% and now contribute 27% of my income to retirement. Wife is about the same percentage but that will likely go down once we start a family. Although, I’ve been in the early retirement camp my entire working career (31 now) so I’m hoping I can accumulate enough of a retirement nest egg at some point between 55-60.
I don’t like the idea of 10% savings rate and never have done. I like to save as close as 60 to 70% of my income which involves finding more innovative ways to generate passive income while reducing or hacking costs in my life. Financial independence and early retirement does not mean sitting around at home for me, I could continue to work if I wanted to but just knowing I can handle the unexpected gives me peace of mind.
An even simpler way to explain things, and the reasoning I tell myself:
With interest rates below historical averages, why would a historically recommended savings rate work? Common sense tells us we need to save more than 10% because I can’t realistically earn 8% annual interest through a mix of savings bonds, CDs, and stocks. Additionally, there’s no pension to fall back on so saving even more than above is necessary. I currently save 20% pre-tax and then another 20% of after tax funds, and re-evaluate these levels annually to make sure my liquidity can cover emergencies plus known upcoming expenses (previously the house, upcoming wedding and honeymoon, future will be replacing the car).
A low savings rate is a double edged sword. Not only is there less money for retirement, but the person has established a more expensive life style.
It sounds to me like you’re pointing out the faulty logic of the 10% rule, and I agree with you on that. However, I have a different perspective regarding retirement.
I understand that “compelled retirement” may happen to me. However, I think I’d like to just find a different type of job if that would happen – probably one I invent myself. My goal is to work until I can’t…not because I’m a workaholic, but because I believe working — without overdoing it — is healthy for my spirit, body, and mind.
Meanwhile, I *am* saving all I can (definitely more than 10%), because as you said, life is unpredictable. However, I hope to continue working NOT solely for the money, but for the adventure of finding new ways to contribute my experience and talents. My grandfather continued helping on the farm until he couldn’t (2 weeks before he died), because he loved it. This is my example.
Michael Hyatt, who is probably in his 50s, has written several very compelling blog articles about this.
One of my favorite lines is in this post: http://www.jamesaltucher.com/2014/09/the-secrets-of-personal-finance/
“You get more money in the bank by making more money.” I.e. you won’t get rich by saving $0.20 on your morning coffee.
Barring that, make smart financial decisions with the big expenses in your life (or try your best not to have those expenses at all). Make informed (data-driven) decisions with your investments.
Great point on the unpredictability of life. During the time of pensions, it was absolutely possible to just save 10% and retire at 65. But we’re living longer so by definition we need to save more. Save as much as you can, whenever you can.
At my first job after college, we had a financial advisor come in and explain 401Ks to the new hires. He said something along the lines of “max out your 401K from day one – you won’t notice the difference now at age 23, but you’re 90-year-old self will thank you for putting food on the table”.
Bottom line – it feels great to have a fat stash of cash at your disposal. One less stressor to worry about. And who wants to work their butts of with nothing but material crap to show for it. I would feel like a total failure if I was 50-years old with only $50K in the bank because I spent the rest on cars, clothes, homes, etc. I want my money to work just as hard for me as I did for it.
10%, 20%, 30%, 40%…..
The biggest thing about retirement savings is to start early and don’t procrastinate about starting. If it takes 40 years (you pick a number) and you start when you’re 22, that’s a big jump over those starting at age 30.
Of course no one person is the same in this. My own father retired comfortable at 56 and is busier than even now. I’m aiming for something along the same lines though I have a feeling that the dependency of college age children at that time may hamper the effort.
Rather than thinking purely about saving I try to incorporate a strategy of all round economic savvies. For instance, I try to fix repair and rebuild everything I can, from the house, to the cars, to electrical appliances. Some call it thrifty, I call it common sense, especially when you examine the post tax $’s spent paying someone else to do it and the recurrent nature of needing to do that every time.
I also amuse myself at the recommended retirement income levels being around 70-80% of current income rates. I think that employing yourself wherever you can offsets that % later, so time well invested now. of course, I do get it in the neck from time to time. Usually with a “if you took the time you spent fixing it and dedicated it to generating income, you could pay someone to do that”. You can, I just don’t think that the longer term economics pan out.
Perhaps one of the bigger questions becomes the ratio of debt now to savings later. Which to contribute to first? Debt, well, I can control that, investments, only marginally so. So in my opinion I will devote potential retirement savings to paying down debt early, knowing that while I lose the effect of compounding, I get a measure of living debt free longer and thus am able to play catch up + having a the option of a corporation free life.
That being said, the contribution to retirement remains 13% despite saving at a rate of 25%. The 12% difference going into accelerating mortgage and student loan payments.
This is a risk based decision.
I’m currently saving 49% of my salary. It’s made a big difference as I will cross the 7-digit mark this year at the age of 38. Most people I explain this to can’t believe it.
This is a really great point. Many of us are actively planning to retire earlier than the standard age of 65, but many more will be forced to stop working. There is absolutely no reason not to give yourself a financial cushion even if you don’t plan on needing it. Too many people plan only for the best case scenario, but most people aren’t going to get it that easy. Always have a backup plan.
More is better. Especially when you retire, it is always wise to know how to increase you savings so that you can retire happily and debt free.
Some very good points in this post here. We can plan all we want, but none of us truly know what’s ahead – so planning on something possibly coming up is a necessity, especially when it comes to finances.
My friend’s parents had to retire suddenly because of some stupid reasons and my friend had to start working when she was still in college. The timing was very unexpected indeed. The bottom line is of course, saving as much as you can. Thanks for the nice post!
Involuntary retirement is more prevalent than ever, as corporations aggressively toss older workers. Happened to me at 57. Age/salary discrimination really starts biting at 55+. I saw it happen to older workers when I was younger, so knew eventually my time would come. Thankfully, worked toward FI from day one, so have that option. But still rankles to be pushed out like the trash. As for all those folks planning to solve their retirement problem by never retiring, well good luck with that.
Can also attest the desire to work wanes (especially in a corporate environment), even for work you nominally enjoy. 35 years in the rat race is plenty.