What am I saving for anyways?

Coin stack and saving money KJ: I once heard a quote that said: if you save 50% of your income, you’ll always be rich. This particular quote stands out in my mind, not that it’s necessarily realistic for 99% of us out there (as it can obviously be much easier to save 50% of your income if you’re making $500,000+ per year, but there’s a lot to say about living well within your means and saving appropriately.

Given the decline of pension plans over time and the potential concerns with the Social Security system and what it may look like 30-40 years from now, people are having to rely on more and more of their own savings to come up with some type the retirement income.

Angela found an article the other day that was a research piece that Fidelity had put together(1). The whole article was talking about how much money and what targets you should have by 35, 45, 55, and 67, to see if you’re on track for a good retirement. The assumptions in the study are broad, but the overall content is a really good message for what types of targets a person could strive for. Given the study assumes continuous employment from young age 25 until 67, and differences in someone’s actual realized savings behaviors, inflation, return expectations, and other factors, it may be worth considering increasing several of these targets. I’m under the opinion that the numbers are actually a little bit on the low side for what you need to have set aside at the different age marks.

In my opinion, gone are the days of only having to save 10% of your income. Nowadays, with most people needing to provide more and more of their own retirement income as well as wanting to send their kids to college (where the average college cost inflation has gone up over 7% for the last 20 years and could potentially continue at a similar pace over the next 20 years), saving has become an ever increasing need.

As in any good financial plan, each person is unique in terms of what amount they would need to set aside in order to be financially secure (as defined by you personally) to accomplish all their goals. It may not be uncommon to save 20% or even 30% of your income if you had particular designs about sending your kids to private college (which in some instances can cost upwards of $60,000 per year) and funding of potential graduate school (if you’re willing to fund that for your children or not). It also depends on what retirement means to you: retiring at age 55, 65, or 70, and if it means stopping work completely or just scaling back to part-time for a while. Obviously, if you’re wanting to retire earlier, then you have to save more to achieve that goal. If you’re lucky enough to be in the camp of people who genuinely enjoy the work they do, you may actually discover a year or two out of retirement a sense of “what now”? This often leads people to go back to part-time work since many types of work can be better for someone’s long-term mental and physical well-being. What better a way to reduce your retirement needs than to generate current income!?

Not to be discouraged by the article, but the main point about the research is the earlier you save, the better off you’ll be in the future. So many studies, time and time again, discuss the importance of starting to save early.

AJ: The most interesting thing to me about the article was that no matter who you are and no matter what stage you’re at in life, you’re probably always going to feel behind. That’s part of what it means to continually set goals as an individual and a couple, you’re never quite there. I don’t plan to generate income into my 70s so it’s incredibly important to me to pay attention to the details of our spending on a day-to-day basis.

Everyone has considered what it would mean to not buy that $4 coffee each morning or pack a lunch one additional day each week, but how much closer do you get to your two week vacation if you pay closer attention for a month? It almost becomes a game. Once you increase your savings, saving less seems ridiculous and you suddenly find yourself moving closer and closer to saving 50% of your income.

AJ & KJ: And what does it mean if you haven’t started saving? Start saving now!

(1) http://moneyland.time.com/2012/09/21/what-you-should-save-by-35-45-and-55-to-be-on-target/?hpt=hp_t3

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