On the Difference in Saving Rates

Ben Carlson at MarketWatch has produced interesting data on savings rates in

Opinion: How a slight edge in investing adds up to big money over time.

In his article he starts with a short story from Atul Gawande on how small changes have a big impact in the medical field where people look for big, miraculous changes. As an aside Dr. Gawande is one of my favorite authors and I highly recommend his

The Checklist Manifesto.

So, what is the impact of a small change in the saving rate? Carlson first looks at an example of a household income of $100,000 saving 10%/year and achieving an investment return of 8%. After 10 years this will produce a portfolio value of $132,822. Increasing the saving rate to 11% results in a portfolio of $146,104. He shows portfolio values for 1% incremental returns up to 15% where the portfolio value approaches $200,000.

It is important to note that the period is relatively short in terms of the saving horizon most retirement savers experience. In fact, most savers should be saving over a 30 year plus period!

Carlson also provides an interesting chart showing the impact of marginally increasing your saving rate. He starts, again, with 10% and then increases by 2% to 10.2%.

The big take away is that incremental changes have big impacts over longer periods of time (both in a person's health as well as their retirement program)  but it is difficult to appreciate them because they are barely noticed in the beginning.

Can't Save? Think Again.

Probably the number one excuse for not saving for retirement is that people need every single penny of their paycheck. Most of us have been there and done that. This isn't just at the lower end of the economic spectrum but admittedly is most prevalent there. At least that's the most frequent response I get from people. The "I can barely make ends meet as it is, how am I supposed to make contributions to a 401(k) or an IRA " is a frequent refrain.

But the fact of the matter is people are already saving. It is forced saving. Out of every paycheck 7.65% is deducted for Social Security and Medicare. Think about this. If this was a choice I would be willing to make a sizable bet that many people would opt out and take the 7.65% each paycheck. Clearly this would exacerbate the retirement crisis that is building in this country. Sadly, many people have to be coerced into doing what is good for them.

To hammer home the idea imagine the task of trying to find people, especially as you move down the economic spectrum who don't welcome with open arms their monthly Social Security payment.

As you think about this you realize that this retirement payment is made through the years as you pay off your student debt, take on a house mortgage, have medical problems, have car payments, consider college for the kids etc. In other words, through all the usual excuses for putting thinking about retirement on the back burner.

An important corollary to all of this is that saving is more important than market returns in building a retirement nest egg, especially in the beginning. But many people use the uncertainty of the capital markets as an excuse to shy away. Know this: saving dominates. In fact, as is widely stated savers who are building a nest egg should cheer a negative stock market which gives them an opportunity to buy in at more attractive prices.

Are You Saving Enough?

Here is a neat 13-minute video from Andrew Hallam, author of  Millionaire Teacher, taking you through the thinking required to find out if you are putting enough away for your retirement.  All of us one day will hone in on whether we have enough to retire comfortably. Some will let this process control them, and others will map it out. Just how you go about thinking it through is explained here.

The video is presented to international teachers but obviously applicable to everyone.  The international teachers have a bigger task because they don't receive Social Security, etc. 

Some of you will see that you have a big job in front of you.  It is better to see this early on rather than later.