saving and spending (Photo credit: 401(K) 2013)
As savers, we Americans are not doing a good job. We’re improving (according to recent data), but still way behind what we should be saving. But it doesn’t have to be that way – you can take small steps to increase your savings right away, and it doesn’t have to hurt.
The Bureau of Economic Analysis recently reported that we are saving at a rate of around 4.6% of disposable personal income, an increase of 0.1% over the prior month. On a per-person basis, that works out to about $1,831 saved per month, or just short of $22,000 per year. Since we know that very, very few people are exactly average (by definition most people are going to be something above or below the average), what concerns me is that even those who are a bit above the average are still not saving enough. And woe to those who are saving at a rate far below the average.
The math works it out – say for example you’re a bit above average, saving 5% on a disposable income that is a bit above the average, say $60,000 per year (the simple average annual disposable income per person works out to just less than $40,000 per year).
Saving 5% over your working life of 40 years will result in a nest egg of $362,400 (inflation-corrected, earning a rate of 5% annually). Even at the most optimistic of withdrawal rate of 6% per year, this amounts to $21,744 – not exactly the 80% of income most folks hope to have for retirement income.
Given that most likely more than half of all Americans are below the average savings rate, you can see my cause for concern. If we don’t get started increasing our overall savings rates, it’s going to be a bleak existence in retirement (ask anyone who’s still working past age 65 because he or she has to how that feels).
I realize that saving more isn’t easy – after all, we have so many things we have to pay for, and the cost of all these things is increasing all the time. The problem is that we need to make some decisions about what’s critical to pay for: is it really more important to have a membership at the gym that you only go to once a month, or would you like to be able to afford to pay for your accustomed meals when you’re retired? Or do you really need the expanded satellite TV package? If you pay attention to what you’re paying out each month and weigh that against paying for the basics in retirement, it’s not as hard of a decision. If you’ve got other great ideas for reducing expenses and increasing savings, leave a comment below – I’d love to pass them along to everyone else.
Increasing savings just a bit – say 1% – would only result in decreasing the example above average person’s monthly net disposable income by $50. Surely you can find somewhere in your budget to set aside an extra fifty bucks! And the resulting 6% withdrawal could be increased to just over $26,000 – an increase of 18%.
Of course, that’s still a small portion of the current take-home of this above average person, but it’s an improvement! So take that small step – start saving an extra 1% more right now, there’s no time like the present!
Note: the figures I use above for the example are extremely over-simplified, using a simple average per-person income rate for all Americans (estimated at 317 million), and the reported figures from BEA (the Bureau of Economic Analysis) to build my example.
In case you’re wondering, in order to replace 80% of your income at the more sustainable 4% withdrawal rate, you’d need to set aside an average of approximately 17.5% of your disposable income over your 40-year working career. This means every year, not just the later years of your career. So if you’re late getting started, you need to save, save, save, with both hands, in order to catch up and have enough set aside to provide yourself with a retirement income that will keep you going.
Of course, if you have a pension, that will factor into your available funds in retirement, as will Social Security. But neither of these sources should be considered guaranteed, nor should they be your only source of income. In today’s world, you have to fend for yourself!
Best wishes to you – if you have additional ideas on how to find money to put into savings, leave a comment below. We’d love to hear your ideas.
