Setting Savings Goals

For those who hope to retire at age 65 and start saving at age 35, a sure-fire retirement savings rate is 15% -19% per year. For those who wish to retire earlier, the percentage goes up. Some people can’t hit that target every year, so what do you do? Gain ground when you can by saving; when payments for cars, student loans, private tuition, or college falls away or bonuses come in. People who retire in their early 60s have typically lived well below their means during their working and saving years. Here is something else to consider regarding what you put aside for retirement.  An investment portfolio has two engines of growth: contributions and the rate of return. But which has the greater impact? The answer depends on the age. For a young person (age 25-35) the portfolio rate of return has more impact. But, at age 45, the pendulum begins to shift. As a person ages, the focus should be more on saving rather than building an overly aggressive portfolio. The same thought applies to those close to retirement. If the investor is reduced to 20 years of saving from 40 years, the beneficial impact of compounding is drastically reduced. For investors who begin in their 50s, which is very late in the game, saving as much as they can offers a greater benefit than chasing after higher returns. Investors who rely on high performance to make up for under-saving usually falls into the trap of poor performance from mismanagement. Here is a message to those under 35: a contribution rate of 5% or less is simply inadequate. For investors ages 35- 45, when living expenses tend to consume the most from our paychecks, push for a savings rate of 10% (not including any employer match) and for those older 18%-22% (including a match) should be the goal. According to an American Century survey of launching retirees, 82% shared having “significant regrets for not saving more and saving earlier”, 76% “significantly underestimated how much they should have saved” and 57% said that “not saving for retirement was one of the biggest mistakes in my life”. A target goal for capital assets saved for retirement should be to have accumulated enough money by the age of 60-65 to maintain the minimum lifestyle and quality of life you want to have for the next 35 years. A person’s financial success depends far less on what they make and much more on what they  do with what they make. Our spending habits during our saving years is the greatest determinant of financial success during the last quarter of one’s life.

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