Save 10% Means What To You?

We hear “Save 10% of your income” as being a reasonable target.  Who knows what happens if you do? Hands up if you know.

I have composed an example based on Mincer’s earnings function, a common model for a question like this, a starting salary of $40,000 at age 24 and retirement at 60.  I have further supposed that inflation is always 3% and investment yield after taxes is 7%.  An ambitious yield but using a Tax Free Savings Account it is possible.

How much will be there at 60?

About $1.75 million.  Quite nice, but in perspective, perhaps we can learn more.

Compared to total career earnings, that is a little less than 29%.  Earn $6 million keep less than a third.  It is about five times final year income.

If you would like to accumulate as much as you have earned, the savings rate must be higher.  There will be tax effects too because the new level exceeds the TFSA limit.  With 1% going to taxes, the saving percentage must be 41%.

This is all very sterile.  Planning requires more:

  1. How much do you need at retirement?
  2. How long after retirement will you need money?
  3. How much can you give up now and still meet your life goals?
  4. What is a reasonable rate of return?
  5. How much management and expense is there to run the portfolio?
  6. How much margin of error is required?
  7. What if I save less now and more later?

Save 10% is a rule of thumb.  It is not in any way sacred and you should never believe a rule of thumb suits you specifically.  They seldom do.

In our case, suppose the person is a teacher and they have a large pension plan that will pay 70% of their best five years at retirement.  Indexed to inflation.  They must contribute about 6% of after tax income to get it.  Should they save 10% or just the part in excess of the pension contribution?

If on the other hand, the person is a tradesman with their own small business, they will have no pension and the 10% might be too low.

Rules of thumb are gross generalities and cannot be relied upon in specific cases.

Find your strategy (the what do I want, when, questions) and then find a tactic to get the outcome you need.

Life balances.  That is one of the fundamental meanings.  What you spend now will be unavailable at retirement.  What you accumulate for retirement is not available to spend now.  Saving too little is a bad thing, but no worse than saving too much.

Decide what you are trying to do and get help with the arithmetic if you need it.  If your advisor starts with a rule of thumb instead establishing your strategic needs, find another.


Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

This entry was posted in Personal Finance, Planning and tagged , , , , . Bookmark the permalink.

One Response to Save 10% Means What To You?

  1. Great post, Ron. What can we envision for ourselves? I say: “Who do you want to become; and how do you shift in your money management when you come from that person?” It important to believer that we have the ability to figure things our our get the resources and eventually to master important areas of wealth. It takes right resources, time and effort. One of my mentors, Brendon Burchard, coach, says it is important to revisit our orientation to money. If we have always heard — put 10 per cent away or whatever our messages have been — repeatedly — we may need to update, or really own what is our orientation to wealth. Brendon says ” If you handle your money in the right way, you can have more, give more, and enjoy your life more. I like to think of being patient (allowing time) and persistent in my actions. I am okay that it takes longer (or at least I’m usually dealing with my subconscious and conscious resistance) than I thought it was going to take to make progress in my wealth plan, but meanwhile I diligent about learning, teaching, and evolving. Putting away money in Index Funds or Tax Saving Funds or into our businesses — is important — but I also often tune into caring about others — and that helps me feel fulfilled and loving of myself and others and that is key to who we evolved to as older adults. I agree the “Life balances” is very important and often not given enough focus, until later in life. Not everyone will agree with what that life balance means — sometime they may just manage 3 of the (about) 10 Key of life, and that will be good. Sometimes they will see the wheel of life riding smoothly and where all the wheel spokes are fully functioning. My 25 year plan is a balanced and exciting plan, but it allows for ebbs and flows. I had to raise my ceiling in many areas of my financial potential. Nowadays there is little room for fear and apathy, as I keep pivoting more and more to love and vibrancy and being grounded with generosity.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s