What The Research Says
- Savings at a rate of 12% gives you about a 90% probability of being able to retire in 40 years with about 40% of your income. Saving at a 18% rate gives a very similar probability of being able to retire with about 60% of your income.
- To determine your ideal savings rate multiple percentage of your income you want to retire with by 30% and give yourself a 40 year time horizon.
- There is a complex relationship between savings, wealth and happiness. Happiness seems to drive savings behavior and additional wealth (up to a level) seems to drive additional happiness (especially if that wealth is spent altruistically or own experience-based goods). Ultimately higher savings rates and their associated wealth will have a positive benefit on happiness.
- While it is hard to draw direct causal relationships, there is evidence that having higher income at retirement leads to better health outcomes and ultimately longer life.
References
- What’s the Right Savings Rate (alt) (alt 2) (Russell Investing)
- Reversing the Question. Does Happiness Affect Individual Economic Behavior? (University of Houston)
- Projected Retirement Wealth and Savings Adequacy in the Health and Retirement Study (National Bureau of Economic Research)
- Were They Prepared for Retirement? Financial Status at Advanced Ages in the HRS and AHEAD Cohorts (National Bureau of Economic Research)
- Study: Many Americans die with ‘virtually no financial assets’ (MIT)
The Choices
Limited (<12% of Income) – What with the kids ballet lessons, private school tuition, and your out of control personal and household expenses you find it difficult to set aside anything on a consistent basis.
Score: +1 Risk
Retirement Focused (Between 12% and 18% of Income) – A penny saved is a penny earned, as long as you save those pennies for 40 years at a market rate of return with limited tax exposure.
Score: -1 Risk, +1 Health
Rapid (>18% of Income) – You might be living on lentils, and sleeping inside a closet that your buddy loans out to you for $15 a month, but you will retire at 40 damn it.
Score: -1 Risk, +1 Health, +1 Wealth, +1 Happiness