Why Save?
In my case I wanted to save enough money so that I wouldn't need money, if I chose not to work. To note, I don't expect to stop being productive or contributing to my community. My goal is to not have to work for money. For me the worse case is depending entirely on my savings for living expenses. So I needed to save enough to achieve this goal. And I wanted to do it in my forties or earlier.
How Much to Save?
Up until last year, I had always set an absolute number as a goal. However, after reading Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement by Charles J. Farrell, J.D., LL.M., I decided to use ratios versus my salary instead of an absolute number. Mr. Farrell makes a good case for saving 12% of one's income and targeting to save 12 times salary by 65. The table below from the article shows the target savings by age.
Personally, since I plan to retire before 65, I am saving 20% of income and targeting to save 20 times salary by the time I retire. For more details, see How Much To Save - The NUMBER.
I like Mr. Farrell's goal setting method because it is fairly simple. There are more complex ways to determine one's savings goal. What's Your Magic Number For Retirement? was recently published by Bankrate.com. It requires one to estimate spending lifestyle, inflation rate and withdraw rates. While it appears more precise, the results are only as good as the estimates, which may not be an accurate prediction of the future.
So start by setting a savings goal - either by using Mr. Farrell's rules of thumb or by modeling one's future needs and calculating the savings needed. In either case, I recommend that one should consult a professional to confirm that one's goal is relatively close to what's needed.
For more on Reaping the Rewards , check back every Friday for a new segment.
This is not financial advice. Please consult a professional advisor.
Copyright © 2007 Achievement Catalyst, LLC
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