The pursuit of the perfect savings rate

The pursuit of the perfect savings rate

How do you ever become content with with the amount you are saving for retirement?

Sorry if this is just a ramble and I know this isn’t the worst problem in the world to have, but I’ve found saving to be too damn addictive. To me it’s the same as salary, you’ll never be content. You always think to yourself, you know if I was making $10,000 more a year I’d be so content and wouldn’t ever need to make more money than that, I would have all I would ever need. Then all of a sudden you get that $10,000 boost in salary, your lifestyle/expectations adjust and all of a sudden you just need a little bit more to make you content.

Well I seem to have the same issue when it comes to saving. Originally when I was a kid I thought if I could just save $10,000 a year once I started working that I would be perfectly content with my retirement nest egg down the road. Well then I started working and really started saving I actually was saving a little over $16k a year, then $18k, and now $20k. Each and every time I come across an extra sum of money I didn’t have before I can’t help but instantly allocate nearly 100% of it to retirement accounts. Get a new job with a big salary – all goes to retirement. Get a raise – goes to retirement. Get a tax refund – goes to retirement. I know this is a great thing to do and 30 years from now I will understand how smart I was to do this, but when is it ever going to be enough.I’m saving $20,000 a year (all in Roth post tax accounts). Certainly that should make me content? Well I’m looking at switching jobs and its likely that I will end up making about $15-$20k more a year and you guessed it I’m thinking that if I do get a new job, I should probably put a chunk of that into boosting my retirement accounts. Only thing I think that might stop my madness is that even with the IRA increases next year to $5k a piece, the most I can put into my retirement accounts is about $25,000 a year (401k max of $15, IRA max of $5k for me and my wife). But then I should really save/invest some extra money into taxable accounts or my kids college education and well you see if it were up to me I’d save everything.
Certainly $25k a year in savings accounts should be enough, right? Well I am afraid where I am headed. My wife and I live frugally and I think both of us enjoy our lifestyle, it’s not a hard thing for us to save, we actually like it. At the same time if I have been so blessed with excess cash, I should probably enjoy some more of it now correct?

I know I can just decide what lifestyle I want to live in retirement figure out what that is and work my way backwards into a savings rate, but when you look at charts like this, it seems like a travesty to spend money on something as trivial as a TV/Xbox/Car when that money could grow into something so much more down the road, and really I can live without a Tv/Xbox/car just fine. Example lets say I got my eye on a $1000 plasma TV (yeah I know cheapo, but it’s a big step for me). I don’t just see it as a $1000 tv, I instantly start doing the math of what that $1000 could be compounded in the stock market 30 years down the road, and well there is no way I’m paying $20,000 for a damn tv 😉

Anyway like I said I know it’s not the worst problem in the world, and I don’t exactly pinch every single penny, but how do I rationalize not saving every single extra dollar that I really don’t need?

  • Charts like that are great, but it doesn’t take into account inflation and taxes (the money you are going to be saving now looks like it won’t be tax defered). If you make 9% (say a split between 8% and 10% that is somewhat typical in the stock market), 3.5-4% of that goes away to inflation, so you are really just compounding at a 5% rate. And with taxes taking away a quarter of that (just an estimate), you’d really be at 3.75% or so. Let’s round it up to 4% and in 30 years that $1,000 TV is really about $3250 TV (in the same dollars).

    Hey, you just saved $16,000+ on that TV. What a bargain! How’s that for rationalizing?

  • btc

    Oh how I wish I had your problem. I just started saving 25% of my net income a few months ago and contribute 5% to my 401(k) with my company matching dollar for dollar. I’m doing much better than I was a year ago, but I still feel I have a long way to go. There just never seems to be enough money to go around. I’m saving for a house down payment, trying to pay off my student loans, and have family obligatons. With that in mind, it makes livng a frugal lifestyle much easier. Still I wonder when or how much it will take for me to feel comfortable splurging every once in a while. On an entry-level salary, probably no time soon.

  • My Financial Journey

    Lazy – Actually all of my savings right now are tax deferred…they are all going into Roth IRAs and Roth 401k. Inflation is a very valid point though.

  • Tax deferred doesn’t really mean tax-free though. In the 401k you’ll have to pay taxes based on your income at that time which may be 25%-28% (just a stab). That’s what makes a 5% interest rate more like a 3.75% one.

  • My Financial Journey

    Sorry I’m not sure why I said tax-deferred. They are tax-free. They are both Roth products so I will not owe anymore taxes on them ever.

  • EMF

    Congratulations for your focus on savings. If you and your family are happy without all the “things” and your basic needs are met, then you’re not oversaving. On the other hand, you need to be balanced later on — I don’t want to end up like some people you read about occasionally who’ve lived very frugally into their 80’s and leave an estate worth several million dollars.

    One thing your blog doesn’t mention is the other aspects of your financial situation. I’d guess that you don’t have a large credit card debt given your mindset. But that’s wrong you should focus on getting rid of any high interest rate debt.

    You also don’t mention an emergency fund. While you could tap the principal of your Roth IRAs in a pinch, that could take some time. I’d have at least one month’s expenses in liquid assets readily available now with the goal of building that up to the 3-6 month range.

  • My Financial Journey

    EMF – I have no credit card debt, never had and never will. I do however have a HELOC at 8.75% interest (about $5500) that I am widdling away at.

    I also don’t have an emergency fund, but I am relying on the HELOC for that. I have a little over $10k left in my line of credit so I figure that could get me through a couple rough months.

    Thanks for your comments!!

  • Pingback: Carnival of Personal Finance #79()

Comments are closed.