This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Wednesday, March 12, 2008

How much is enough?

Posted by Matt

One of the most common questions I hear from people about saving is "How much is enough?" It is a question I've struggled with myself, although more so as I've gotten older. As is the case with many people, my salary was much lower when I was younger and I had to use almost all of it just to cover basic expenses. I wouldn't have believed that I would reach a point where I would have to ask myself "am I saving too much"?

Is there such a thing? Look to the case of Hetty Green for an extreme example. She was arguably the richest woman in the world when she died in 1916, yet owned only one dress, would not turn on the heat for her house or water and suffered with a hernia in her later years because she would not pay the $150 for surgery. What a saver! But she clearly went overboard.

To see the opposite end of the spectrum, let's examine...oh, I don't know, most of America. We have a BIG problem with people in this country living well beyond their income. So, we obviously need to find a middle ground.

The commonly-quoted benchmark for savings is 10% of income, but I often read that this is outdated and should be adjusted upward to accommodate for increasing lifespans. Insurance adviser Charles Farrell recommends 12% (including employer contributions) as the ideal level, but also provides some other handy benchmarks to let you know whether you are on track for retirement. After all, 12% is not going to cut it if you are 50 years old and have only just begun to save!

Check out Farrell's table to determine whether you are "on track". If you meet these recommendations, you should be able to safely retire when you are 65. Congratulations! The only question that remains is "Do you want to wait that long?" If you can increase your savings, it will just bring retirement that much closer.

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