Posted by Tim Stobbs on May 11, 2009
I was reading a post over at Million Dollar Journey that discussed How Much Do You Need to Save for Early Retirement. What got me about the post beyond the helpful summary table on % of salary saved and years to early retirement (ER) was implied information on diminishing returns on your savings.
Here is a modification to FT’s table that shows what I’m getting at.
Increase Savings From Reduction in Years to ER
10 to 15% 10
15 to 20% 8
20 to 25% 5
25 to 30% 5
30 to 35% 4
35% to 40% 3
40 to 45% 3
45 to 40% 1.5
So obviously saving a bit more % of your income can greatly reduce the years until you retire at the low end. 5% more of your income can shave off 10 years. While the other extreme that same 5% increase is just giving you 1.5 years earlier. So what’s the point of saving more if it does not get you much more time? It’s the classic case of diminishing returns.
At what point does that extra time become useless compared to what else you could be doing with that money. In my mind that last few steps start to become a bit worthless. Really another 1.5 years is not worth that 5% of my income. I could be enjoying my life a lot more by spending that extra 5%.
I think for me when balancing happiness versus retiring earlier my sweet spot is around 30%. Why? Because increased saving at this point start to cut into my lifestyle and choices in the present to feed the future more than I want. I can’t live in the future so I refuse to devote too much resources to it.
That’s just my personal point of view. Where would your sweet spot be on the table?