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Monday, March 27, 2017

Diminishing Returns

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?

Comments

3 Responses to “Diminishing Returns”
  1. I am between 20-25%.

  2. Hey thanks for the mention! That’s a great way to look at it, and it’s interesting to see that the sweet spot may be around the 30-35% savings level. For us, saving goes towards the overall goal of FI, however, we get more aggressive when we have larger goals, like paying off the mortgage.

  3. That is an interesting question.

    Beyond one’s basic needs more money does not automatically lead to more happiness. More stuff or nicer stuff does not make one happier.

    That question is always applicable before and after retirement. There is always a nicer home, car, boat etc. There is no end to that rabbit chase.

    I retired nine years earlier than the normal age 65 mentioned in our pension agreement…at age 56. Looking back, I would not trade the last 5 years for a larger pension.

    Earlier retirement also has a finanical advantage. I will take more than $300,000 out of the pension fund during those nine years compared to someone else who worked to age 65. I suppose one measure of financial success might be being the person who takes the most out of the pension fund before dying.

    In comparison, if I had worked until age 65, and if my pension had increased by say another $20,000 per year the break-even point would be about 15 years later or at age 80. Heck…the stats say I will likely be almost dead by then.

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