Tuesday, June 9, 2015

You Can Never Retire If You Only Save 10% Of Your Income

Saving 10% of income is better than not saving any money at all? That's what a lot of people say. But, is it wise to save only 10% of our income? Saving 10% only means spending 90% of our income. If you earn $1000 and can only save $100, it is still acceptable as you may not have much money to spend. But if you earn $5000 and only save $500, it is a whole different story.

Saving 10% of our income takes us 51 years before we can retire. Even if you start saving since the day you start working, you still can't retire in your 70s. Many people may say they want to double their income so they can have a better lifestyle and don't have to sacrifice too much to save money.

The scary part about increasing your income to increase expenses is that it has a negative doubling effect on your life. It is the simple reason why people who earn higher salary can get into an even worse financial problem than another person who earns lesser income.

Credit: http://pixabay.com/en/percent-percentage-percent-sign-76213/

Percentage of Savings makes a difference

Previously, I wrote that there was a report on Asiaone which showed how people in their 30s got into financial problems. Below shows 2 of the cases:

Case 3  
The third person is a 33 year old who earns $4000 monthly. Has credit card debt totalling $15,000 which was accumulated since 2007. 
The lifestyle:
  • Go to the spa every week for massages, mani-pedis and hair treatments
  • Take cabs everywhere
  • Eat at expensive restaurants twice a week
  • Always treating friends to drinks when outside
There were several instances where she was flat broke and has to walk one and a half hour from her office back home because she doesn't even have money to take a bus or MRT home.  

Case 4
The fourth case is a couple of age 34 and 36. Both are lawyers and have a combined income of $17,000. This amount of salary is an envy for many but they still can get into trouble. Currently has debts amounting to a couple of hundred thousands dollars.Their lifestyle:
  • Spent $100,000 on wedding
  • Pay six figure sum for a condo in a prime district
  • Spent even more money on renovating and expensive furnitures for the house
They said the debts will probably take them 3 years to clear. 

In case 4, the couple had a combined monthly income of $17,000 but has debts amounting to a couple of hundred thousands dollars. This is more than the $15,000 debt which the person in case 3 who earns only $4000 monthly.

The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. The reason is that every permanent drop in your spending has a DOUBLE effect:
  1. it increases the amount of money you have left over to save each month
  2. and it permanently decreases the amount you’ll need every month for the rest of your life
If you ask a person who spends $5000/month how much he needs for retirement, he'll probably say about $5000. If you ask a person who spends only $2000/ month how much he needs for retirement, he'll probably say about $2000. It is very very hard to change your "upgraded" lifestyle once you're up there. Some people may say that they can downgrade their lifestyles when they are older but how many have actually done it? 

Creating income for retirement is better than saving for retirement. If you spend $5000/month, you have less money saved per month and it takes a longer time to create a $5000/month income for your retirement. You need $1.5 Million dollars to create a $5000/month income base on a withdrawal rate of 4%. If you earn $10K per month and spend $5K, it takes about 17 years to do it. That is a 50% savings rate invested at 5% yearly compounded returns to achieve $1.5 Million dollars in 17 years. 

If now you earn only $6K and still spend $5K, it'll take you 41 years to create an income of $5K as compared to 17 years in the above example. In this case, this person only saves 16% of his salary. It really is just simple maths, saving 16% will mean spending 84%. 

How Much Should We Save?

10% savings takes 51 years before we can create an income that surpasses our expenses for retirement. If we do that, we will never be able to retire at all unless you have other alternatives. This is the hard truth of life and the reason why many people cannot retire today. 

If 10% savings is a no no, how much should we save then? I've done the calculations and here's the verdict:

Savings Rate (Percent)Working Years Until Retirement

Look at the savings rate and the working years until retirement. If we want early retirement in our 40s, probably a 50% savings rate is good. If we want to retire before 60, we should save at least 25% of our income starting from our 20s.

It is really not that hard to retire if we can see the road ahead and plan accordingly.

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Related Posts:
1. Save 75% of your income to retire in 7 years
2. How an Average Family Can Retire Within 10 years of Working?


  1. Hi SGYI

    Wouldn't it make sense for the pie of the size that grows bigger makes that 10% savings even much higher in absolute term?

    If a person is earning $1m/annum, then 10% would translate into a savings of $100k/annum. Do you worry that the person would need a substantial amount of income in order to curb off his huge spending patterns?

    1. Hi B,

      If a person earns 1m and spend 900k, that is really scary. It'll take him 9 years of 100k savings just to save 1 year of expenses.

      Yes its the spending pattern. It is hard to change habits. Ask a spender to save and he'll always have excuses.

  2. Hi SGYI,

    CPF savings rate is 36% today. This means, if CPF is not used for housing and other purpose, everyone should be able to retire after working 25 years. However, since most Singaporeans use their CPF to pay for housing, we need other form of savings / investment.

    1. Hi Sanye,

      Yes you're right. Even if we earn just 3k a month and no pay increment from age 25 to 55, we would have close to 600k in our cpf by then.

  3. For those who have troubles to put aside at least 20% of their income, this mental trick might help. Don't think of saving 20%, instead do think of living on 80% of your income.
    The first option triggers a phenomenon known as loss aversion in our emotional brain, which does not make you feel so good.
    The second option to live on 80% of your income is to do without what you would gain from that last 20%, which makes you feel better.
    At least that's what researchers have found out.

    1. Hi Tacomob,

      Thanks for the suggestion. :)