How Much Should You be Saving for Retirement?

In this client-ready video, Massi DeSantis, PhD, of Dimensional Fund Advisors, explains that the answer should be customized for each individual, based on how their salary grows prior to retirement. Here are the key takeaways:

1. The number one solution for retirement is to save, but how much to save is a key question.
2. Saving early in one’s career and 10% of one’s income is the rule of thumb.
3. When this 10% rule of thumb was tested, there were circumstances where it worked well and other times when it did not even come close to replacing one’s standard of living.

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4. Compare the 10% savings rate for Jack and Jill. They both have a 40-year career, but Jill’s salary is $100,000 for the whole 40-year period. Jack starts at $20,000 per year, but his salary increases. His ending salary is $180,000 in year 40.*
5. The 10% rule of thumb works well for Jill who replaces about 51% of her income withdrawing about $51,000 per year from her 401(k) account.
6. The 10% rule of thumb failed Jack. Replacing only 22% of his income or about $40,000 per year, his savings did not even come close to replacing his standard of living.
7. Jack would benefit from a more dynamic approach where his initial savings rate is 5% but eventually increases to 15% once his salary reaches 100k. So as Jack’s salary rises so should the percentage he saves.
8. Increasing his savings percentage would allow Jack to replace about 41% of his income and receive about $75,000 per year.
9. Savings rates should increase as one’s salary increases.

*Disclosure: The assumed rate of return on investments is the same for Jack and Jill at 4.5% annualized. This rate of return is not guaranteed. Neither scenario includes any income received from Social Security or a pension.

Valuable Life Lessons from a Nobel Laureate

Let’s talk about economics! Whether you know it or not, we all apply economics to our daily lives.  It’s called economizing.  If you’ve ever ordered pizza, for instance, you may have weighed the cost and benefits.  “If I bring home pizza tonight, I don’t have to cook.  But then again, it may cost me more to feed my family than cooking dinner.  But cooking takes time.”  You get it.

Kenneth French, Professor of Finance at the Tuck School of Business at Dartmouth College, recently wrote an article “Things I’ve Learned from Gene” about his friend and mentor, Professor Eugene Fama.  Fama is a Nobel laureate in Economics and widely recognized as “the father of modern finance.”  And although the article focused on their academic relationship, French shared valuable life lessons from Fama that we should apply to our own lives, whether we’re scholarly researchers or not.  I’ll discuss three:

On Time Management.  First, don’t commit to anything that you don’t want to do now.  Chances are that you won’t want to do it later, either.  Do the things now that will yield the best results.  Secondly, don’t be deadline-driven.  Granted, there are some people who can’t get anything done unless they have a deadline.  But for the rest of us, setting priorities should be a priority.  Don’t let deadlines force you into making decisions.

On Keeping it Simple.   Some academics and professionals consider Fama to be in another stratosphere of economic and financial research.  Despite this, he believes in keeping it simple.  “Our job is not to write papers.  Our job is to get people to read papers,” he asserts.  Believe me, when I meet with a client, I shouldn’t speak in technical terms.  I’ve got to explain a portfolio so that my client will understand.  Or as the saying goes, “Keep it simple, studid.”  Another great scholar put it best:  “If you can’t explain it simply, you don’t understand it.”  That’s Einstein.

On Relationships.  Just be nice.  French noted that in over 30 years of working closely with Fama, he rarely saw Fama be unkind.  You don’t have to be a Nobel Prize winner in Economics to know that being mean to co-workers, friends, or family amounts to diminishing returns.  Fama is mindful of not creating a toxic environment.  Finally, French respects that Fama doesn’t take things personally.  It’s important to know that the kind of research Fama does is subject to wide criticism from numerous circles.  He may not always agree with his critics, but French states that Fama consistently remains on higher ground.

Sure, these lessons may seem like common sense, but to practice them on a day-to-day basis takes discipline.  You may not win a Nobel Prize for adopting Eugene Fama’s behaviors, but any economist will tell you that you’ll enjoy more “utility” in your life by managing your time better, not trying to be the smartest person in the room, and just being nice.