Wednesday, 9 May 2007

When is it OK to stop Saving?

When I started out in my first full-time job out of uni, I was saving around 25% of my gross salary, of about $10K pa in today's money. This obviously had a huge impact on how fast my net worth increased - in the second year my savings alone boosted my net worth by around 100%, and the relative impact of how much you save is massive when you first start out.

These days I save around 35% of my gross salary - as my salary has increased I've tended to spend roughly the same amount on "needs" and not increased my consumption of "wants", so I'm able to save a bigger slice of my salary. However, now that my net worth is around $1.15m this years "savings" will only add 2.6% to my net worth. It's still worth saving, as it helps boost my overall rate of increase in net worth from what can be achieved from my investment income and capital gains, but it's not hugely significant any more.

My contributions into my superannuation account are similar. The 9% employer contribution and my 13% salary sacrifice add around 4.5% to my retirement account balance - nice, but these days my asset mix and investment returns are getting to be much more significant that saving a few more percent of my salary.

I intend to boost my savings into my retirement account via salary sacrifice for the next couple of years, but that is in order to arrange my income and investments in the most tax efficient manner rather than a need to boost my savings rate in order to meet a retirement target.

In a few more years the impact of my savings will be negligible on my net worth, but I still intend to save the same amount. Why? Several reasons:
1. I intend to live of the same amount during retirement as I currently spend, so any increase in spending now will have a large impact on how much I need put aside to fund my retirement years.
2. I enjoy my current lifestyle and don't actually enjoy "wasting" money. I used to spend more on books, hobbies etc. but I now have more than enough "toys" to last the rest of my life.
3. One of my more nebulous goals is to leave create the basis of a "family fortune" - although it will take more than one generation to accumulate significant wealth based on modest living and sensible investing rather than a establishing family business empire.

So the answer for me is "never", but I suspect that this isn't the answer for most people.

Enough Wealth

1 comment:

R said...

I just dropped by after my morning read of the simple dollar and because of my current interest in this topic. My son is just starting out, he's 22, and he has had the good fortune to begin work in the foreclosure market as a reseller. His annual salary projects to 120k. His boss has convinced him to take his pay as a 1099 Individual Contractor which means the boss has no tax liability and my son gets to pay his own self employment taxes. He is in an enviable but tenuous position that we'd like to help him with but still it's his life to live and learn. Any suggestions?