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When is it OK to stop Saving?

May 8th, 2007 at 07:31 am

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

4 Responses to “When is it OK to stop Saving?”

  1. yummy64 Says:

    My question is why are you saving? Money is a tool. Well at least to me it it is. If you have have met your savings goals to me saving more is supurfluous. Or perhaps your initial goal is now different?

    Then again I'm one of the weird people who isn't here to save as much as possible. I'm here to help ensure that my use of money allows me to accomplish what I want to accomplish both now and in the future.

    So what do you want to accomplish with your life and how can money get you there?

  2. Joan.of.the.Arch Says:

    Wrom what I know Australia, has sometimes tinkered with the arrangements for the healthcare system, so I would not count on that always remaining as it is now. Another thing to try to cover with savings is the possibility of a high rate of inflation. That could strongly affect the value of retirement savings next year or forty years from now. Have you figured into your savings major expenses your home (if you own) may have in the future? For example, maybe you can predict your roof will be secure for another thity years. But maybe you have an expected lifespan of forty two years. Will you be able to afford that in 2037 dollars after, say, three years of horrendous 15% inflation, ten years of 6% inflation, and the rest at, say 4% inflation? I think you have to look to the future as best you can and predict what things might change that are out of your control. Are food prices going to radically change what with the current drought? What if that drought is sustained for a decade? It is probably a good idea to allow for at least one catasrophic expense during your retirement.

  3. zetta Says:

    It gave me a chuckle that your conclusion is "never" given that your username is "enough" wealth. Smile
    I like the levels of wealth defined by The Complete Idiot's Guide to Getting Rich. (My notes on it are here: http://zetta.savingadvice.com/2007/01/15/thoughts-on-the-com...)

    I would say there's not much need to continue "saving" if you reach Level 3, where the returns from your investment portfolio exceed your annual living expenses. I'd guess that you are currently at level 2b or 2c -- where your returns are equal to 2 or 3 times the amount you would need to save each year to meet your retirement goals. Your desire to create a family fortune is similar to Level 4, where it's possible to leave a major legacy to your family or a charitable institution.

  4. zetta Says:

    It gave me a chuckle that your conclusion is "never" given that your username is "enough" wealth. Smile
    I like the levels of wealth defined by The Complete Idiot's Guide to Getting Rich. (My notes on it are here: http://zetta.savingadvice.com/2007/01/15/thoughts-on-the-com...)

    I would say there's not much need to continue "saving" if you reach Level 3, where the returns from your investment portfolio exceed your annual living expenses. I'd guess that you are currently at level 2b or 2c -- where your returns are equal to 2 or 3 times the amount you would need to save each year to meet your retirement goals. Your desire to create a family fortune is similar to Level 4, where it's possible to leave a major legacy to your family or a charitable institution.

    Personally, when I get to 2b or 2c, I plan to enjoy more of the money myself!

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