Why Your Savings Rate Matters Most in Retirement Planning
Retirement planning can feel overwhelming, with so many things to consider. Questions like, “What should my investment strategy be?” or “When should I adjust my risk level?” often arise. While these questions are important, there’s one piece of the puzzle that’s both simple and often overlooked: your savings rate.
Simply put, how much you save each year plays the biggest role in determining how comfortable your retirement will be. If you save consistently and at a high enough rate, you’ll likely be in a good place to enjoy retirement, even if some other factors (like market ups and downs) don’t go perfectly. On the other hand, if you don’t save enough, even the best investment strategies won’t make up the difference.
Let’s Look at the Numbers
Imagine you have 25 years to save for retirement and decide to put away $20,000 per year in a balanced portfolio (60% stocks, 40% bonds). Assuming modest growth rates (6% for stocks, 3% for bonds), you’d accumulate just over $973,000 by retirement.
This is a solid foundation, but what if you changed how much you saved or how aggressively you invested? Adjusting your investment mix can make a difference. For example:
- More Conservative Approach (40% stocks): You’d have around 8% less money or about $82,000 less.
- More Aggressive Approach (80% stocks): You’d have about 9% more, or an extra $90,000.
While these adjustments can add up, what really moves the needle is changing how much you save. Let’s compare a couple of scenarios to see how both savings rates and investment choices work together:
- If you increase your savings rate by 20% (putting away $24,000 instead of $20,000 per year), even with a conservative portfolio, you’d still end up with about $100,000 more by retirement.
- However, if you decrease your savings rate by 20% (saving $16,000 per year) and increase your portfolio’s risk, you’d still end up with significantly less than if you’d simply saved more consistently.
In other words, a higher savings rate can more than make up for a less aggressive investment approach. The takeaway: What you save matters more than how you invest it.
What This Means for You
Many aspects of retirement planning, like choosing specific funds or deciding when to rebalance, can help, but they’re details compared to your savings rate. Setting aside what you can reasonably afford now can provide the strongest foundation for a comfortable retirement, letting the other pieces fall into place.
In short, don’t let the complexities of retirement planning overshadow the simplest and most powerful step: saving regularly and consistently. This approach will give you more flexibility, peace of mind, and freedom to enjoy retirement when the time comes.
McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.
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