Last month I introduced you to billionaire investor and philanthropist Sir John Templeton. This month, I’d like to look at his advice on savings. Sir John and his wife adopted the 50/50 rule — saving 50% of their income!
I know this is pretty aggressive for most of us, but what should we be saving? It’s funny, but my answer isn’t “as much as possible.” Why not? Simply put, this is a balance between enjoying life now and preparing for the future.
The worrisome piece is that many of us aren’t adequately preparing for the future. For example, my grandparent’s generation saved about 20% of income. My parent’s generation saved about 10%. The current savings rate is about 5%.
Suppose you start saving at age 35 and continue to age 65. Suppose your average income over that period is $80,000. And suppose your investments grow at 4.75% annually. The 20% plan will produce about $1,000,000. The 10% plan will produce about $500,000. And the 5% plan will produce $260,000.
Perhaps you can see why many financial advisors recommend saving 15-20% per year as a base plan. Naturally, there are a number of important factors that can influence this advice. For example, suppose you are starting to save later in life. If so, you’ll probably want to increase the savings rate. Or suppose you’re saving for some specific goal, such as you children’s college education, in addition to your own retirement. That would also increase your rate.
In addition to these kinds of factors, it turns out that there actually are times when the normal saver ought to consider the 50/50 rule. A great example of when this is advisable is when you receive one-time or periodic windfalls. For example, if you receive a yearly bonus, you should consider saving at least 50% of it (more if you are behind on your savings plan). Other examples include inheritance and gains from asset sales (such as homes or businesses).
Guidepost Financial Planning regularly advises people on the best savings rate for their situation. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.