1% Savings for 30 Years vs. 3-6 Months of Working More

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Cortopassi
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1% Savings for 30 Years vs. 3-6 Months of Working More

Post by Cortopassi » Thu Jun 28, 2018 3:48 pm

I heard this on the radio a couple days ago. Interesting:

https://www.marketwatch.com/story/the-s ... 2018-06-25

First couple paragraphs:

Which of the following has the greatest impact on your retirement standard of living?

Saving an additional 1% of your salary for the 30 years prior to retirement, or postponing your retirement by 3 to 4 months?

This seems like one of those impossible questions to answer. Fortunately, however, a new study circulated by the National Bureau of Economic Research has reached an answer. And it’s not what you think.

Believe it or not, the authors found that these two options have roughly equal impact for the vast majority of investors. That seems hard to believe, since not spending 1% of your salary for each of 30 straight years seems like a far greater sacrifice than working for another couple of months. But the authors base their conclusion on rigorous statistics and straightforward and plausible assumptions about the typical retiree.

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Re: 1% Savings for 30 Years vs. 3-6 Months of Working More

Post by Kriegsspiel » Thu Jun 28, 2018 6:15 pm

Cortopassi wrote:
Thu Jun 28, 2018 3:48 pm
That seems hard to believe, since not spending 1% of your salary for each of 30 straight years seems like a far greater sacrifice than working for another couple of months. But the authors base their conclusion on rigorous statistics and straightforward and plausible assumptions about the typical retiree.
It depends on how much of your salary you're already saving. If you aren't saving anything, then cutting out a couple nights out a year isn't much of a sacrifice at all (1% of the median US salary is $300). But if you're already saving at ERE levels, then that might be a real sacrifice.
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Re: 1% Savings for 30 Years vs. 3-6 Months of Working More

Post by barrett » Fri Jun 29, 2018 5:53 am

The following is from the article:

1. Your Social Security benefits will be higher the longer you postpone retirement

2. You will contribute more to your 401(k) or retirement portfolio the longer you work

3. Your retirement portfolio will be able to grow more the longer you postpone retirement

4. The older you are, you can purchase a better annuity for the same amount of money.

Point number five could be that a person working longer is also several months closer to death, so they have a slightly shorter retirement to fund. Point number 5.5 could be that a person who is being beaten down by their work might actually be shortening their life expectancy the more they work, but I digress.

I'd love to see the math behind the authors' conclusions. Let's take a hypothetical person making $100,000 a year and saving 30% versus 31%. The difference in savings is $1,000 per year or about $83 extra per month. The person saving 30% with zero ROI has $900,000 at the end of 30 years, and the person saving 31% with zero ROI has $930,000 saved. That's a difference of $30,000 which, at least on the surface, makes it appear that one would have to work an extra year (as opposed to an extra three or four months) to get to that same $930,000.

If we assume a doubling of real investment returns every 15 years (roughly 4.67% real, using the rule of 72) the extra $30,000 of savings comes out to an addition $75,000 in real term (the $1,000 from year one has quadrupled in real terms whereas the $1,000 from year 30 has barely grown at all. So, it would seem that one would have to work an extra 2.5 years to catch up.

Of course tax assumptions complicate everything. For example, over my personal time frame (I started saving in 1981 or 1982) the amount that I've been able to put in a tax-deferred account has gone from $2,000 in a solo IRA to $24,500 in a solo 401(k). So it's been far from a steady path. One has to consider that a lot of that extra $1,000 saved each year would have likely gone into a taxable account. The Roth IRA went into effect in 1998 so that wasn't an option for me for the first 15 or 16 years.

Just throwing out some numbers to ponder in that last paragraph but I'm guessing that the burden that taxes put on savers is, over long time periods, the biggest factor in limiting how much wealth one is able to accumulate. Who would have thunk it so??
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Re: 1% Savings for 30 Years vs. 3-6 Months of Working More

Post by sophie » Fri Jun 29, 2018 7:23 am

I think I could see this as plausible if you add up the additional Social Security from working at max salary for another 3-6 months over a 30 year retirement, and factor in a likely assumption that wages for much of that 30 year period are less than wages at the end of career. And assume that retirement is after age 65 so there's no worry about additional medical expenses. This is making a lot of assumptions about Social Security and wage increases that probably aren't valid though.

I'm also seeing a trend toward people not being able to sustain a high-complexity job all the way to full retirement age. The administrative overhead is increasing everywhere, and it's gotten to the point where I see older physicians/ faculty to whom iPhones are still a new thing and who normally would have continued to work past retirement age, quitting early or shifting to lower key/part time positions. If things keep going as they have been (and I see no signs of the administrative burden leveling off) there's going to be a breaking point. This is probably going to be seen as a generally good thing from above, since hiring young workers is cheaper than retaining older ones. I seriously wonder if anyone should count on being able to continue holding a job to FRA, but rather plan on a semi-retirement, or full retirement, by age 59 or so. So regardless of the validity of the math, the 1% savings plan is a MUCH safer plan in my book.
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Re: 1% Savings for 30 Years vs. 3-6 Months of Working More

Post by Cortopassi » Fri Jun 29, 2018 8:17 am

sophie wrote:
Fri Jun 29, 2018 7:23 am
I'm also seeing a trend toward people not being able to sustain a high-complexity job all the way to full retirement age.
I am starting to feel that (at 51). The complexity in my job, electrical engineering, has gone from circuits operating at 10MHz and 5V when I got out of school in 1989 to 10GHz and 0.85V now. I cannot imagine what they are in 10 years and the tools required to test them.

I am proposing a slightly radical plan to my management for the next few years. Since I am now paying for college and will for the next 8 years at least, any salary increase will have a good portion negated by a reduction in aid. And since I am closer to retirement, I do want to start spending more time outside of work.

I've asked to forego raises (not a certainty anyway) for three years in exchange for a reduction in hours to 36, taking a 1/2 day Friday every week. If it flies, in 3 years, I would ask for that to be upped to a 4 day week instead of 5. So the company doesn't need to shell out more money on paper, I don't look like I'm making more to colleges, and I get closer to eventual part time status where I want to be.

Hopefully it won't get shot down.
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Re: 1% Savings for 30 Years vs. 3-6 Months of Working More

Post by barrett » Fri Jun 29, 2018 9:08 am

Corropassi, Are you in a position where each marginal dollar earned is essentially one dollar less in grant & scholarship $ for college?
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Re: 1% Savings for 30 Years vs. 3-6 Months of Working More

Post by Cortopassi » Fri Jun 29, 2018 9:19 am

barrett wrote:
Fri Jun 29, 2018 9:08 am
Corropassi, Are you in a position where each marginal dollar earned is essentially one dollar less in grant & scholarship $ for college?
I believe I am right there, yes, based off the price calculators I run through. So it makes no sense to me to get a salary increase right now if I can finagle a different, non-cash benefit.
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Re: 1% Savings for 30 Years vs. 3-6 Months of Working More

Post by Mountaineer » Fri Jun 29, 2018 9:34 am

Cortopassi wrote:
Fri Jun 29, 2018 8:17 am
sophie wrote:
Fri Jun 29, 2018 7:23 am
I'm also seeing a trend toward people not being able to sustain a high-complexity job all the way to full retirement age.
I am starting to feel that (at 51). The complexity in my job, electrical engineering, has gone from circuits operating at 10MHz and 5V when I got out of school in 1989 to 10GHz and 0.85V now. I cannot imagine what they are in 10 years and the tools required to test them.

I am proposing a slightly radical plan to my management for the next few years. Since I am now paying for college and will for the next 8 years at least, any salary increase will have a good portion negated by a reduction in aid. And since I am closer to retirement, I do want to start spending more time outside of work.

I've asked to forego raises (not a certainty anyway) for three years in exchange for a reduction in hours to 36, taking a 1/2 day Friday every week. If it flies, in 3 years, I would ask for that to be upped to a 4 day week instead of 5. So the company doesn't need to shell out more money on paper, I don't look like I'm making more to colleges, and I get closer to eventual part time status where I want to be.

Hopefully it won't get shot down.
If you have a defined benefit pension, be sure to consider the impact of your strategy on your retirement financial situation. I'm guessing you already have considered all that. 8)
Hebrews 9:27 And just as it is appointed for man to die once, and after that comes judgment, 28 so Christ, having been offered once to bear the sins of many, will appear a second time, not to deal with sin but to save those who are eagerly waiting for him.
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Re: 1% Savings for 30 Years vs. 3-6 Months of Working More

Post by Cortopassi » Fri Jun 29, 2018 10:32 am

Nope, just my 401k/IRAs and SS.
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Re: 1% Savings for 30 Years vs. 3-6 Months of Working More

Post by pugchief » Fri Jun 29, 2018 10:46 am

Cortopassi wrote:
Fri Jun 29, 2018 8:17 am
sophie wrote:
Fri Jun 29, 2018 7:23 am
I'm also seeing a trend toward people not being able to sustain a high-complexity job all the way to full retirement age.
I am starting to feel that (at 51). The complexity in my job, electrical engineering, has gone from circuits operating at 10MHz and 5V when I got out of school in 1989 to 10GHz and 0.85V now. I cannot imagine what they are in 10 years and the tools required to test them.

I am proposing a slightly radical plan to my management for the next few years. Since I am now paying for college and will for the next 8 years at least, any salary increase will have a good portion negated by a reduction in aid. And since I am closer to retirement, I do want to start spending more time outside of work.

I've asked to forego raises (not a certainty anyway) for three years in exchange for a reduction in hours to 36, taking a 1/2 day Friday every week. If it flies, in 3 years, I would ask for that to be upped to a 4 day week instead of 5. So the company doesn't need to shell out more money on paper, I don't look like I'm making more to colleges, and I get closer to eventual part time status where I want to be.

Hopefully it won't get shot down.
Yep. Different situation, same result. At 58.5, my back is not up to the daily stress of leaning over patients. I cut back from 4.5 days to 4 a few years ago, then to 3 a year ago, and as of June 1 I am now at 2 days. And I don't start until 10:00AM as of a few years back, which cuts an hour off each day. My stress level is way down and my back hurts less. Yay! Thankfully, my son wanted more hours, so he just took over some of mine.
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Re: 1% Savings for 30 Years vs. 3-6 Months of Working More

Post by Cortopassi » Fri Jun 29, 2018 11:06 am

pugchief wrote:
Fri Jun 29, 2018 10:46 am
Cortopassi wrote:
Fri Jun 29, 2018 8:17 am
sophie wrote:
Fri Jun 29, 2018 7:23 am
I'm also seeing a trend toward people not being able to sustain a high-complexity job all the way to full retirement age.
I am starting to feel that (at 51). The complexity in my job, electrical engineering, has gone from circuits operating at 10MHz and 5V when I got out of school in 1989 to 10GHz and 0.85V now. I cannot imagine what they are in 10 years and the tools required to test them.

I am proposing a slightly radical plan to my management for the next few years. Since I am now paying for college and will for the next 8 years at least, any salary increase will have a good portion negated by a reduction in aid. And since I am closer to retirement, I do want to start spending more time outside of work.

I've asked to forego raises (not a certainty anyway) for three years in exchange for a reduction in hours to 36, taking a 1/2 day Friday every week. If it flies, in 3 years, I would ask for that to be upped to a 4 day week instead of 5. So the company doesn't need to shell out more money on paper, I don't look like I'm making more to colleges, and I get closer to eventual part time status where I want to be.

Hopefully it won't get shot down.
Yep. Different situation, same result. At 58.5, my back is not up to the daily stress of leaning over patients. I cut back from 4.5 days to 4 a few years ago, then to 3 a year ago, and as of June 1 I am now at 2 days. And I don't start until 10:00AM as of a few years back, which cuts an hour off each day. My stress level is way down and my back hurts less. Yay! Thankfully, my son wanted more hours, so he just took over some of mine.
Nice. Except for the back part...! At least it is better. Nice to have a built in replacement.
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Re: 1% Savings for 30 Years vs. 3-6 Months of Working More

Post by Mountaineer » Fri Jun 29, 2018 2:06 pm

pugchief wrote:
Fri Jun 29, 2018 10:46 am
Cortopassi wrote:
Fri Jun 29, 2018 8:17 am
sophie wrote:
Fri Jun 29, 2018 7:23 am
I'm also seeing a trend toward people not being able to sustain a high-complexity job all the way to full retirement age.
I am starting to feel that (at 51). The complexity in my job, electrical engineering, has gone from circuits operating at 10MHz and 5V when I got out of school in 1989 to 10GHz and 0.85V now. I cannot imagine what they are in 10 years and the tools required to test them.

I am proposing a slightly radical plan to my management for the next few years. Since I am now paying for college and will for the next 8 years at least, any salary increase will have a good portion negated by a reduction in aid. And since I am closer to retirement, I do want to start spending more time outside of work.

I've asked to forego raises (not a certainty anyway) for three years in exchange for a reduction in hours to 36, taking a 1/2 day Friday every week. If it flies, in 3 years, I would ask for that to be upped to a 4 day week instead of 5. So the company doesn't need to shell out more money on paper, I don't look like I'm making more to colleges, and I get closer to eventual part time status where I want to be.

Hopefully it won't get shot down.
Yep. Different situation, same result. At 58.5, my back is not up to the daily stress of leaning over patients. I cut back from 4.5 days to 4 a few years ago, then to 3 a year ago, and as of June 1 I am now at 2 days. And I don't start until 10:00AM as of a few years back, which cuts an hour off each day. My stress level is way down and my back hurts less. Yay! Thankfully, my son wanted more hours, so he just took over some of mine.
I'm glad you were able to manage the issues and that your back hurts less. Good for you and your son. Blessings.
Hebrews 9:27 And just as it is appointed for man to die once, and after that comes judgment, 28 so Christ, having been offered once to bear the sins of many, will appear a second time, not to deal with sin but to save those who are eagerly waiting for him.
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