Talk:Savings rate

Savings rate vs. starting early

There are 2 aspects. First, the importance of saving early - I have a page under development in the Bogleheads wiki: Importance of saving early, but it's going to be revised. See the Bogleheads forum posts from here forward: Re: Wiki comments requested: The importance of asset allocat.

Second - the savings rate, which is described here (so far). The result is a complete picture- the starting point and the savings rate.

I think Ms. Newbie needs to have the concept introduced in an easy-to-understand format. Take a look at the example graph shown in this post: Re: Wiki comments requested: The importance of asset allocat. Perhaps the concepts of "start early" and "savings rate" can be combined? --LadyGeek 14:01, 7 February 2015 (MST)

Excellent idea. I've created a separate page for now, User:Quebec/Importance of saving early, because I don't know how to call a hypothetical combined page with both "saving early" and "savings rate". The graphs were developped along the lines suggested in the Bogleheads wiki and references therein. I guess they could be resized a bit smaller (but I don't know how to do this). Please check my maths for the 3rd graph. Thanks! --Quebec 17:35, 7 February 2015 (MST)

I checked your math and revised the calculations. An explanation is in the talk page.

The graphs have been resized. Just add the size as a new parameter like this: [[File:Saving-early-graph2.jpg|600px]]. The middle graph is intentionally larger than the others. --LadyGeek 10:18, 8 February 2015 (MST)

LadyGeek, do you still want to combine "importance of saving early" and "savings rate"? If we leave them separate, they can be linked via a sidebar (and internal links)... If you want to combine them, what would be the title? --Quebec 13:59, 10 February 2015 (MST)

I no longer want to combine these pages, as the "importance of saving early" "catch-up" section summarizes savings rate in an easy-to-understand manner. "Savings rate" can then be used to deep-dive into the details, perhaps as a "See also" page. --LadyGeek 15:13, 10 February 2015 (MST)

Purpose of this article

You're missing an introduction which describes the purpose of this article. Starting with "Savings rate is composed of X, Y, and Z, but subtract P... and be sure you achieve 70% when done." is missing why I need to do this.

Take a look at the Bogleheads wiki: Introduction to retirement spending models. You are after the replacement rate, which is very much needed to be explained here. My head was still in Importance of saving early, so I got mixed up when reading this page (savings rate to mean monthly contributions). After reading this more carefully, my comments in the previous section show how much I missed the main point of this page - by a lot.

After the introduction, then introduce the "Savings rate is composed of..." description. However, that's a bit hard to take in one chunk. Can you expand the statement to clarify, such as why I need to subtract the pension? (Because it's an income stream, I think.) --LadyGeek 20:28, 12 February 2015 (MST)

I re-wrote the lead section. Is that better? --Quebec 14:06, 13 February 2015 (MST)

It is a step in the right direction. I took a larger step and rewrote the lead section, as it was easier to rewrite the section than to explain what was missing here. Now, I can see the relationship between savings rate during the accumulation phase and replacement rate during the decumulation phase.

Since you intend to prove someone wrong, I used the {{POV}} template because I think (but I'm not sure) this article no longer represents a neutral point of view. Perhaps some statements can be reworked, or additional perspectives provided. Or, just complete the article and see how the forum members react. Keep going, in any case. This is good info.

Suggestion: Take a look at the wiki pages on bogleheads:Retirement spending. It's a different aspect than what you are trying to show, but it might be helpful. --LadyGeek 15:13, 13 February 2015 (MST)

I'm not concerned about the details of retirement spending. As long that the replacement rate is a reasonable approach (and that's a totally separate topic), then what is the required savings rate during accumulation to reach 70% replacement during retirement?

About a neutral point of view, I'm not trying to prove anyone wrong (except perhaps the conventional wisdom, which obviously cannot be correct if the working poor need to save 0% and the rich need to save over 20%). The G&M article used as a "source" in the introduction mentions the 10% figure ("The conventional wisdom has been 10 per cent"), but it does not say that 10% is good for everyone. The author also says "isn’t it 15 or 20 per cent these days?". I don't think that the statement that the required savings rate depends on many factors including the level of income is too controversial... This is explained in detail in the subsequent sections of the article, which are based entirely on two C.D. Howe reports, one of which was written by the former Governor of the Bank of Canada. I suggest removing the {{POV}} template. --Quebec 15:59, 13 February 2015 (MST)

OK, I removed the template. I now see what you are doing and have revised the introduction again. Hopefully, this is more clear and fits closer to the writing style of a wiki. The quote is at the top of the article, as it entices the reader to continue and provides a good context of your intentions.--LadyGeek 17:48, 13 February 2015 (MST)

Calculating your current savings rate

A simple example in the form of a table would be helpful. Then, show how to use the result in the following sections. IOW, walk the reader through the process. The idea is to answer the question "I calculated a savings rate, what do I do with it?" A section "Savings rate too low?" is needed. --LadyGeek 13:15, 14 February 2015 (MST)

I changed the "saving rate too high" section title to "required savings rate too high". In other words, if your current savings rate is lower than the required values, what can you do about it? I think this is what you meant by "Savings rate too low?"?

Also at the end of the "Calculating your current savings rate" I indicated that the current rate can be compared with the ideal rates presented in the subsequent sections. --Quebec 16:36, 14 February 2015 (MST)

Yes, that's what I meant about "Savings rate too low?"

I think it helps to show a simple table in place of your description. Otherwise, it seems as complicated as the tax forms. I borrowed an example format from Bogleheads:Traditional IRA to show what I mean. --LadyGeek 18:55, 14 February 2015 (MST)

Income replacement rates, the elephant in the room

As much as I want to avoid the debate on income replacement rates because this is not the topic of this article, the prerequisite to any sensible discussion on the required savings rate is agreeing on a suitable replacement rate. Proposals for a suitable replacement rate range from 50 to 100% of pre-retirement income, and may even depend on the income levels. Clearly the best strategy, as the investor approaches retirement, is to do a detailed estimate of how much he's spending now, and much he'll be spending during retirement, looking at the specific numbers for taxes, benefits, etc. and considering individual circumstances such as are children still around, is the house paid off, does he wish to travel, etc. and work from there to plan retirement. But this is doable say 1 to 5 years before retirement, whereas a long-term savings rate must be determined 30-35 years before retirement at the beginning of the savings period. Working that far ahead, there are too many unknowns and some rules-of-tumb/shortcuts must be taken. Hence the attraction of using the replacement rate, but 50%, 70%, or what?--Quebec 17:08, 14 February 2015 (MST)

This is the same argument posited by US retirees, but from a different part of the equation. How much can I safely withdraw, a.k.a. the Safe withdrawal rate. There is a LOT of information pointing to 4%, but more recent studies show it's closer to 3%. Then, there's a few outliers like longinvest or those that say it depends on your own situation. Therefore, 4% is seen as a good starting point. I'd stick with 70% replacement rate, as that's where the majority of the research is done and it seems "safe". It's also a good starting point, you can adjust as you go along. --LadyGeek 18:55, 14 February 2015 (MST)

Well I finally found an approach that makes sense, see the new section ("lifecycle model"). The model calculates both savings rates and income replacement rates. --Quebec 17:52, 17 February 2015 (MST)

Good, but some tutorial info is needed - especially to explain about consumption smoothing and "dissaving". Here's some background from the Bogleheads wiki: Life-cycle finance. Consider using the graph. --LadyGeek 18:49, 17 February 2015 (MST)

I reformatted the "warning" section, as it is a direct criticism of the model. Are there any credible sources to support these claims? --LadyGeek 19:38, 20 February 2015 (MST)

I've reframed the criticism of the Horner model into a more general discussion of both types of models. I've also better introduced the lifecyle model in the lead section. --Quebec 08:25, 21 February 2015 (MST)

Taking additional risk

This statement sends the wrong message:

4. take on more risk than with 50% or 60% stocks in the hope of increasing the return

"Hope is not a strategy" -- James Cameron. Perhaps change the suggestion to:

4. take on more risk than with 50% or 60% stocks, but recognize that your retirement will be delayed or your funds may not last as long as you planned.

--LadyGeek 20:48, 15 February 2015 (MST)

the savings rate in the tables are based on the expected real returns for a balanced portfolio (with 50-60% stocks). If one increases the stock percentage to 70% or 80%, there is an expectation that the long term returns will be a bit higher, than for a portfolio with 50% stocks. Otherwise people would not buy stocks. However it is possible that these expectations will not materialize (i.e. the realized return will be the same, or even less, than that of a balanced portfolio, despite the greater volatility). Hence the word "hope". --Quebec 13:05, 16 February 2015 (MST)

Perhaps then, to change the phrase from "the hope of increasing the return" to "the hope of increasing the expected return" --LadyGeek 18:49, 17 February 2015 (MST)

Definition of lifecycle model

In the 5th paragraph, you state "In a lifecycle model, the explicit goal is to have consumption after retirement equal consumption before retirement." I do not believe this is the goal of a lifecycle model, i.e. there is no "equality" of consumption to compare "before" vs. "after" retirement. Take a look at the Bogleheads wiki reference papers: Introductory_articles specifically this paper by Paula H. Hogan Life-Cycle Investing Is Rolling Our Way.

Life-cycle investing is a multi-period model that uses hedging and insuring as well as precautionary saving and diversification as core strategies. Personal wealth is defined as the sum of current financial wealth and the present value of an investor's human capital—that is, what an investor's labor will earn during his or her lifetime. In contrast to the current paradigm, welfare is measured by lifetime consumption, not wealth.

--LadyGeek 18:10, 26 February 2015 (MST)

The particular model used by Horner (2009) is a two period model (before retirement; after retirement). He calls it a "stylized lifecycle model". All he cares about is that consumption before retirement (age 64) is equal to consumption after retirement (age 65). Horner writes:

These benchmark savings rates, which vary by household or family type and across earnings levels, are derived from a simple model of consumption and savings over the lifecycle. The model is extremely simplified in some respects. For example, a 55-year adult lifespan is collapsed into two periods – before and after retirement at age 65. This simplification allows the model to be very detailed when it comes to representing the tax/transfer system and its effect in shaping savings needs and incentives. The model is based on the hypothesis that people will seek to have the same level of consumption after retirement as before.

I'll rephrase the 5th parag to indicate that this is a very specific model.--Quebec 06:18, 27 February 2015 (MST)

I moved the modeling details to the lifecyle section, as it makes more sense as a footnote at that location. --LadyGeek 18:28, 27 February 2015 (MST)

I liked the idea of talking about the replacement rate approach and Horner's model in the intro, to give them "equal space" there. But the footnote works. Do you want to move some of the intro material to the "traditional income replacement rate approach" section then? --Quebec 04:55, 28 February 2015 (MST)

Yes, I moved the material as you suggested and think it is much easier to follow. My perspective: It's not the amount of space, but that the intro should not have any details. Consider the first few paragraphs as a top-level abstract. Now, the reader now understands the scope of the article and can follow the approach as the concepts are developed. --LadyGeek 18:34, 28 February 2015 (MST)

Well done, the article reads much better now. --Quebec 05:41, 1 March 2015 (MST)

Ready for main space?

I'm happy with this article. Any last changes before we move it to main space? --Quebec 06:20, 4 April 2015 (MDT)

I added Importance of saving early and I think it's ready to move to the main namespace. --LadyGeek 12:37, 4 April 2015 (MDT)

Does it belong to the Getting started sidebar? I started writing this as a short 'save as much as possible' article but it evolved into a long article not necessarily suitable for beginners. --Quebec 17:30, 5 April 2015 (MDT)

No, it does not belong in the Getting started sidebar. I think it does belong in the Retirement planning sidebar. Look at Preparing to retire - some introductory discussions can be added here. --LadyGeek 19:46, 5 April 2015 (MDT)