The Dynamic Effect of Saving More

Picture1What is the dynamic effect of saving more? It is how you reach your retirement goal sooner than expected. Why? Because most retirement calculators fail to make a key adjustment when calculating when you may retire.

When you save for retirement the calculator basically tells you how long it will take to reach a target sum of money. That target sum matches the amount you need based on how much you spend each year. In the presentation below, how much you spend each year is labeled Standard of Individual Living (SOIL)*. The amount you need to have saved is depicted by the red triangle.

Then, when you save more, the target sum is reached sooner and is depicted by the yellow triangle. So far, so good … or is it?

You see, the problem this calculation approach has is that you are saving more … which means you are spending less. That means your SOIL is lower … you are living on less because you are saving more!

Very few retirement calculators make this adjustment to bring in the fact that your target annual spending amount is now less than it was before you saved more. What is the effect? You basically have moved your target to green triangle.

The dynamic effect of saving more … the more you save, the more you move the green triangle and the sooner you may retire (relative to what you are doing right now). Retirement is a Moving Target!

*SOIL is a term I coined in my book Wealth Odyssey. Short Wealth Odyssey book video.

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About Larry Frank, Sr.

Larry R Frank Sr., MBA, CFP®, is an experienced financial advisor and a published author on Retirement Planning Research. Have a financial question? Click Here to Ask Larry

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