I have carefully studied the posts in this group. Some topics and
answers concern to aspects as "is it possible to save too much", "save
much, retire early" and "the advice to balance savings and life".
Obviously, the problem for most people is not "save too much", but
"save enough". Nevertheless, today, people have the opportunity to
earn a "lot of money", for example after university, and some of them
may not feel any reason to change their lifestyle and therefore save
most of their earnings for years. Further, more and more women start
their own business in prosperous fields like engineering, law,
especially fiscal law, and medicine. And, as I have read today in a
german newspaper, especially such women are notably careful and
neither take out a loan, if possible, nor want to have large
disbursements for a secretary, office space, and such.
Hence, I think there is a need for a simple rule to decide, whether
someone may increase his/her consumption in a very conservative way.
You may also read "should" instead of "may", when you follow the
advise to balance actual savings and actual life.
My rule, as a concept that I put here under discussion, is:
It is advisable to increase consumtion, while consumtion stays within
6 % of personal net worth and while a saving rate of at least 30 % of
earned income after income tax is maintained.
Or more formally:
a) Determine net worth;
b) Determine earned income per annum after income tax (including
savings invested according to official plans);
aa) 6 % out of net worth determined and
bb) 70 % out of income per annum determined;
d) Advise: Increase of consumption is possible in a conservative sense
within the range limited by (aa) and (bb) of calculations according to
- 100% - 70% = 30% = minimum saving rate within this concept. This is
where the 30" in the name of the concept comes from.
- Obviously, most people are outside the calculated limits, because
this is a rule to determine when to spend more.
- Savings of an employee that are invested according to a pension plan
are already a part of the 30 % saving rate.
- Rental and capital income is not regarded in (b).
Net worth = 500,000; earned income after tax = 60.000 /a; actual
spending = 15.000 /a, and therefore saving is 45.000 /a (saving rate =
6 % of 500.000 = 30.000;
70 % of 60.000 = 42.000;
Advice: It is possible to increase spending up to 30.000. As a result,
the new saving rate is at least 50%.
But, if you save more, you can retire early. Or, you can handle downturns
more easily. Your advise seems to be to calculate and encourage spending.
I know very few people (well, I'm one of them) that need to be encouraged to
spend. So, your premise seems to be needed only for the very few.
======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for
a FEW lines to add context, the previous post is deleted.
You provide the rule, but don't provide any real world support for it. How well
does it work for somebody who is retired and meeting 100% of their needs from
Social Security and pension? How well does it work for someone who has four
kids who will be in college in five years? ... someone who is just out of
school with $100K in school debt, needs a car, work wardrobe, and furniture?
I think peoples' situations vary too much for a simple rule to work.
For that matter, why is this simple rule better than other simple rules? Say
consumption of 3% of net worth and savings of 20% of earned income. Or some
other set of random percentages of random financial measures?
I question one of your premises "- Rental and capital income is not
regarded in (b)."
People with NW above personal residence have meaningful income from
such sources, with every expectation that it will continue through
retirement. If you are going to exclude that income, why bother with
the 6% NW number at all, or with retirement planning? Perhaps you
could clarify what you mean there?
I also question the 15k expenditures given in your example, since that
is below poverty - more realistic is near the middle of the income /
spending distribution. Looking at the BLS (Bureau of Labor Statistics)
tables, the middle quintile income and spending is around $50,000 a
year per family, which gives a number to work with.
Otherwise, your assumptions would probably work quite well for someone
aged 40 - 50 whose NW (net worth) exclusive of principal residence
exceeds 500k. More work is required however, to cover more of the
population and more of the financial alternatives available.
The general idea is to ensure an adequate life-long income stream,
indexed for inflation IN THE SECTORS OF PLANNED EXPEDITURES, while
avoiding significant changes in comfort in either direction. Estate
planning will figure into the picture as well.
Maybe if you are starting out in adult life you have to set some
rules. But if things are not changing a lot, a simple rule might
be last year's budget plus five percent.
You might keep a seperate accounting of exceptional events-
e.g. emergencies like an expensive medical procedure,
or car or furniture that needs replacing,
job or housing change, etc.
First of all, thank you for your answers and encouragement. Let me
present my revised rules for my model and some explanation for the
1) A conventional idea is to determine spending on the basis of actual
earnings. This has the disadvantage that people may spend to much in
the beginning of employment.
The object of my model ist to provide a relatively homogenous welfare
over lifetime for people who are accumulation money and are willing to
increase their spending slowly.
The rule is an alternative which determines "advisable spending" on
the basis of actual net worth, especially as 6 % of net worth.
2) As an example, at the beginning of career, a person may live in a
small apartment and drive an inexpensive car. This is a "normal"
lifestyle for people between 20 and 30. And it is possible to continue
with this lifestyle for a while. In my example of the initial post,
earned income after tax is 60.000. If spending is 15.000, then with i
year net worth 6%
0 0 0
4 200.000 12.000
9 500.000 30.000
Consider a doctor who has an job offer in a new district, or who
drives an old car. Should she rent a nicer apartment or buy a faster
car, while still following the road to accumulate net worth? The rule
says, if she wants this in year 4, the advice is to concentrate on
accumulation, because the "6%" are actually smaller than actual
spending. But in year 9 the "6%" are larger than actual spending and
an increase up to this value is possible.
3) Peter Lynch proposed a "6% rule" for retirement, which was
considered as too optimistic. But, during employment, it is a good
point to start with. Claiming a figure under 6 % may advice an
unnecessary frugal lifestyle.
I think the saving rate limit is not necessary at all. When a
relatively high net worth has been accumulated, the spending limit of
6 % can be continuously reduced to a value that is intended to start
You might want to look into "consumption smoothing" which is a far more complex
means of doing the same thing. I believe the complexity is necessary because
life is complex. While I'm willing to be convinced otherwise, I believe your
rule is too simple to have broad application.
These are both examples of how to apply the rule. Before that gets interesting,
we need to justify the rule itself. Does it really achieve the goal stated
above? Is it better than other rules, simple or complex?