Savings! How much is enough?

[winterwanderer]

Say you were a twenty-something single full timer, sleeping in a jalopy SUV, virtually no possessions of value. Completely self-reliant, no fixed income. You can work hard, but despise the "grind" to the core of your being. Alternative lifestyles provide meaning and purpose to life, but no income. You're highly frugal and despise materialism, but don't want to be "locked out" of normalcy.

Say you are a financial pessimist and believe that the economy will collapse in a few years, flooding the job market with desperate people and making it damn near impossible to find a decent job. 

How many dollars would you have in the bank before you can feel comfortable quitting wage labor altogether and pursuing your dreams?

[B and C]

I would sack back every cent I could and when the collapse happened, I would be sitting pretty while everyone else living paycheck to paycheck would have a very hard time. That is if you really believe the economy is going to collapse like that and somewhat soon. In any event, not a bad idea to sack back every cent you can anyway. Rainy days do happen.

You also have to think about your later years and what you will need when no longer able or want to work. Not having a good income for enough years will severely impact your social security income too when the time comes. A good nest egg invested today would be large for retirement given the time you have for it to grow.

Nothing in life is guaranteed and you can only go with the information you believe to be correct today. I really wish I could connect the dots into the future.

[mpruet]

It all depends on how much you spend in a year.  This is an issue that retired people face - how to ensure that they don’t spend all of their savings before death.  It’s possible to do but it always takes more money than you expect.  

If you are young when you want to retire, then you have an issue because you will not have enough SS credits to ever get social security benefits, so you would have to provide for all of your expenses.  

In addition to having enough in savings to last say 30 years, you also have to plan on how to deal with inflation.  Randy Vining has been quoted as saying that he built up a Nest Egg of about $100K, but that was a few decades ago and the $100K would be more equivalent to $250K in today’s dollars.  I’m retired now, but when I first started working you were considered doing well at $20K a year.  Now that would be considered poverty level. 

This means that you have to make your nest egg grow and that generally means investing.  

You also have to protect yourself from downturns in the market.  You want to ensure that you have cash or near-cash for the next few years.  That means t-bills and/or muni-bonds.  

As a general guideline you can take your annual expenses plus 25% and multiply by 25.  You need to add the 25% because you will have some larger expenses every few years - maybe a new van for instance.  

So let’s suppose that your expenses run about $1000/month - including insurance. That would be $12K per year.  Add an additional 25% and that becomes $15K.  Multiply by 25 and you get $375K in your nest egg.  

But - and this is very important -  That would only work if that $375K can grow over time AND you can protect that savings by always have a non-risk cash for at least three years so that you never have to pull money out of the growth part of your nest egg during a recessionary period.

[mpruet]

By the way.  If the economy really collapses then your savings would be worthless.  I’m assuming that you really mean have a recession instead of collapses.

(This post was last modified: 09-28-2019, 04:21 PM by mpruet.)

[highdesertranger]

you can never have to much, there is no such thing. highdesertranger

[swlands]

I think this is an extremely personal issue. Some people freak out if their check account dips under $25,000 while their entire annual expense is not much more than half that (I have a couple elderly people in mind) while others will look over their finances and realize they are $5 in the black today and go to sleep happy. Then of course there are those who simply live with too much month at the end of the money. Everyone is unique.

I would figure have at least 3 months living? That is just me. I have heard 6 months. When you are old you need 30 years.

I would suggest you won't like yourself if you get old and you don't have any way to pay your bills. So put a little away for later. That is not capitalism or the economy or the grind - that is just reality.

[maki2]

you can get free financial planning at any credit union. the best approach is to set it up as a lifelong plan. Remember that young people today will not be able to collect social security at age 62 or even at age 65. It is going to be 70 years old. So you have to keep that in mind and get the money earned and socked away during your prime earning years so you are taking advantage of accumulated interest.
Also ageism is alive and well. Many people in their late 40s are finding it difficult to change careers and get paid as much as they were getting in their previous job.

While you are young and employed with a good salary part of the financial plan will be to put some money into more risky but higher return investments which might mean investing in yourself by stating your own business where you don't have to worry about hating your boss or your job. Plus make it one where you can work while on the road. Then you don't have to worry so much about if you run out of savings in an emergency. But you might want to have some insurance that pays an income if you are injured and can't work for a while.

(This post was last modified: 09-28-2019, 05:40 PM by maki2.)

[LoupGarou]

Have enough to keep the wheels turning. If things go pear shaped, just start up a Go Fund Me account.

[SLB_SA]

You also have to think about your later years and what you will need when no longer able or want to work.  Not having a good income for enough years will severely impact your social security income too when the time comes.  A good nest egg invested today would be large for retirement given the time you have for it to grow.

I agree with this advice but with a caveat.  To quote the book Get What's Yours (on page 48), "The PIA benefit formula is highly progressive.  The formula that determines your full retirement benefit, or PIA, based on your lifetime earnings base, or AIME, is progressive.  This means it gives lower-wage workers - those with low earnings bases - a disproportionately better deal."  Thus, even if you don't earn a lot, the years you work will still add to your social security benefit.

As an example, a person born in 1952 (and so whose full retirement age is 66), receives the same benefit ($1017/month) if her/his AIME is $856 and s/he takes SS at age 70 or her/his AIME is $2686 and s/he takes SS at age 62.  (This example is not adjusted for inflation.)  The person making $32,232 per year and the person making $10,272 per year receive the same SS benefit at age 70 when the first starts SS at 62 and the second starts SS at 70.

(This post was last modified: 09-28-2019, 08:36 PM by SLB_SA.)

[VanForNow]

Another factor is your ability to repair your own vehicle. Repairs are inevitable, but a person with mechanical skills doesn't need as large of a nestegg as a person who needs to pay large repair bills to a professional mechanic.

(This post was last modified: 09-28-2019, 09:46 PM by VanForNow.)