Life After Full-time Work Blog

Learn about preparing for life after full-time work through posts from Don's upcoming book.

#17: A First Exploration Of Saving

In Post #1 we saw that we need to set aside money while we’re working if we want to draw on it later so that we don’t have to work forever. This post picks up on that idea, and explores how much we need to save, as well as what our choices are if we don’t save as much as we need to. Make sure you also read Post #18, which will make you feel much better!


Why do we bother to save at all?

Well, if we have enough money, we really don’t need to save. So we save if we feel that we’re going to need money at a time when we won’t have enough.

Typically there are two types of occasions.

One is emergencies, meaning something we don’t contemplate as a regular occurrence, and so it doesn’t come out of the normal paycheck. Some of us think of anticipated vacations or gifts that way, in fact, and we set aside money for them separately. But here, when I refer to emergencies, I’m thinking simply of unexpected events. Talking to financial professionals, I’ve heard advice that recommends that, during your working years, you should accumulate up to six months of spending in a bank account that you keep just for emergencies – possibly even unemployment.

Apart from that, the main goal of saving is to give ourselves the gift of being able to retire – to have money available to live on, without the need to keep on working forever.

Let’s do a little arithmetic to see how much saving we need to do for that goal.

I’m going to show you a simple example. And I’m going to make some assumptions, to keep the calculations easy. There’s a very important point that follows.

I’m going to deal with someone who is now 25 years old and hopes to stop working at the age of 65. This person, whom I’ll call X (a nice, mysterious name), is planning to start saving right away, and intends to save for the full 40 years until reaching age 65.

Let’s assume X is given pay increases in line with inflation, and saves 10 per cent of that pay each year. Yes, I know that’s more than most people actually save. Don’t take any of these numbers seriously – they’re just used as an example.

X invests those savings safely, earning a return that matches inflation but nothing more.

Because of those assumptions, we can ignore inflation in our calculations, since every year, everything automatically matches inflation.

OK, let’s see what happens to the savings.

After 40 years, X will have 40 times 10%, or 400%, of pay accumulated. In other words, at 65, X will have a pension pot that has a lump sum in it, equal to 4 years of annual pay.

How much money can X withdraw every year after age 65?

That depends, of course, on how long X will live. For this example, let’s make an assumption that X plans to have enough to last until age 90. So that’s 25 years of withdrawals required.

X continues to invest safely, earning a return that just matches inflation. For a constant drawdown each year, X can withdraw 400% divided by 25, or 16%, each year; and that will last for 25 years.

That’s the example. The benefit of X’s saving 10% of pay each year is to be able to withdraw 16% of pay each year, when working stops. (Note, by the way, that the actual amount available for spending is probably somewhat lower, because typically the drawdown is taxable.)

To this, of course, X will add whatever is available from the Pillar 1 pension in that country (the state pension).

I think I can guess what your reaction is, because I hear it every time I show this calculation.

Hey, 16% plus Pillar 1 isn’t nearly enough to maintain my standard of living! And that’s if I save for 40 years – and I haven’t actually been saving for 40 years – and I’m not actually saving 10% every year. There must be something wrong!

No, there isn’t anything wrong. The arithmetic is simple and impeccable. That’s the point I want to make – that if we save over a whole working lifetime, even as much as 10% of pay each year, and invest it safely, the chances are that we aren’t going to have enough money to match our retirement ambitions.

OK, what are our choices, then? This is the point I want to make. I think in terms of a dashboard with three dials that we can turn.

The first dial is to save more, or longer. Meaning, we can save more than 10% of pay. Or we can start before age 25. Or we can work until after age 65. Actually, postponing retirement is doubly valuable, because not only does it increase the accumulation period, it also reduces the post-work drawdown period.

The second dial we can turn is to scale down our post-work ambitions. We don’t like to do that. But it’s a possibility that is realistic for most of us, so let’s at least bear it in mind, even though it’s not a choice we would make willingly.

The third dial we can turn is the investment risk dial. By that I mean that we can try to earn an investment return that exceeds inflation. And that means we have to invest, not in something safe, but in something risky, and hope that taking investment risk will be rewarded, and we’ll end up with a lump sum much in excess of 4 years of ending annual pay.

That’s in fact what we tend to do. We know from the Investment posts it’s reasonable to expect a higher return if we take higher risk – though of course it’s also not certain, because that’s the essence of risk.

But for now, I just want to make the point that our retirement ambitions tend to greatly outstrip our willingness to save enough, and that, because of that, we are forced into the situation of taking investment risk.



We need to save because otherwise we won’t have enough money to last the rest of our lives. Our retirement ambitions are typically such that we need not only to save, but also to take investment risk in the hope of adding to our savings.



I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.

2 Responses to “#17: A First Exploration Of Saving”

  1. Mohan Kinra says:

    This is so clearly and wondefully written.
    Many young people hope to “retire early” and there is nothing wrong with that.
    However, I feel lucky, that circumstances in my life made it necessary for me to work until my wife would turn 65. The reason is that she must at all times be medically insured because she lived in USA and has Lymphoma.
    She does not work. I am older to her by nearly 10 years. This means that I need to work till I am 75. Yes, I feel lucky because if I work till 75, I have less remaining years to worry about planning for and can therefore afford to take lower risks after I retire at 75+.

    • Don Ezra says:

      Thanks for your very personal story. The way you play the hand you’re dealt says so much about your character. I wish both of you much happiness in the years ahead.

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