So you know you should be budgeting and saving money. The question is what is a realistic savings rate for you and your family? And where should that money be going?
What is a "Savings Rate"?
First, to define a term - Savings Rate - a percentage of your income that you are able to tuck into long term storage. Don't think of your savings as an amount each month but instead think of it as a percent. In reality, the precise number you save each month means much less than the percentage of your check you stash away.
Take the following example into consideration. This is a famous example used in the book that first put me on the path to financial freedom, The Millionaire Next Door.
Mike earns $50,000 a year. He is able to save $10,000 into his retirement accounts, a savings rate of 20%. Mike's lifestyle has adjusted to live comfortably on the $40,000 a year the he currently budgets.
Joe earns $500,000 a year. He is able to save $100,000 into his retirement accounts and live off the $400,000 he has left to budget. Also a savings rate of 20%.
On the surface joe will have far more money in his retirement account than Mike does. This can be deceiving. Since Joe is used to the $400,000 a year lifestyle both men will reach financial independence at the same time. Reaching that 4% rule and being able to live off their accounts. So you see your savings rate is more important than the amount you put away.
What should my savings rate be?
So what is an ideal rate? Well... For sure it is more than 0%. Life throws situations at us where at times we don't have the luxury of saving up. The key is during those moments is to buckle down and fix the problems or make the changes necessary to get above the 0% savings rate. Don't feel bad or embarrassed if this is where you are currently at. It's normal. People just don't like talking about it. The key is to keep moving and keep working in the right direction. Choose and work towards a positive savings rate. It won't happen overnight, but slowly you will become more financially savvy and you'll be in the black. Once you are in the positives, automate some of those savings so that you no longer have to mentally focus on them. So how much should be going there...
Your first step should be to get a savings rate that is equal to your school's 403b match. This is an automatic 100% guaranteed return because your school is putting in that same amount you are putting in. For most teachers, we do NOT get a "robust" match from our schools. It's usually not the same as the private sector. Most private sector jobs will match a percentage of an employee's salary. The standard match is usually 3%, and in some cases, even up to 8%! Most schools do not match a percentage of salary, but usually have a flat dollar amount that they will contribute. As an example, our district will match up to $750 to our 403b. For me, that's 1.2% of my salary, so my first goal is to save 1.2% of my salary into my 403b.
From there, it's all about increasing that rate over time. A very easy way to increase this rate as a teacher is to take a portion of your salary increase each year and budget that directly towards your savings rate. Ideally, you would allocate 100% of any yearly salary increase to your savings rate, but that's just not realistic. Inflation, especially in today's economic environment, is a real thing. A realistic goal might be to allocate 25% or even 50% of any salary increase to savings. If you do this each year, your savings rate will grow a an incredible rate. Let's look at an example of a teacher just starting out.
You just signed on to teach high school science at a starting salary of $45,000. Your district will match up to $1,000 of your 403b contributions. You decide to make that your savings for the year. Your savings rate your first year is 2.22%. Not great, but hey, it's a start. Let's fast forward 5 years. Your salary is now $53,000. You started your career contributing $1,000, but you've decided to allocate 25% of any raises towards your savings rate. Your salary grew by $8,000, so you have added $2,000 more to your contributions giving you $3,000 going towards your savings. In five years your savings rate has climbed from 2.22% up to 5.66%! Let's go ahead another 5 years. During this time, you were able to get your master's degree, so your salary has jumped up to $65,000. You continued to allocate 25% of any raises to your savings. This adds another $3,000 to your savings giving leading to a total savings of $6,000. Your savings rate has now grown to 9.23%! By year 15, your salary has climbed up to $73,000, and you are at the top of your district's salary schedule. You have added another $2,000 to your yearly savings. Your total savings is now $8,000 a year. Your savings rate is a very solid 10.96%. If you would have allocated 50% of your raises, your savings rate by year 15 would have climbed to over 20%! Take it one step further. By year 5, you have gotten your expenses in line and you have no reason to grow them. You decide to allocate 100% of any future raises to savings. In year 15, your savings rate is a whopping 31.51%!!!
| 25% Allocation of All Raises | |||
| Year | Salary | Savings | Savings Rate |
| 1 | $ 45,000.00 | $ 1,000.00 | 2.22% |
| 5 | $ 53,000.00 | $ 3,000.00 | 5.66% |
| 10 | $ 65,000.00 | $ 6,000.00 | 9.23% |
| 15 | $ 73,000.00 | $ 8,000.00 | 10.96% |
| 50% Allocation of All Raises | |||
| Year | Salary | Savings | Savings Rate |
| 1 | $ 45,000.00 | $ 1,000.00 | 2.22% |
| 5 | $ 53,000.00 | $ 5,000.00 | 9.43% |
| 10 | $ 65,000.00 | $ 11,000.00 | 16.92% |
| 15 | $ 73,000.00 | $ 15,000.00 | 20.55% |
| 100% Allocation of Raises after Year 5 | |||
| Year | Salary | Savings | Savings Rate |
| 1 | $ 45,000.00 | $ 1,000.00 | 2.22% |
| 5 | $ 53,000.00 | $ 3,000.00 | 5.66% |
| 10 | $ 65,000.00 | $ 15,000.00 | 23.08% |
| 15 | $ 73,000.00 | $ 23,000.00 | 31.51% |
Where should I put these savings?
Everything that we have talked about to this point has focused on saving money in your 403b. This is a great option because it is a pre-tax option. Is it always the best option? That is for you to decide. One thing that is important to point out is that your 403b is not easily accessible until you reach retirement age. A portion of your savings should go into after-tax saving's accounts, or you will run into a problem called "liquidity". Liquidity is a term that means your ability to quickly access your money. As was pointed out earlier in the post, there are times when you will need access to cash. It could be to purchase a home, pay for kid's college, replace a water heater, or buy a vehicle. These are events that happen in every person's life, and you will need to be prepared for them. Too many Americans have good-looking retirement accounts, but they have no access to money so they can't afford to pay for that new water heater when theirs breaks. This is why part of these savings should be put into an emergency fund in a savings account or a brokerage account.
Why is savings rate so important?
If you are planning on teaching to your full pension age, you are going to be using your savings to help float the gap that is left over between your pension and your typical spending rate. Remember your pension will only be about 60% of the salary you have been used to. So if you have been spending your entire paycheck for your entire life, you will be in for a rude awakening.
Some people believe that social security will be able to make up for that 40% "gap" between your full salary and your teaching pension. This might be a possibility, but social security funding and payouts will need to be changed in the coming years to make up for budgetary shortfalls. Some people believe that social security could become "means-tested". The government will see how much money you are bringing in during retirement and determine if you will qualify for social security benefits. Well... The sad news is that if you have a pension, you may end up having your social security benefits reduced.
Now, this is definitely us doing some speculating, but we would rather let you know the "worst-case scenario" and have you plan for that than bury our heads in the sand and "hope" everything works out. That's what too many people are doing for their retirement "planning" these days!
In Closing
Saving money is not something that comes natural to most people. The thrill of spending money and buying that next shiny toy is designed to give you that shot of dopamine that most people crave! It takes planning, patience, and vision to see the big picture and build toward the future you want. Hopefully by following the information we've shared with you, you are able to build your own vision for your future and make it become a reality, and as always....
KEEP STACKIN!