A reader queries:

I’m trying to make sense of this in light of the reality of life because we’re used to seeing financial planning advise based on a consistent savings rate over extended periods of time. We are a married couple in our mid-30s who aim to save 30% of our gross income in order to provide context. We were living well below our means and had a savings rate of 40–45%, which was significantly higher than our target of 30%, prior to having children and buying a property (age 30-35). Our savings rate has now fallen to 20–25% as a result of paying for a home and childcare, and we feel bad about it since it seems like we have given in to lifestyle creep. On the other hand, is this simply a natural change in which the savings rate declines until kids enrol in public school and then rises again? We want to make sure we stay on the correct track and are interested in seeing how a savings rate changes over time in response to life events.

This question is great since it highlights how unreliable the typical retirement calculator is.

There was a research a few years back that determined how much you should have saved by a specific age:

Even though the study itself provided numerous cautions, people on the Internet were really upset about this one.

The issue is that life is not a straight line.

Nobody truly starts saving a certain proportion of their salary at age 25 and continues saving at the same rate all the way up until retirement. Only in personal finance books and FIRE blogs will you find that.

Spreadsheets are much cleaner than reality.

People relocate, change jobs, earn more or less money, are laid off, have children, incur unforeseen bills, experience health scares, spend carelessly, and go through all the other life events.

Each person will experience good and poor years, based on their occupation, location, circumstances, and luck.

Just consider how unstable the personal savings rate is here:

It is dispersed throughout.

While a linear path through your life would be ideal for financial planning, none of this actually occurs that way.

In fact, I hazard an estimate that, for the majority of people, personal finances are at least as unpredictable as the stock market.

Therefore, I wouldn’t feel bad about seeing your savings rate decline simply because you bought a house and had a child.

With regard to specific life events, I can say that over the years, my personal savings rate has fluctuated.

The basement of our first home was unfinished. Our savings rate suffered in the year we finished it because house renovations are expensive.

We had three kids in daycare for two years before to the birth of my twins. Those were undoubtedly difficult years for our savings rate.

However, you don’t feel bad about it when it occurs. That is the main factor behind your high savings rate. You have a safety net with a high savings rate for when life unavoidably gets in the way.

Although a savings rate of 30% is an admirable target, 20 to 25% is likely preferable to 98% of households. A 40–45% savings rate when you are in your 30s is actually too high. In those years, you ought to be having fun.

Additionally, you may plan better for the future to expand your savings (assuming that’s what you want to do) now that you have a house and a child.

Although owning a home is expensive, your monthly payment is now fixed. Taxes don’t really increase that much year over year. Being in your late 30s indicates that your peak earning years are still ahead of you, though I can’t guarantee anything.

Additionally, even though daycare is pricey, public school is the bright spot. when the daycare fees are no longer owed after your child starts preschool or kindergarten. You’ll consider that to be a raise.

I know firsthand how costly daycare is, so when that rise occurs, it will feel like a healthy one.

A new job, a bonus, a new source of income, refinancing your house, etc. are just a few examples of life events that could go your way despite the fact that life interfered with your personal finances and decreased your savings rate.

Listen, my savings rate would be noticeably greater if I lived in a monastery, rented, and avoided having children. But I’ve decided against leading that life.

Over time, your personal finances may experience volatility.

It isn’t lifestyle creep when your savings rate drops from 40–45% to 20–25%; it’s just part of life.

On the most recent episode of Portfolio Rescue, we talked about this issue:

This week, Joey Fishman joined me on the podcast to discuss regional arbitrage, online savings accounts versus short-term bonds, and RSUs at start-ups and public firms.

Additional Reading

Stupid Young Retirement Investors

The podcast for this week’s programme is available here:

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