It’s probably less than you think
IF YOU EVER go fishing in the streams of southern Alaska you will see hundreds of Dolly Varden char swimming in the clear waters. What you won’t see is much for them to eat. Well, at least most of the year. But starting in the early summer, the salmon arrive.
From the moment the char encounter their egg-filled prey, they erupt into a gluttonous feeding frenzy that leaves their bellies ready to explode.
“They are totally egg-crazed,” says Jonny Armstrong, a David H. Smith Conservation Research Fellow at the University of Wyoming. “Their stomachs are packed with eggs. They are beaten up and scratched from duking it out with salmon.”
Once the salmon are gone, many of the char stay behind despite having no consistent food source. “If you do the energy calculations and the amount of food in the watershed most of the year, you quickly see they shouldn’t be able to survive there year-round,” says Armstrong. “But they do.”
How do the char withstand such conditions? As Armstrong and his colleague Morgan Bond discovered, when food is scarce the char shrink their digestive tracts in order to use less energy. When the salmon arrive, their digestive organs grow to twice their normal size.1
In biology this concept is called phenotypic plasticity, or the ability for an organism to change its physiology in response to its environment. Not only is phenotypic plasticity useful for understanding how plants, birds, and fish change based on their surroundings—it can also be useful when determining how much money you should save.
The Problem with Most Savings Advice
When you Google “how much should I save” you will get over 150,000 results. Look through the top 10 and you will see this sort of advice:
“Save 20% of your income.”
“10% of your income should go to savings, but work up to 20%, then 30%.”
“Have 1x your income saved by age 30, 2x your income saved by age 35, and 3x your income saved by age 40.”
These articles share the same flawed assumptions. First, they assume that income is relatively stable over time. Second, they assume that people at all income levels have the ability to save at the same rate. Both of these assumptions have been disproven by academic research.
First, data from the Panel Study of Income Dynamics (PSID) suggests that incomes are becoming less stable, not more stable, over time. Researchers utilizing this data found that “the estimated trends in family income volatility show a 25 to 50 percent increase” from 1968 to 2005.2
This makes logical sense as the gradual shift from one-income households to two-income households means that the typical family doesn’t have to worry about one person losing their job anymore, but two people losing it.
Second, the biggest determinant of an individual’s savings rate is the level of their income. This fact has been broadly established within the financial literature.
For example, researchers at the Federal Reserve Board and the National Bureau of Economic Research estimated that earners in the bottom 20% saved 1% of their income annually while earners in the top 20% saved 24% of their income annually.
In addition, their estimates show that those in the top 5% of earners saved 37% annually while those in the top 1% saved 51% of their income each year.3
Similarly, two economists at UC Berkeley found that savings rates were positively correlated with wealth in every decade in U.S. history from 1910 to 2010, with the exception of the 1930s.4
This is why savings rules like “save 20% of your income” are so misguided. Not only do they ignore fluctuations in income, but they also assume that everyone can save at the same rate, which is empirically false.
This is where the Dolly Varden char and phenotypic plasticity come in. Instead of consuming the same number of calories throughout the year, the char change their caloric intake (and their metabolism) based on how much food is available.
We should do the same thing when it comes to saving money.
When we have the ability to save more, we should save more—and when we don’t, we should save less. We shouldn’t use static, unchanging rules because our finances are rarely static and unchanging.
I experienced this personally after seeing my savings rate drop from 40% while living in Boston to only 4% during my first year in NYC. My savings rate plummeted because I changed careers and stopped living with roommates when I moved to New York.
If I had vowed to always save 20% of my income no matter what, then I would have been absolutely miserable during my first year in NYC. And that’s no way to live.
This is why the best savings advice is: save what you can.
If you follow this advice, you will experience far less stress and far more overall happiness. I know this because people worry enough about money as it is. According to the American Psychological Association, “regardless of the economic climate, money has consistently topped Americans’ list of stressors since the first Stress in America™ survey in 2007.”5
And one of the most common financial stressors is whether someone is saving enough. As Northwestern Mutual noted in their 2018 Planning & Progress Study, 48% of U.S. adults experienced “high” or “moderate” levels of anxiety around their level of savings.6
The data is clear that people are worried about how much they save. Unfortunately, the stress around not saving enough seems to be more harmful than the act itself. As researchers at the Brookings Institute confirmed after analyzing Gallup data, “The negative effects of stress outweigh the positive effects of income or health in general.”7
This implies that saving more is only beneficial if you can do it in a stress-free way. Otherwise, you will likely do yourself more harm than good.
I know this personally because, once I stopped saving money based on an arbitrary rule, I no longer obsessed over my finances. Because I save what I can, I am able to enjoy my money instead of questioning every financial decision I make.
If you want to experience a similar transformation when it comes to saving money, then you first need to determine how much you can save.
Determining How Much You Can Save
Figuring out how much you can save comes down to solving this simple equation:
Savings = Income – Spending
If you take what you earn and subtract what you spend, what you are left over with is your savings. This means that you only need to know two numbers to solve this equation:
1. Your income
2. Your spending
I recommend calculating these numbers on a monthly basis given how many financial events occur monthly (e.g., paychecks, rent/mortgage, subscriptions, etc.).
For example, if you get paid $2,000 twice a month (after taxes), then your monthly income is $4,000. And if you spend $3,000 a month, then your monthly savings is $1,000.
For most people, calculating income is going to be easy while calculating spending is going to be much tougher since spending tends to fluctuate more.
In an ideal world, I would ask you to know where every dollar you are spending goes, but I also know how time consuming this is. Every time I read a book that told me to calculate my exact spending, I ignored it. Since I am assuming you will do the same, I have a far easier approach.
Instead of calculating every dollar you spend, find your fixed spending and estimate the rest. Your fixed spending is your monthly spending that doesn’t change. This will include: rent/mortgage, internet/cable, subscription services, car payment, etc.
Once you add all these figures up, you will have a monthly fixed spending amount. After this, you can estimate your variable spending. For example, if you go to the grocery store once a week and spend about $100, use $400 as your monthly food estimate. Do the same thing for going out to eat, travel, etc.
Another tactic that has helped me better estimate my spending is putting all of my variable expenses on the same credit card (which I pay off in full at the end of the month). This won’t maximize your rewards points, but it will make tracking your spending much easier.
Whatever you decide to do, at the end of this process you will know approximately how much you can save.
I recommend this approach because it’s so easy to get lost worrying about not having enough money. For example, if you ask 1,000 American adults, “How much money do you need to be considered rich?” they will say $2.3 million.8 But if you ask the same question to 1,000 millionaires (those households with at least $1 million in investable assets), the number increases to $7.5 million.9
We get richer yet still feel like we don’t have enough. We always feel like we could or should be saving more. But if you dig into the data you will find a completely different story—you might be saving too much already.
Why You Need to Save Less Than You Think
One of the biggest worries for new retirees is that they will run out of money. In fact, there is overwhelming evidence that the opposite seems to be happening—retirees aren’t spending enough.
As researchers at Texas Tech University stated, “Rather than spending down savings during retirement, many studies have found that the value of retirees’ financial assets held steady or even increased over time.”10 The authors demonstrated that this occurs because many retirees don’t spend more than their annual income from Social Security, pensions, and their investments. As a result, they never sell down the principal on their investments portfolios and, therefore, typically see their wealth increase over time.
This is also true despite required minimum distribution rules (RMDs) that force retirees to sell down a portion of their assets. As the researchers concluded, “[this] is evidence that retirees take required distributions and reinvest them in other financial assets.”
What percentage of retirees do sell down their assets in a given year? It’s only about one in seven. As the Investments & Wealth Institute reported, “Across all wealth levels, 58 percent of retirees withdraw less than their investments earn, 26 percent withdraw up to the amount the portfolio earns, and 14 percent are drawing down principal.”11
The end result of this behavior is lots of money left to heirs. According to a study by United Income, “The average retired adult who dies in their 60s leaves behind $296k in net wealth, $313k in their 70s, $315k in their 80s, and $238k in their 90s.”12
This data suggests that the fear of running out of money in retirement is a bigger threat to retirees than actually running out of money. Of course, it is possible that future retirees will have far less wealth and income than current retirees, but the data doesn’t seem to support this either.
For example, based on wealth statistics from the Federal Reserve, millennials had roughly the same per capita wealth as Generation X, who had roughly the same per capita wealth as baby boomers at the same age and after adjusting for inflation.13
As the following chart illustrates, the per capita wealth of these generations seems to be following a similar trajectory over time.
This is evidence that, on aggregate, millennials don’t seem to be building wealth at a slower pace than prior generations. Yes, there are issues with the distribution of that wealth and how much debt some millennials have, but the overarching story isn’t as dire as the media usually makes it out to be.
And on the Social Security front, things aren’t as bleak as they seem either. Though 77% of workers believe that Social Security won’t be there for them when they reach retirement, the complete elimination of benefits seems unlikely.14
The April 2020 report on the Actuarial Status of the Social Security Trust Fund concluded that there would be sufficient income to pay “79 percent of scheduled benefits” even after the Trust Fund runs out of money around 2035.15
This means that future retirees should still receive roughly 80% of their estimated benefits if the U.S. stays on its current course. This isn’t an ideal outcome, but it is far better than the one so many have imagined.
Given the empirical research, the risk of running out of money for many current and future retirees remains low. This is why you probably need to save less than you think. Along with saving what you can, these comprise the two important answers to the question, “How much should you save?”
However, for those that need to save more, we turn to our next chapter.
1 Miller, Matthew L., “Binge ’Til You Burst: Feast and Famine on Salmon Rivers,” Cool Green Science (April 8, 2015).
2 Nichols, Austin and Seth Zimmerman, “Measuring Trends in Income Variability,” Urban Institute Discussion Paper (2008).
3 Dynan, Karen E., Jonathan Skinner, and Stephen P. Zeldes, “Do the Rich Save More?” Journal of Political Economy 112:2 (2004) 397–444.
4 Saez, Emmanuel, and Gabriel Zucman, “The Distribution of US Wealth: Capital Income and Returns since 1913.” Unpublished (2014).
5 “Stress in America? Paying With Our Health,” American Psychological Association (February 4, 2015).
6 “Planning & Progress Study 2018,” Northwestern Mutual (2018).
7 Graham, Carol, “The Rich Even Have a Better Kind of Stress than the Poor,” Brookings (October 26, 2016).
8 Leonhardt, Megan, “Here’s How Much Money Americans Say You Need to Be ‘Rich’,” CNBC (July 19, 2019).
9 Frank, Robert, “Millionaires Need $7.5 Million to Feel Wealthy,” The Wall Street Journal (March 14, 2011).
10 Chris Browning et al., “Spending in Retirement: Determining the Consumption Gap,” Journal of Financial Planning 29:2 (2016), 42.
11 Taylor, T., Halen, N., and Huang, D., “The Decumulation Paradox: Why Are Retirees Not Spending More?” Investments & Wealth Monitor (July/August 2018), 40–52.
12 Matt Fellowes, “Living Too Frugally? Economic Sentiment & Spending Among Older Americans,” unitedincome.capitalone.com (May 16, 2017).
13 Survey of Consumer Finances and Financial Accounts of the United States.
14 19th Annual Transamerica Retirement Survey (December 2019).
15 The 2020 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (April 2020).