Why do people save so much?
When I am old and retired (70 years +), I don't plan to spend a lot of money. I'll be living in my own house that is already paid off at that point, so no rent or mortgage payments. Since I don't need to get to work every day, I wouldn't need (or want) a car, and would probably use a bicycle or maybe some cheap future-scooter... or just walk. In terms of activities, my life would revolve around my family, watching sports, a number of other low-cost hobbies to keep me busy, and intellectual studies (learn some of the sciences). My country has universal healthcare, so medical expenses are not a worry.
Really, my only real expenditure will be food on the table every day, and helping my children out if they need it.
Money is what I need/want now. House, car, insurance, gas, clothes, shoes, restaurants, vacations, etc, etc, etc, etc.
With all that in mind, I am a bit confused to hear so many people talk about how they save 15-20 % of their income, despite often being young (as low as early 20s!).
I can't understand that. What are they doing it for? Why do they need so much money as old people?
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Lots of great answers already. Two points that don't seem to have been addressed so far:
You ask:
I am a bit confused to hear so many people talk about how they save 15-20 % of their income, despite often being young (as low as early 20s!). ... Why do they need so much money as old people?
Others have already noted that saving such a high percentage is not overly common. I'll add: do the young people who save so much do so for retirement? Or are they saving, at least in part, for a car, for a downpayment on a house, or to tide them over while they try starting a business? All of these are very good reasons to save (and I am not even mentioning an emergency-fund, since people saving 15% presumably have this well covered already), and the time horizon is much shorter than retirement.
Saving is simply spending less than you earn. Getting used to spending less than you earn is extremely good discipline. It allows you to take a temporary hit to your income without having to cut luxuries that you have gotten used to. If you get used to luxuries all your life, then the frugality you are budgeting with in your question may be hard to deal with when you actually get to experience it!
Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
(Charles Dickens in David Copperfield)
For myself, I saved because having accumulated a nice pile of money - enough to live modestly on the income (what I call being "independently poor") is both security and freedom.
Take security. What are the odds that sometime between wherever you are now and your 70 year old self, you will find yourself out of a job, with no prospects of finding another anytime soon? Perhaps your skills are no longer in demand, and you need to retrain, perhaps you can no longer physically do the work you were doing, perhaps your country undergoes a prolonged recession brought on by ill-advised economic policies? (I've had all these happen to me.) What do you do if you don't have savings, live in a cardboard box and eat out of dumpsters?
Then there's freedom. Once I've accumulated that initial pile, I don't have to take the highest-paying job I can get. I can afford to take the more interesting ones that pay less. I can take a year or two off, go back to school for advanced degrees (which makes those more interesting jobs available), take a job on another continent that doesn't pay much, work for myself so I can set my own hours and have time to hike, ski, ride my bike or horse...
Then there's the fact that having saved money saves me money. I can put enough of a down payment on a house so that I get lower interest rates, and don't have to pay PMI*. If I want a car or something, I can just pay cash instead of taking out a high-interest loan. And if I do need to borrow, I can get really low interest rates, even 0% interest credit cards..,
PS: And another reason I personally saved a bunch? What else would I do with the money? Most of the things I enjoy doing - hiking, biking, cross-country skiing - are pretty cheap. I don't like fancy cars or clothes, expensive restaurants, and so on. Should I spend money on stuff I don't want, just to show that I have it? (Or had it before I spent it on consumerist junk, anyway :-))
PMI = Private Mortgage Insurance. In the US, this is an extra charge on a mortgage payment if you have put less than a 20% down payment on a property. It is supposed to cover the lender's risk of property losing value (as in the '08 housing slump) and the purchaser simply walking away because the property is now "underwater" - that is, the outstanding balance of the loan is more than the property is worth.
As already mentioned, in USA few people save fifteen percent. But there's a good reason many people save four to six percent—employer matching. If I got paid a thousand dollars (before I retired), I could put forty into a 401k and my employer would put in twenty. Would be foolish to pass up the extra twenty. Plus, no taxes on the entire sixty until I draw it out of the account (during retirement).
Another reason many people set aside money for retirement is the number of so-called experts spouting the B.S. that it's not possible to retire without millions in savings. People take their word for it and don't check the math. I know it's nonsense because I retired with only K and I didn't even need that. My total expenses in the four years since I retired averaged thirty thousand a year, and a good portion of that was unnecessary luxuries. Actual living expenses (food, lodging, clothing, medical) for four years were K. Transportation to over twenty countries, K and the rest luxuries. (67+24)K = less than my Social Security and pensions.
TL;DR: Do your own math; ignore the "advisors."
"Always listen to experts. They'll tell you what can't be done and
why. Then do it." (Heinlein)
Everyone has different retirement goals. Some people want to retire before they are 70, the earlier they want to retire the more they need to save now. Other people want to travel in retirement and drive a nice car. It just varies a lot.
There's also uncertainty about future expenses. Medical expenses are much higher for the elderly, if you want to live in your own home until the day you die, you may require in-home care at some point, that could be very costly.
Some people probably save more than they need because they over-estimate their future needs, it's not easy to know now exactly what one will want/need in the distant future, but living below their means now means they are less likely to come up short down the road.
It's also worth noting that while some people do save 15-20% of their income, that's exceedingly rare, many more people save nothing substantial.
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