The more you save now, the more you can spend tomorrow. Almost all financial advice available encourages more saving. We don’t disagree, but there should be a balance. Being too frugal can be just as big of a mistake as overspending.
Due to diminishing marginal returns, most people can maximize the usefulness of their money if they are able to generally smooth consumption over their lifetimes. It is ok to spend a bit more now than later, but don’t assume you won’t want the money just as much when you are older. You will.
To make intelligent tradeoffs such as one nice vacation now or two later, it is helpful to understand and quantify how much saving now actually increases future consumption. Let’s try.
Real Growth Rates
Most financial advice about saving tells you something like, “If you invest $X, in Y years you will have $Z”, where Z is usually a lot of money.
The point is correct, but there are two problems. First, it ignores taxes and inflation. This makes a big difference. Second, we know the assumptions will be wrong, but we don’t know how wrong. Will Z be off by 20% or 80%?
Let’s try to think about it correctly.
The following tables show how much money $1 saved will be worth, after taxes and inflation, for given time periods. It uses an 85% stock and 15% bond portfolio, and assumes 8% returns for stocks, 4.5% for bonds, and 3% inflation.
For those who are still working, the tables below also give an estimate for how much can be withdrawn each year in retirement as a result of the extra dollar saved. For this, they use a fairly standard 5% withdrawal rate. This is also inflation adjusted.
Obviously, real world results will be different, but this gives us a good general framework to better understand saving. “Real Value” means inflation adjusted back into today’s dollars. The 5% annual withdrawal is also inflation adjusted into today’s dollars.
One Time Saving $1 
Every Year Saving $1 

After # of Years 
Nominal Value 
Real Value 
5% Annual Withdrawal 
After # of Years 
Nominal Value 
Real Value 
5% Annual Withdrawal 

5 
1.35  1.16  0.06  5  6.00  5.47  0.27  
10 
1.84  1.37  0.07  10  14.15  11.89  0.59  
15 
2.55  1.64  0.08  15  25.39  19.52  0.98  
20 
3.56  1.97  0.10  20  41.02  28.67  1.43  
25 
5.00  2.39  0.12  25  62.94  39.74  1.99  
30 
7.07  2.91  0.15  30  93.87  53.22  2.66  
35 
10.04  3.57  0.18  35  137.72  69.70  3.48  
40 
14.31  4.39  0.22  40  200.13  89.93  4.50  
45 
20.45  5.41  0.27  45  289.22  114.84  5.74  
50 
29.28  6.68  0.33  50  416.67  145.58  7.28 
For example, $1 saved now and held 20 years results in about $2 of extra savings after inflation, and an extra $0.10 per year in retirement spending.
Or, using the table on the right, saving $1 every year for 20 years should result in about $29 of extra savings after inflation, and an extra $1.43 per year in available retirement spending.
If we think about this in percentage terms, saving 10 percent of income every year for 20 years should lead to about an extra 14% of current income to spend in retirement. So saving 10% every year is unlikely to lead to a dream retirement, though you will also have Social Security and possibly other income to help.
Again, these are only estimates. But the tables provide a good framework for understanding what to expect when devising a savings plan.
Deviation
The numbers above represent the median expected value. In real life, results will be different. Assuming you own stocks, which you should, you will probably end up with a lot more or a lot less.
As a very, very rough estimate, with an 85% stock portfolio, after twenty years you should expect one standard deviation of the final value to equal about half of the total expected value.
This means about a third of the time your estimate will be off by more than 50%. If you expect to have $1 million, there is a 32% chance you will have less than $500K or more than $1.5 million. There is a 68% chance you will have between $500K and $1.5 million. Dispersion gets even bigger if the time horizon is longer.
Because most people are more concerned with the bad scenario, in very rough terms, assume about a 15% chance of having less than half of the expected amount.
Still, for planning purposes, it is generally best target the median with the expectation that the final value will likely come in somewhere between 50% and 150% of what you expect. Luckily, with saving, you can adjust as you go along.
Conclusions
A few of you, may be thinking, “Hey, this all sounds great”, but most of you are probably thinking, “That’s it?”.
Well, yes. Investing helps, but most likely we will have to save most of the money we ultimately spend. We may get another period like the 1980’s – 1990’s with huge returns, but we can’t count on it.
Before you give up on saving, consider that in the real world the money you save will be used in one of two scenarios.
 If investment results turn out worse than expectations, you may need this extra money to maintain your basic living expenditures, in which case you will be glad you have it.
 If investment results are better than expected, the extra amount will grow to be larger than projected, and you can spend this surplus more aggressively.
Please don’t use this information to decide that saving is not that important. Along with making a lot of money, saving is the best way to ensure financial success. It is possible to save too much, but most people end up wishing they had saved more, not less.
Craig Birk, CFP®
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