The Fundamental Error We Make When Planning For Retirement

The key to retirement is understanding a fundamental concept called savings rate. A lot of people only focus on the savings, and not the savings rate. Let me explain to you why the savings rate is more important than the savings.

A friend of mine was saving $200 every month while he was making north of $1000. A few years later, his business really took off and now he was saving $300 every month while making nearly $3000. While he was making progress in saving more money, he thought that he was going to retire much earlier now. But that isn’t true. He actually delayed his retirement. Sounds strange, right? Let me explain.

His savings rate before was 20% of his income and a few years later despite increasing the savings amount, he reduced his savings rate to 10%. The reason why this matters is because his expenses have gone up considerably. While his savings have gone up by $100 each month, his expenses have gone up by $1900 per month.

Now that his new lifestyle requires much more money to maintain, and assuming that he doesn’t want to downgrade his lifestyle once he retires, his savings will now support him for considerably lesser time period. And hence he will have to work for a longer time period now before he can retire.

Here’s a retirement calculator for people in Pakistan.

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