Savings and lifestyle

The purpose of this post is to show how to maintain one's lifestyle after he/she stops working. Observe the chart below (Source here). It shows the advantage of continuing education past high school. It also shows that in the course of a lifetime one’s salary will tend to rise until about 40, it will rise a bit slower from 40 to 50, then it will plateau and slowly decline.

20120910-Income-by-education

20120910-Income-by-education

For illustration purposes, here is simplified version of the above graph:

20120910-income-by-education-abstracted

20120910-income-by-education-abstracted

Income tends to rise when young people get more experience, education, and skills. Income tends to decline as work skills become obsolete, and as people work less and/or leave the workforce to retire. Many people have negative savings when they are young. That means that they spend more than they earn by taking advantage of school loans. If they had average annual earning and they spent everything they earned on lifestyle and paying back student loans, their lifestyle would look something like this:

20120910-income-and-lifestyle

20120910-income-and-lifestyle

They would borrow when they were young and pay off the loan when they are older. If they spent the rest of their income on lifestyle, then they would be in big trouble when they approach retirement years. They would be forced to decrease their lifestyle and possibly become dependent on others as there annual earnings decreased. To avoid this, they would have to save, by consuming less than they earn as shown in the graph below. For simplicity, let's assume that they didn't have to take out any school loans.

20120910-lifestyle-below-income

20120910-lifestyle-below-income

If people saved as they earned more, they would be able to maintain their lifestyle by living off of their savings. How would savings carry them through retirement? By investing. The graph below shows how this could hypothetically happen:

20120910-income-lifestyle-and-investement

20120910-income-lifestyle-and-investement

If one saved and put their money into investments, he/she could create an income from their investments that would replace their annual earned income that they had to work for. The only way to maintain independence and increase one's lifestyle over time is to consume less than you earn and put your savings into an investment that will grow and provide income without having to work.