Boosting retirement savings has a less-appreciated benefit

Patricio Nahuelhual | Moment | At risk of stating the obvious: Boosting one's savings rate is among the best ways to improve a household's retirement prospects . Doing so increases the size of the financial war chest one can deploy in old age. But there's another, somewhat hidden benefit to saving a larger share of income, according to financial advisors — it simultaneously pushes households to live on less money, thereby reducing the amount of money they'll ultimately need to fund their lifestyle in retirement. It may even help reduce the age at which someone is financially able to retire. "A higher savings rate doesn't just build the portfolio faster. It also lowers the amount you need to retire," Fran Walsh, co-founder of Opulus, a financial advisory firm based in Doylestown, Pennsylvania, wrote in a recent post . "Because if you're living on less, you need less to sustain that life indefinitely," he wrote. 'Far more work than most people realize' Walsh provided an example to illustrate the concept. Consider two households: Each earns $250,000, starts saving at age 35, and gets an assumed 8% annual rate of return. Household A saves 10%, or $25,000 a year. Household B saves 30%, or $75,000 annually. Next, we use the so-called rule of 25 to determine the households' respective savings targets. This framework uses household spending to approximate the size of an adequate nest egg, by multiplying its annual spending by 25 .