Save More Even If It Is Less Than You Should

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The lottery relies on the most powerful way to motivate people: a variable reward in response to a specific behavior. This strategy produces more of the behavior than a consistent reward and more than a schedule of rewards based on an interval of time.

Lotteries are normally a terrible idea because they motivate the wrong kind of behavior. Participating in a lottery is merely giving your earnings to the lottery sponsor.

Instead, saving your earnings for yourself produces real value. No matter how small your savings, those small changes have large effects over time.

Alas, the benefit of saving is on a delayed schedule. Up until retirement, you have to decide each day to continue to delay your reward. If you falter and try to reap your benefit early, you could accidentally jeopardize the entire prize. Each day you save, you see no benefit until you need retirement withdrawals and find that you have enough money to support you.

This kind of delayed schedule is the worst reward system to motivate people. It’s no wonder most people don’t save enough.

To have a 40-year working career (age 25 to age 65), you need to save and invest 15% of your standard of living each of those 40 years, regardless of how much you earn, in order to stay on track for retirement. If you are starting late on your savings, then you have to save and invest more.

A 2014 study found that 44% of families are saving less than 10% of their salary towards retirement and 21% have saved nothing for retirement.

Trying to move from 10% savings to the recommended 15% savings can be challenging. On an annual take home pay of $50,000, it might mean finding $2,500 more in annual savings.

However, setting the modest goal of moving from 10% savings to 12% savings might be more achievable. On an annual take home pay of $50,000, 2% more savings is finding $1,000 more in annual savings, which is $83.33 per month or $19.23 per week of savings. Saving $20 each week could be easily achieved by eating one more dinner at home each week instead of eating out. This small change, eating at home one more night to save 2% more each year, enables you to retire 3 years earlier or 20% richer.

After solidifying that lifestyle change, you can try to do it again; save 2% more to bring your total savings up to 14%.

If you are currently not saving or effectively not saving, then starting to save something will make a huge difference. A 25-year-old saving and investing 0.2% of their salary each year is on track to retire at age 100, which is to say they are not on track at all. On a salary of $50,000, this is saving and investing $100 per year.

However, even just increasing savings by 0.8% is saving $400 per year, $33.33 per month, or $7.69 per week. Avoiding a $33 monthly purchase might mean canceling a monthly box delivery subscription service. That small change enables you to retire 6 years earlier (down to age 94) or 400% richer at age 100.

Then, you can try to do it again and bring your retirement 4 years closer (down to age 90) or 80.00% richer at age 94.

There are two reasons that you are able to retire earlier when you save and invest more.

First, the power of compounding means that the more (and the earlier) that you save and invest the larger those assets will grow. Saving more now means that you will have more later.

Second, when you save more, it means that you spend less. If your salary stays at $50,000 but you increase your savings from 0.2% to 1%, it means that you had to decrease your lifestyle from $49,900 to $49,500. This decrease in your lifestyle spending, assuming that it is a permanent decrease, means that you don’t need as much in order to retire.

To calculate the amount you need to retire, take your standard of living and divide by your safe withdrawal rate at the age you want to retire.

An age 65 safe withdrawal rate is 4.36%. Without adding the complexity of factoring Social Security into safe withdrawal rate (which we would do for our clients), $49,900 / 4.36% = $1,144,495 needed to retire. However, a lower lifestyle needs less, as $49,500 / 4.36% = $1,135,321 needed to retire. Meaning, this $400 decrease in lifestyle spending decreased the total assets needed to retire at age 65 by $9,174.

Together, these two financial principles of compounding and reducing your standard of living mean that it is in your best interest to save more now, even if your total savings will still remain less than you ideally should be saving.

Change of any kind, and especially financial change, can be stressful. You are likely not prepared to make all the necessary changes at once. However, take small steps.

First, if you have savings but they are not invested, invest them. This small step brings you significantly closer to retirement. Even if you are saving 15% of your take-home pay, if you are not investing it you are not on track for retirement. Using a modest real portfolio return of 5.3%, investing your savings could bring your retirement 23 years earlier or 673.43% richer.

After investing your savings, start increasing the amount you save by reducing your lifestyle. After identifying how much more you ideally should save, my favorite strategy for locating savings opportunities is using the Core Values Budgeting strategy.

In this strategy, you try to live on less in the areas that bring less value to your life while maintaining funding for the core of your budget. In areas of life that are unimportant to your goals, you strive to be frugal to the point of being miserly. However, when it comes to what is important to you, you remain willing to spend money on your life goals.

As you cut back your budget, make changes one at a time. Do not implement the next change until you have adjusted to the one you just made. Too many changes all at once may make the results short-lived. For example, you might be eating every meal out right now. If you try to eat every meal at home, while this does afford a lot of savings, you may not be able to sustain the change. You might spend a week eating at home, but then rebound the next two weeks and eat out even more than normal.

It is better to make small sustainable changes. For example, eat breakfasts and one more dinner at home while selecting more inexpensive restaurants when you eat out.

You don’t need more money. To achieve your lifetime goals, you need to focus your financial efforts around your goals and cut out all the excess.

Photo by Emma Simpson on Unsplash

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.