The Rules of Thumb
Earlier this year, Fidelity published an article covering some general rules of thumb relating to retirement savings. They estimated you need about 10x your income by age 67 to be ready for retirement. To make it to that number, they estimate you should have 1x your salary in retirement savings by age 30, 3x by age 40, 6x by age 50 and 8x by 60. To meet these benchmarks, it is generally advised to save between 10-15% of your income (pre-tax income, not take-home pay), and then invest those savings in a retirement account to take advantage of the power of compound interest. If you do that consistently from the point you enter the work force until you are ready to retire, chances are pretty good you will be in the ballpark of those numbers.
Getting a Late Start
But what if you are in your 30s and haven’t started saving yet? There are plenty of reasons you might not have the retirement nest egg the sages say you should. Anything from pursuing advanced professional education or medical training. Maybe you spent your 20s trying out a couple different career paths looking for the right fit. And let’s not forget student loans, family life and the general chaos that is common for young adults. So the question is “Are you screwed?” Are you so far behind that you will never catch up? Will you spend your senior years living under a bridge while your high school classmates who started saving at age 18 drive past you in their shiny new cars and throw rotten vegetables at you?
No. Not Even Close.
If you save 9.85% of your income every year, invested to generate a modest 5% inflation-adjusted return for the next 37 years, you will end up with 10x your income at the end of that period. So if you are 30 years old and start automatically saving 10% of your income into your employer’s retirement plan and invest reasonably, you will hit the recommended mark right on time. If you are 35 and just getting started, you’ll need to increase that savings rate to 13.5% to hit that number at age 67. Alternatively, you could work a little longer or invest a little differently. You could also look at ways to spend less in retirement. If you get in the habit of saving more today, you will prevent life-style creep that causes people to spend more over time, often with little to no increase in happiness. This has the double benefit of helping you save more money towards retirement now and keeps your baseline spending down in retirement.
Traditionally, retirement planning is based on several factors: how much you will spend each year in retirement, how long you will spend in retirement (your age at death minus your age at retirement), how many years you save money away, the returns you get on your investments and inflation. Some of these factors are within your control and some aren’t.
What Can You Do About It?
Start by focusing on what you can control: when you start saving, how much you save each year, when you retire, and how much your lifestyle costs to maintain.
The Power of Starting Now
If you haven't already started saving, then 2022 is the perfect time to do it. It is pretty straight forward and self-explanatory that the sooner you start saving the better. By starting to save now, instead of putting it of another year, you will have more time to put money away. The other benefit of starting now is giving your investments more time to grow.
One day Jane and Mark were sitting at their local coffee shop when the topic of saving for retirement came up. They both recently turned 30, had high-paying jobs and were starting to think about long-term goals. They both planned to stop working at age 70 with $1 million (after inflation) saved for retirement, but each had a different approach to how they were going to save for retirement. Jane said she was going to try to save up as much as she could before she turned 40.Mark, on the other hand, wanted to spend more of his money right now on things he enjoyed, and decided he was going to wait until age 40 to start saving for retirement. So how much do they need to save? If Jane invests her savings to earn a moderate 6% inflation-adjusted return, she needs to save $13,500 each year for the next 10 years, and then leave that money invested until she retires at age 70 to have just over $1 million. Even though Mark is going to wait 10 years until age 40 to start saving, he plans to invest the same way as Jane and expects the same 6% inflation adjusted return. For Mark to retire with the same amount of retirement savings as Jane at age 70, he will need to save $13,000 per year starting at age 40... FOR THE FOLLOWING 30 YEARS! That's right, by starting now Jane only needs to invest $135,000 from her income to reach $1million by retirement, while Mark's plan requires him to save $390,000 from his income over 30 years. Jane sacrifices $13,500 in spending for 10 years now, but Mark has to give up almost the same amount, but for three times as long to get the same result.
Five Ways To Save More
Whether you have already been saving, or are ready to get started, you might want to consider how to make sure you save more than in previous years. Here are five tips to help you save more:
- Set Savings Goals- Setting a goal is the first step towards making real progress. It is important to be specific when setting goals. A goal of "I want to save more money this year," is likely to fail, while "I am going to save $5,000 towards retirement and another $1,000 into an emergency fund" is much more likely to succeed. Once you have your goals set, break them down into actionable parts. For example, if you want to save $6,000 next year and you get paid twice a month, save $250 per paycheck.
- Use an Automated Tool- There are a number of apps available to help you automatically save, and even some banks have built-in tools to help you out. You can also set up a recurring monthly transfer from your checking account to your saving account. Set this up to sock away a portion of each paycheck as soon as it hits your checking account each month. That way saving towards your goals can always take precedence over optional spending. If your employer has a retirement plan, contributing to it is a great way to automate your retirement savings, especially if your employer matches a portion of your savings. Check out this article on the retirement contribution limits for 2022.
- Track Spending- Tracking your cash flow (income and expenses) will help you get a clear picture of your finances and find areas where you can save. It is human nature to manage towards what we measure, so if you measure your expenses you are much more likely to take steps to control them. I recommend using an app like Mint or Nerd Wallet's app.
- Be Careful with Online Shopping- Online retailers are doing everything they can to make it easy for you to spend money on their products. Be careful about that "Buy Now" button. Personally, I find online shopping extremely tempting, and they've gotten so good at simplifying the process, I almost don't feel like I am spending money. To help with controlling those impulse buys, I started using the Wish List feature if a site has it (Amazon), or I bookmark product pages for later. Then I come back to the items later after a few days or weeks have passed. This keeps me from feeling like I might forget about that really cool gadget that I just can't live without (hint: I almost certainly CAN live without it). Then after some time goes by, if I still feel I want to buy it, I can look at my budget and save up to buy it. CAUTION: Many retailers are now offering financing with "low monthly payments" to further ease the pain of impulse buys. You are almost never going to be buying true necessities online, so if you don't have the cash on hand to buy the item, save up before hitting the "Buy" button.
- Cancel Unnecessary Subscriptions- Today you can get a subscription for just about anything. The ones that jump to mind are all the streaming video services like Netflix, Hulu and Disney+, but you can also get subscriptions to fitness gyms, diet programs, magazines, food delivery and I've even heard of people renting furniture. None of these things are inherently bad, the problem comes when we forget to unsubscribe from things we are not getting value from. Are you subscribed to five different streaming services, but you've gotten so busy with work and family life that you don't watch them anymore? Or maybe you subscribed to watch a particular show that ended but you never cancelled the subscription. I've tried a couple different meal delivery subscriptions, but found the meals were a bit repetitive and just stacked up in the fridge after a while. I ended up cancelling each one after a few weeks. If you have any subscription services you aren't using, unsubscribe and put the money towards other goals.
If you are wondering what accounts to put your additional savings in, take a look at this list.
What Do You Want Retirement To Look Like?
Traditional thinking says retirement is a restful escape after spending your adulthood slaving away in a job. In retirement you spend your days playing golf, sitting around a card table with your white-haired peers or sitting on a beach watching the sunset on the rest of your life. Here's the thing: it doesn't HAVE to be that way. More and more, the traditional view of retirement is being challenged and often completely upended. Retirement should be less about getting LEAVING something you hate (a meaningless job that brings no fulfillment) and more about moving TO something you love. With advances in modern medicine and the reduced strain on the body of the modern work force compared to the agricultural and manufacturing cultures of our predecessors, not only are we living longer, but people are experiencing more vitality in their later years. It is not unreasonable for someone in their 30s today to expect to live an active lifestyle well into their 80s. That is an extra 20 years of activity in which you can pursue your passions. Here is the real kicker, your passions can be something that you are paid for! Maybe you have worked hard to find a field you love. You could work full-time until you "retire" in your 60s, and then work as a part-time consultant focusing on the things that bring you a sense of fulfillment. Maybe you have a side-hustle you enjoy, but it doesn't pay enough to fully support your lifestyle. In retirement, maybe you turn that side-hustle into a passion project. Or maybe you enjoy your work enough that you just want to keep at it past the traditional retirement age. There are plenty of ways that you can continue generating some income after you retire. After your first month of retirement, there is only so much golf you can play or hours on the beach before you are going to get bored. Don't get hung up on the traditional idea of retirement, and keep an eye out for ways your passions could supplement your spending once work becomes optional.
If you are ready to get clear about what you want a fulfilling life, both before and after retirement, and how you can start building towards that future, I would love to help.