How to Save More and Need Less for Retirement

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People have lots of questions about saving for retirement. “Am I saving enough?” is a really common one. As my colleague Amy Arnott explored in “Do You Really Need to Save That Much for Retirement?” the hardest part for many people may simply be scraping together enough of their paycheck to make regular contributions. Many planners recommend investing 15% of your pretax salary, which is no easy feat. (But remember that any employer contributions also count toward that number, so if your employer matches up to a certain amount, contribute enough to get the full match!)

Beyond your savings rate, though, you also have some control over how much you will need to save. That’s because, to some extent, your choices determine how expensive your lifestyle is. In effect, by being mindful of how much you spend and ratcheting up your savings/investing rate as needed, you will be able to save more–and you will ultimately need less–money for retirement.

Fred and Sarah

Here’s the tale of two retirement investors, Sarah and Fred. They’re starting out in the same place–they each make $50,000 and save $5,000 per year (10% of their salary, which is taken out of each paycheck, a bit at a time). But just because they started in the same place does not mean they’ll finish in the same place.

For one thing, we don’t know how these two investors’ salaries will grow. If their 401(k) contribution is set up as a percentage of salary, it will adjust upward as they make more money. But that shouldn’t stop them from investing more if they want to and can afford to–employees can contribute up to $19,500 to a retirement account in 2021. And if those over 50 can contribute $26,000 per year.

What else determines whether they’ll have saved “enough” come retirement? In addition to how much Fred and Sarah are able to save, there’s another big variable that’s within their control: how expensive their lifestyles are.

If you’re not following, I’ll help connect the dots. Think of them each having the money they saved for retirement in a big pool that will eventually replace their salaries. Right now, they work and get paychecks. But someday, when Sarah and Fred stop working, the money they’ve saved in their individual pools for retirement, along with Social Security payments, will help provide the income needed to pay their mortgages, buy their groceries, and take vacations.

Don’t Get ‘Creep-y’

Because you are one of the main architects of your own lifestyle, the choices you make along the way help determine how expensive your lifestyle is and, therefore, how much you are able to save in your pool and how much you need to save in your pool.

The more income you earn, the more money you spend (usually). It’s not strictly a bad thing; you work hard, and when you get rewarded with a raise, you might be able to afford a bigger apartment closer to work or a house in an area with a good school district, for example. But these lifestyle upgrades add up and have consequences, in terms of both how much you are able to save while working and how much money will be required to fund that lifestyle during your retirement. For example, maybe your housing costs jump to $4,000/month from $2,000/month. That’s an extra $24,000 per year. The more expensive your lifestyle becomes, the more you’ll need to save to fund its continuation. But the more you’re spending, the less money you’ll have available to save.

I interviewed financial-planning expert Michael Kitces about this phenomenon–which a lot of advisors call “lifestyle creep”–a few years ago, and this is what he had to say:

“We usually don’t say, ‘Hey, I got a great idea. I’m going to change my lifestyle so I need twice as much money to retire.’ That doesn’t really feel very good. But you say, ‘Hey, I’m making a little more, I’m going to upgrade a little. I’m going to get a little bit nicer car; I’m going to move to a little bit nicer neighborhood.’ Like, the expenses start creeping up. Once it becomes a part of our lifestyle, it’s hard to go backward.”

Here’s a more optimal situation: By staying conservative about spending and not taking on too much debt, you’re not only able to save more while you’re working, you’ve created a less expensive lifestyle that doesn’t require as much money to fund during retirement.

In fact, Kitces says, the reality is that “managing the retirement savings need” (by managing lifestyle expenses) is just as important as managing retirement savings itself. It’s especially important to look out for lifestyle creep in the early years of our careers, he adds, because not managing it then can result in a savings/investing shortfall that’s much more difficult to rectify in later years when your investments don’t have as much compounding potential.

If none of this sounds particularly revolutionary to you, that’s because it’s not. Proponents of the FIRE movement (Financial Independence, Retire Early) have set up blogs (such as Mr. Money Mustache and Our Next Life) to coach others on how to spend mindfully, save as much (as early) as they can, and retire (or achieve financial independence) as soon as possible.

3 Ways to Prevent Lifestyle Creep

Even though they started in the same place, whether Fred or Sarah will fare better when it comes to retirement savings is, in many ways, up to them. That’s because retirement savings shortfalls can happen regardless of how much money one makes. Here are some ways Fred and Sarah–and you–can make sure the plan is staying on track.

1. Make a budget and stick to it: Make sure you keep tabs on how expensive your lifestyle is and what your spending habits are like. Even though retirement might seem like a foreign concept when you’re a young worker, someday all of us will want (or need) to stop working. How much you are able to save, and how much you need to save in total, are dependent on you, to some degree.

2. Consider raising your retirement savings contribution rate: Some 401(k) plans offer “autoescalation,” which is an automatic increase in the deferral rate–say, 1 percentage point per year. Consider signing up for that, and revisit your contribution rate occasionally to make sure it still makes sense given your current circumstances. If you get a big pay raise, you may be able to save a bigger percentage of your salary than in years past.

3. Pay off your debts: People tend to think about credit card bills and student loans separately from their investments and savings. But everything is connected and funded from the same source. It’s important to consider prioritizing debt paydown because of the guaranteed return on investment it offers: If you have thousands of dollars’ worth of credit card debt compounding at an interest rate in the midteens, your debt may be the fastest-growing thing in your portfolio. To put it another way, you would be hard-pressed to find an investment that would give you a guaranteed rate of return of 16%, which is the average interest rate on a consumer credit card, according to data from the Federal Reserve.

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