1. Save More, Need Less Later
Submitted by Larry Frank Sr. on Tue, 02/05/2013 - 9:00am
When you save for retirement, the ugly truth is that you also need to keep
your spending at a sustainable rate. Decreasing your standard of living is
hard, in retirement or when working. But it’s easier if you control your
consumption now.
Especially among high earners, there’s a big disparity between savings
and need because rich folks are used to a more expensive lifestyle.
Fidelity Investments says that, if you want to retire at 67, you need a nest
egg worth eight times your salary to live off 85% of your final year’s pay.
As shocking as it may sound, those with lower incomes tend to be better
prepared for retirement, even though they have less money saved.
The real issue here is sustaining your standard of individual living once
the income stops when you retire. However, higher income people are not
saving enough to sustain their spending. Lower income people need to
save less proportionally, because Social Security pays a larger
percentage of retirement income needed to offset their savings shortfall.
Don’t get me wrong: Lower income folks tend to not save enough either,
but their gap gets filled a bit more by more Social Security. That said,
Social Security isn’t enough for anyone. Social Security outlays are
capped at a maximum benefit, below – usually far below – your working
income. So it can never fund the high life.
Folks with higher incomes also get fooled into thinking that maxing out
their 401(k) contributions is all they need to do. They often must save
more than the maximum contributions to sustain their standard of living in
retirement.
Most people think it’s enough to just avoid debt. That’s only part of it. Too
many people are overspending. Equating living within your means with
spending less than you earn only works when you’re working and have
2. an income. What happens when you retire?
Study after study say people are not saving enough for retirement.
According to the Schwartz Center for Economic Analysis at the New
School, the bottom half of 50-64-year-olds (those making $27,468 or
less) have a median of $0 saved for retirement. Even high earners are
under-saved.
The country as a whole is saving less than it used to. Since 1959, we
saved an average of 6.91% of our monthly incomes. Before the financial
crisis, that rate hovered around 1% to 3%. The crash scared people into
paying off debt and saving, but now, we are back to our old ways. In
November, the nation’s savings rate was 3.6%.
The takeaway should be clear: You need to consume less now if you
want to avoid a dramatic reduction in your standard of living later. Giving
up spending habits is painful, especially after you retire. But your
standard of living is what decides whether you have enough to last you.
Naturally, this is easier if you already maintain a modest lifestyle.
Saving more reduces your standard of living and makes the shift easier
when you retire. Determine what you need to save to sustain yourself in
retirement. If you save an extra $1,000 a month, redo your retirement
calculations to sustain a standard of living which is now $12,000 a year
less because you saved more and spent less while working. Keep doing
that until your savings rate matches your sustainable standard of living.
Of course, there is no magic number of dollars that everyone should
save by a certain age. Everyone’s needs are different. A trusted financial
advisor can help you determine sustainable savings and spending rates
to carry you through retirement.
Follow AdviceIQ on Twitter at @adviceiq.
Larry R Frank Sr., CFP, is a Registered Investment Adviser (California)
in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has
an MBA with a finance concentration and B.S. cum laude in physics with
which he views the world of money dynamically. He has peer-reviewed
research published in the Journal of Financial
Planning. www.blog.BetterFinancialEducation.com.
AdviceIQ delivers quality personal finance articles by both financial
advisors and AdviceIQ editors. It ranks advisors in your area by
specialty. For instance, the rankings this week measure the number of
clients whose income is between $250,000 and $500,000 with that
advisor. AdviceIQ also vets ranked advisors so only those with pristine
regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012,
by veteran Wall Street executives, editors and technologists. Right now,
investors may see many advisor rankings, although in some areas only a
few are ranked. Check back often as thousands of advisors are
undergoing AdviceIQ screening. New advisors appear in rankings daily.
