Save More, Need Less Later

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 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.

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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.

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