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How Much Should You Sacrifice Today To Ensure A Secure Tomorrow?

J. Patrick Collins Jr., CFP®, EA

Every few months you are sure to run across an article talking about the woefully inept savings rate plaguing our country.  The data is disheartening.  Collectively we save about 3% of our income.  Just 30 years ago the personal savings rate was triple where it is today.  So, why do we have such a hard time saving for the future?

It is a great question that researchers have been studying for quite some time.  Some believe it is a behavioral issue.  There is quite a bit of evidence to suggest this is the case.  For example, some studies show that participation in 401(k) plans increase dramatically if you just automatically enroll someone in the retirement plan and make them opt out if they don’t want to participate (versus the other way around).  Other studies show that when people see an aged picture of themselves, they tend to save more money, suggesting that people tend to have a hard time identifying with their future selves.

In our own practice we have often struggled with the savings question.  When working with clients we will clearly lay out how much they need to save each month or year to accomplish the goals they have told us are important to them.  Many times those savings goals go unmet.  We have come to realize that the goals they initially stated were important to them, may be overshadowed by something more important:  enjoying their life today.

And that is where the conflict lies.  How much should you sacrifice today to ensure a secure tomorrow?  I’m not sure we have a great answer for that, but we do have some suggestions:

  • Develop a realistic plan– understand where you will most likely be in the future if you stay on your current path. If you are short of your targets, be careful about just assuming you’ll work longer.  A recent study showed that while 75% of workers expect to work until at least 65, only 23% actually work past that age.  The two major reasons for retiring early are health problems and company downsizing.
  • Automate things as much as possible– we believe the research around automatic savings in retirement plans can apply to other areas of your savings. Have a set amount go from your paycheck into an account that can’t easily be accessed.  Better yet, if it can go directly into an investment account you accomplish two tasks.  First, and most obvious, you save for the future.  Second, you learn to live on less.  That may be more important than actually saving, especially as you approach retirement.
  • Celebrate your success– instead of an all-or-nothing approach, create some savings milestones. Once you hit a certain level of savings, or save a specific percentage of your income, treat yourself to something.  A balance between the future and the present is important to keep your savings strategy going.
  • Give more to those in need– we’ve written before how giving to charity can take the focus off of “stuff” and more on others. If you are interested in how this can help you save more, you can read more here.

As in most of life, extremes are rarely good.  If you save every penny you earn you are most likely not enjoying the fruits of your labor and believe that money will provide you security.  Conversely, if you spend every cent, there is a good chance you have a serious case of “keeping up with the Joneses” and believe that buying things will provide your contentment.  Balancing enjoyment for today with securing tomorrow is the key to serenity with your finances.