“Idler, go to the ant; ponder her ways and grow wise: no one gives her orders, no overseer, no master, yet all through the summer she gets her food ready, and gathers her supplies at harvest time.” ~Proverbs 6:6-8
“A goal without a plan is just a wish.” ~Antoine de Saint-Exupery (1900-1944)
It is our religious duty to save for retirement. Depending on Social Security is foolhardy and unreasonable, mainly, because it was never intended to be a retirement plan. If we want more for retirement, it is our personal responsibility to do so. Nevertheless, there will be those who refuse to save any level of money, much less for retirement. In this country, we treat our money as if we have the right to spend every dime of it, including money we do not have in the form of debt. Too often, I hear, “I can’t afford to save for retirement.” Translation, “I can’t afford my current lifestyle, so I have no money to save for retirement.”
If in a wise man’s dwelling there is precious treasure and oil, the fool will gobble it up. ~Proverbs 21:20
Bankruptcy attorney, and now U.S. Senator, Elizabeth Warren co-authored in her book, “All Your Worth: The Ultimate Lifetime Money Plan,” a wonderful 50/30/20 plan it essentially says one should allocate their operating money as follows:
- 50% for “Must Have” or essential expenses. These include housing, utilities, food, car, minimum debt payments and health insurance.
- 30% for “Want To” or non-essential expenses. These include cell phone, cable, clothing, entertainment, vacations, dining out, etc.
- 20% for “Savings/Debt Reduction”. This is pretty self-explanatory, but it does include retirement savings, emergency savings, and paying down debts.
The key for this plan to work is one must be dedicated to actually saving 20% of their operating income (take home + tax deferred savings). If one is unwilling to do that, then retirement and staying out of debt becomes a wanting task.
For our illustration, we show a married couple, both 35, with two children earning a joint household income of $75,000. We will use standard deductions, and assume that our family is making tax-deferred savings into retirement plans. All data is Government data, and assumes some basic averages. Again, we have to assume that the family is dedicated to setting aside 20% of their operating income toward savings and retirement. We know that is a big “If.”
What are data shows is that our families actually have more money than they realize. If one strictly adheres to using the 50/30/20 plan, they will realize that basic needs can be met, there is enough money to enjoy life, and money can be saved for retirement. It also shows, because of tax benefits, that one pays less to save more.
Now imagine the difference in the lives of this couple if they can stay dedicated to just contributing 5% toward a retirement plan for 35 years. Now, assume that they are able to increase their contributions 2.5% per year. There is a neat little table below to help. Please know that we have not even included retirement matching programs. Our illustration only addresses Traditional IRA contributions.
The mindsets of Americans have to change for this to work. One has to adjust what their essential expenses are. One way is to only spend 25% of operating income on rent/mortgage. If Americans would embrace just that concept, budgeting for retirement would be easier. Of course, this would require a fundamental change in our attitudes toward money. Money is a tool, it is not a toy, nor is it a weapon. It is something to help us survive, but if used the right way, it can also help us thrive.