Ever wonder how much you should be saving? We hear it from a lot of clients who want to make sure they’re putting away enough each paycheck towards retirement. We typically suggest saving at least 10% of your before-tax income and for those approaching retirement within 10 – 15 years, we like to see that number closer to 20%. Although we never like to make blanket statements in financial planning, those savings rates are typically what most should be striving for while still maintaining a balance to live a full life now. But is there a better strategy that could be more efficient?
Give Your Savings a Raise
What do most people do when they get a raise? Many people keep their savings rate the same but increase their standard of living. Sure, the actual dollar amount is increasing because the savings percentage is now based on a larger salary; however, my argument would be that controlling your standard of living is what is most important, especially when approaching retirement. So how do you keep your standard of living from getting out of control and far surpassing savings?
Spend 50% of your raise and save the other 50%
Let’s see how that strategy could impact our hypothetical client, Jack. Jack is 30 years old and is earning $100,000/yr as a business consultant. He is currently saving 10% towards his 401k ($10,000/yr). Jack had a great year in 2013 and earned an 8% raise for 2014, increasing his base salary to $108,000. Assuming Jack kept his savings rate of 10% the same, he would now be putting $10,800/yr into his 401k. However, what if he took the “spend 50, save 50” approach? After taxes and other payroll deductions, Jack actually realizes a “take home” raise of $5,000. In the 50/50 strategy, Jack would tack on $2,500 to his annual 401k savings, increasing total annual contributions to $12,500 (from $10,000 prior to his raise). By simply saving 50% of the money that didn’t exist the year prior, Jack has increased his total retirement savings to about 11.6% ($12,500/$108,000). He’s controlled how quickly his standard of living increases.
As a young professional, I can certainly attest to the difficulty of looking down the retirement road to a goal that is 35+ years away. However, committing to your goals and having a clear, simple strategy, such as the 50/50 savings approach, can help you reach the financial goals you set for yourself or family!
Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.
Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. C14-025359