But, my experience working with people it that they are still over spending. How can that be if they’re debt free? Doesn’t this mean that they are making ends meet? That they’re not spending more than they make? Yes it does. But there’s more to it than that …
This concept of living within your means only works when you’re working and have an income. What happens when you retire? And here’s what I’ve noticed. Google “not saving enough” and you get over 230,000,000 hits! Study after study say people are not saving enough for retirement.
Here’s another thing I’ve noticed. It doesn’t change based on the income! Lower income have saved some money, and higher income have saved some too. But … the lower income tend to actually be better off towards their retirement goal than the higher income. That’s right … the higher the income the worse off they tend to be towards retiring, even though they’ve saved more!
What’s the problem … how can that be? Haven’t the higher income people saved more? Won’t that help?
Let’s put this into perspective. What is the real issue here? The issue is sustaining your Standard of Individual Living once the income stops when you retire. The more you make, the more you need to save. Yes, it is proportional in other words. However, higher income people are not saving enough to sustain their higher standard of living. Lower income people do save more proportionally, because Social Security pays a higher benefit for them to offset their shortfall. Don’t get me wrong, lower incomes tend to not save enough either, but their gap gets filled a bit more by more Social Security.
Higher incomes need to save more … to sustain their standard of living as well as make up for the lesser impact Social Security (Social Security is capped at a maximum benefit). Higher incomes also get fooled into thinking that maxing out their 401k contributions is all they need to do. There’s a point where this is true, but higher incomes often go beyond that point because they need to save more than maximum contributions to sustain their standard of living in retirement.
The break point between max contributions being enough, or not, is different for different situations because of Social Security earnings history differences and if there’s a pension or not. There’s no good rule of thumb. The best tactic to take? Go through the effort to determine what you need to save to sustain yourself in retirement.*
*Oh, by the way, the act of saving more reduces your standard of living. This means you can save less than your first cut at it. If you save an extra $1000 a month ($12,000 a year = two Roths for a couple over 50), redo your retirement calculations to sustain a standard of living which is now $12,000 a year less because you saved more. Keep doing that until your savings rate matches your sustainable standard of living. Where to put your contributions if you’ve maxed out all the retirement plans? Simple – in a plain old individual or joint account … could be the same investments – just titled differently so the IRS knows how to tax them.
The next topic that people get hung up about – rate of return. Go low for planning purposes and remember this …