How to balance saving for retirement & spending now
The balance between spending now and saving for later is a dilemma that faces many. Families want to use their income to take trips together, participate in extracurriculars, or even indulge now and then. There’s also the unexpected expenses that may come up like medical bills, home repairs, car maintenance, etc. Striking the right balance between saving for retirement and spending now can feel like an impossible feat. But when it comes to making the decision to spend now or save later, there are both behavioral and financial strategies to consider.
The first is to KNOW YOUR NUMBERS. Thinking through and deciding on what age you would like to stop working OR be able to stop working should you choose is step number one. For example, maybe your goal is to be in the position at age 55 where you are financially secure enough to make the decision to stop earning income. Keep in mind, it’s okay if this number fluctuates, but the point is to think through and have an estimated idea.
Knowing what your anticipated retirement age is will help you to know how much you should be realistically putting away in your retirement account. Many financial planners will say that the average rate of return for a 401k is between 5 and 8% and a ROTH IRA is between 7 and 10%. You can use these return rates to help calculate your annual or monthly savings. Retirement calculators can be found here and here and will help give you an idea of how much you will have/need in retirement and how much to be stocking away monthly.
So, what if the numbers are more than what you can save monthly? Good question. If saving for retirement is important to you, then both partners have to be on the same page in making it a priority. If you are currently saving $200 a month in your 401k but after running the numbers it shows that you need to be putting $500 a month away then that’s a big difference, a $300 difference to be exact. The question or strategy here for you and your partner are to look at your spending plan and try to find where you can cut out $300 per month so that you can close that gap. Even if you can’t close the gap entirely, work towards where you can close it enough and still feel comfortable. Perhaps after looking at your spending plan, you decide that of the 5 streaming services you are currently subscribed to that you only *really* need 2. Unsubscribe to the other 3 and add up how much you are saving each month, then allocate that money to your 401k savings. You can do this for other areas of your spending plan as well. This simple exercise can not only help to fund your retirement, but also not create a feeling of deprivation.
The key to keep in mind here is that balance does not mean rigidity. While it would be ideal to contribute the $500 per month (using the example above) there may be times when you have to reduce that amount in order to fund other goals or pay down debt. Contributing consistently, even if sometimes the amount has to change, is the behavioral habit that you want to get into. Morgan Housel, author of The Psychology of Money says in his book that creating wealth “has little to do with math and everything to do with behavior.” And he’s right. Knowing your numbers is great, but if you are not in the habit of putting money away or maximizing your savings, wealth and financial security cannot be achieved.
If you’ve done everything above (of even if you haven’t) and still struggle to find ways to save then it could be helpful to talk with a CFP® or a financial therapist. There could be a piece or a behavioral element that you are missing and talking to a professional may help.
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