When I quit my job to start my financial advising company, I instantly got closer to my retirement “goal.” Around the same time, a family member of mine got a new job with a 30% pay bump, yet it left that person further from their retirement “goal.” Wait, what?
If you re-read that to make sure I didn’t type it all wrong, I don’t blame you. I mean what I wrote. On the surface it makes little sense, but I like this example because it illustrates that retirement planning rules are just a starting place, and you have to take time to plan for your own life, not just relying on typical rules of thumb.
A Retirement Rule of Thumb
Here is a commonly used rule of thumb for retirement savings: At age 32, you want to have about 1x your annual income in retirement savings. (For complete ratios by age, see this link and scroll towards the bottom.)
Let’s look at two hypothetical teachers, both of whom are saving in a combination of a 403(b) and a ROTH IRA.
|Teacher A||Teacher B|
|Context/Situation||Teacher A is moving from Louisiana to Massachusetts and becoming an assistant principal next year.||Teacher B is expecting her 2nd baby, and plans to switch to a reduced schedule and salary next school year.|
|Current Total Retirement Savings||$60,000||$50,000|
|Next Year’s Salary||$80,000||$38,000|
As of today, Teacher A is ahead of the 1x annual salary rule. Fantastic. But her new job (and pay raise) instantly makes her “behind” the mark. Teacher B is a bit behind the target today, but will be way ahead if you use her reduced salary next year. I actually like this rule of thumb, and I think there is a lot of value in providing some general direction. It can help you pat yourself on the back or realize that it’s time to get going and prioritize saving for your future. The downside, as shown in the above, admittedly oversimplified example, is that rules like this assume a linear career path with consistent increases in income, savings, spending, cost of living, etc. For most people though, the path to retirement looks more like this:
Someday, you’ll lose a job. Or get an unexpected inheritance. Or the housing market will crash, and you’ll lose a big portion of home equity. Or you’ll start a side-hustle on nights and weekends, it takes off, and you leave your teaching job to pursue the new gig full time. Or you’ll get married. Or divorced. Or stay home with your baby for a year. Or. Or. Or. The endless possibilities that we call life. The point of this list isn’t to scare you; it’s just to say that the path is messy and uneven, so don’t overreact if you’re ahead or behind right now. Things will change more times than you can count between here and there, so the important thing is to get started saving as soon as possible so you have flexibility when the curveballs come. It’s also why I’ve been using the word “goal” in quotation marks, because I never want people to think of their goal as etched in stone.
A Rule Worth Striving For
Now that I have completely undercut retirement rules of thumb, I’ll turn around and give you one: Aim to save 15% of your income in retirement accounts. If you can possibly manage it, get to 20%. It’s ambitious, but I believe most people can get there by age 30 with the following strategies. And of course, when you start saving is the number one factor in reaching retirement goals, so if you start later, you’ll have to save even more than 15%.
4 Strategies for Getting to 15%
- Take advantage of any matching funds from your employer. I recently found that a client wasn’t meeting the match at his employer. By bumping his savings up $100/month, his employer also started contributing an extra $100/month. Easy money. If you wouldn’t turn down me walking up and handing you a dollar, don’t save any less than the employer match in your workplace account.
- Set a calendar alert to bump your savings up 1% every year. For most people (I know not all), they will get a salary increase yearly, so saving an extra 1% at that time will literally be invisible to your monthly spending.
- Use the 80/20 rule for new influxes of income. I wrote about this in a bit more detail here, but the basic idea is that you take 80% of any new influx of income, whether a raise or a debt paid off, and allocate it to your long-term saving. This gives you a clear way to fight life-style inflation, but also to pocket a little bit for a burrito, or concert, or movie night, or whatever it is that the little bit extra will let you do each week or month.
- Automate your savings. While I often don’t like 403(b)’s for all the reasons discussed in my last article, a major benefit is that the contributions go straight from your employer to the account. No time to sit in your account and let temptation take over. If you can automate your IRA contributions straight from payroll as well, you’ll never even miss the cash.
Focus on What You Can Control
I sometimes hesitate to say the 15% number because I know some people look at the number and think, “Nope, no way. I can’t do it,” and that feeling can lead you to not starting. And then inertia. And then years go by, you run the numbers again, and they’re even scarier than before. Really and truly, the best day to start working on this path is today. And if not today, then tomorrow. There are other variables involved, but how much you save and when you start saving are the most important. They also just so happen to be the two variables most in your control. And given what we know about state pensions, it’s critical that teachers be considering ways they can control to attain their future financial freedom.
(c) Ryan Frailich
Ryan Frailich is the founder of Deliberate Finances, a registered investment adviser in the state of Louisiana. Information presented is for educational purposes only and should not be relied on for investment or other financial decisions. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.