When it comes time to save for future retirement, Americans on the whole are terrible at it. It appears most Americans will either work until they drop dead or live in much more modest circumstances in their old age.
How do you balance living for now versus preparing for a comfortable retirement?
You don’t want to save too much and miss out on fun now. But on the other hand, your future self will probably be grateful to your younger self if you have a more comfortable retirement. According to the AARP, most assume they will work until their full retirement age of 65 or 67. In reality most people retire at 62.
How do you start treating your future self with more respect?
In an interesting Ted Talk, “The battle between your present and future self,” Daniel Goldstein says that seeking distant results is difficult, especially in the face of immediate reward or gratification. To overcome this challenge and resist temptation in the present, we may use a “commitment device” to bind ourselves to the decision. In a strong moment, you might hide the Oreo cookies in the top cupboard so you aren’t tempted. Or you might freeze your credit cards in a block of ice only to be defrosted in case of emergency. You might have a written financial statement that you read before you get tempted to sell your stocks in a panic.
The problem with commitment devices is that people are prone to wiggle themselves out of them with some rationalization. When that craving strikes, you’ll get that step ladder and dig out the hidden cookies. Believe me, I’ve been up there. Making it harder to do something can help you change a bad habit, but Goldstein says we often “weasel our way out of them.”
What works better than a commitment device?
It turns out that thinking about your life in the future and seeing yourself as an older, aged person on an app can remind you that your actions today affect your life in the future. Most people can’t imagine their lives five years ahead, let alone 50 years in the future.
Figuring out how much you’ll need and want to spend in your golden years isn’t easy.
If you are many years away from retirement, you have time on your side, making it easier to save. Most financial planners state that you need 70-80% of your working income in retirement. That is a good starting point. Next, you can simply multiply that annual income figure by 25 to get a good guess on how big your retirement savings should be.
If you and your partner make an average salary of $50,000 each for a household income of $100,000, then you can figure on a retirement income of $80,000 a year as a reasonable guess. Multiply that by 25 and you get $2,000,000 needed in your retirement pot. Whoa! That’s a lot. But don’t forget that you can subtract income from Social Security, pensions, and any other income streams (i.e., rental). Let’s say you’ll have $ 40,000 a year in guaranteed income. Now you only need $1,000,000 in your retirement pot. Given that number still sounds astronomical, let’s bring it down to earth. Start by saving $100,000 for retirement. That is a target that seems doable. And if seems doable, you are more likely to get started.
I remember being shocked to discover that my credit card debt wasn’t borrowed from the bank or credit card company. In reality, I borrowed from my future self. I was making my future self poorer by carrying that debt (and making the credit card company or bank richer).
In another Ted Talk, Wendy De La Rosa shares three ideas to help you become a better saver in The Way We Work. She agrees with Goldstein in her first point that we need to consider our future self. She points out that we are always perfect in our future lives—we imagine ourselves healthy, slim, wealthy and happy. In the future we’ll save, but right now, in the present, we whip out the credit card to snap up those lovely new shoes on sale! De La Rosa counsels us to do something difficult now (like sign up for an automated 20% retirement savings plan) for your future self.
De La Rosa’s second tip is to use transitions to your advantage. If you are getting married and moving in together, there will be automatically reduced living expenses because two can live cheaper than one. Instead of spending the savings, decide from the start that you’ll live on one income and save the other. A 50% savings rate means you could retire in 15 years instead of 30 or 40.
Instead of buying the big house with huge property taxes and maintenance expenses, consider getting a just-right-sized house from the start. By keeping your housing expenses down, you’ll have more disposable income to enjoy life now and in the future. And of course, buy a used car instead of a new one or live close enough to work that you can cycle or walk to keep transportation costs down. Research indicates that people are happier when they have more disposable income to enjoy life rather than having a bigger, more expensive house.
Most people enjoy their lives more by having lots of little pleasures sprinkled throughout the day. De La Rosa advises us to get a grip on our small, frequent purchases (i.e., coffee, on the go lunches). I’m all for enjoying the little things in life, but so often, these become habits and we no longer truly savor them. Keep these treats sporadic and you’ll keep hedonistic adaptation at bay. As a result, you’ll be happier and wealthier!