How To Save More For Retirement Without Really Trying

How to save more for retirement

Congratulations for thinking about retirement! The key to retirement is saving more money.

Too many people wake up old one day and realize, “Oh crap! Where did all my money go?!” As a result, they end up having to work long after they want to retire. Is there any wonder why there are so many miserable people in the workforce?

There's really no mystery to money. The more you have, the more you can make. A 10% return on a $1,000,000 nut is $100,000. A 10% return on a $1,000 nut is $100. It's all about building your financial nut large enough so that when the bull market roars, like it has been since 2012, you're pulling in an extra $50,000-$100,000 on your $500,000-$1 million portfolio.

If you aren't on retirement track based on my 401k age chart and disagree with my figures, just do the math YOURSELF and see whether you've saved enough to retire on. I don't think you're going to like the results.

How To Save More Money For Retirement

Surprise! You've actually got to focus and try if you want to save more money for retirement.

* If the amount of money you're saving each month doesn't hurt, you're not saving enough. If you're not sweating at the gym and your muscles don't feel sore the next day, you might as well go eat a double cheeseburger with a milkshake and fries because you're just wasting your time. The same goes with saving. Since you're in the lower income bracket, savings is not supposed to be easy. If you're not feeling the disposable income pinch of putting away, 20%, 25%, 35%, 50% of your income into your 401K, IRA, or savings account, you simply are not saving enough. You need to feel the pain, so you are forced to change your spending habits.

* Recognize that you are not rich. For whatever reason, you do not make a lot of money. It could be by choice (messed up in school, less lucrative field) or misfortune (laid off, accident, starting over). Once you recognize you are of lower income, you've got to come to grips with the fact that retirement is not going to be filled with milk and cookies. Think tasty water and crackers instead. You're going to be working longer and harder than others. You've got to save more than your wealthier friends simply because you have less.

If you only make $50,000 a year, what on earth are you doing driving a $25,000 car? That's 50% of your gross income, and around 65% of your net income! Follow the 1/10th rule for car buying instead.

If you guys only earn a combined $70,000 a year and have a child, what are you doing living in a 3 bedroom apartment that costs $2,500+ a month? Downsize to a two bedroom apartment and save the difference. A family of four in Tokyo live in 600 square foot, 2 bedroom apartments!  Don't act rich, because you are not.

See: Housing Expense Guideline For Financial Independence

* Do the math. One reader against my 401k by age chart asked how he can put away $17,000 a year in his 401K and then another $5,000 in his traditional IRA if he “only” makes $70,000 a year. I told him to do the math. He did the math, and he did it all wrong!  This is what he calculated:

70k – 17k (401K) = 53k —> Fine. 
53k * 0.4 (taxes)= 31.8k —> 40% tax rate on a $53,000 income?
31.8k * 0.2 (after tax) =25.4k —> What's this extra 20% tax?
25.4k-5k (Roth) = 20.4k —> Why contribute to a Roth after tax, when you can contribute to a traditional IRA pre-tax?
20.4k/12 = 1.7k per month. —-> Wrong.  Should be around $35,500 net = $2,960/month, 74% more than what is stated.

The effective tax rate on a $53,000 income is around 17%. Add on 9% state tax, and at most he's around 26%. His Roth deduction is fine, if he doesn't want to contribute $5,000 in a traditional pre-tax. However, I always recommend paying less taxes than more. I am shocked how little people understand what their effective tax rates are, and the difference between pre-tax and post-tax contribution. Do the math people. You have more than you think!

* The new normal is a lower rate of return. Anybody telling you to input more than a 8% constant rate of return on your investments is being too aggressive. The days of 8%+ portfolio returns are gone in an environment of 2.5% long-term treasury yields. There is an inextricable link to fixed income and equities, and baking in more than a 2.5X return over the risk-free rate is a stretch. We can increase our assumptions once we see an uptick in inflation, corporate earnings, and risk appetite, but not now. It always better to stay conservative than aggressive when it comes to financial forecasts.

* Realize that making more money is a choice, especially if you live in a developed country. It only takes around $34,000 to be in the top 1% of world income earners. Meanwhile, $33,000 so happens to be the middle line between the top 50% and bottom 50% of US income earners. You have a choice to work more than 40 hours a week to get ahead.

You have a choice to have as many or as little kids as you wish. You have a choice to start a business and make extra income on the side. You have a choice to get in before everyone and leave last, while proposing new profitable ideas for your company. You don't have to be a top income earner, you just have to make enough to be happy and save.  We live in a free country, not North Korea.

* Realize that wealth is mostly luck. Although wealth is mostly luck, you can take action to make yourself more lucky every day.

Now that you've changed your mental outlook, here's a proposed savings chart I developed to slowly turn the screws so that you get to your retirement goals.  Here are some following assumptions:

Financial Samurai Recommended Savings Chart

How much savings you should have by age

Assumptions for the chart:

* No matter what your income level, you are saving some money. Develop the savings habit early and always.

* Your goal is to ultimately save at least 20X your annual expenses to achieve financial independence. If you can get there before 65, great! The sooner the better.

* It's important to keep your rate of spending slower than your income and savings growth.  Don't let lifestyle inflation derail your plans.

* After you have maxed out your 401K, save an additional 20% or more in your after-tax investment accounts. Having liquidity is important if you want to retire sooner.

* If the amount of money you're saving each month doesn't hurt, you're not saving enough.


401k savings targets by age

The good thing about not making much money, is that you are used to living on not much money, and therefore you don't need much money to retire on!  With the above assumptions and chart, I hope I've provided a guide for those who have wondered how they can save so much if they don't earn much at all. Savings should be an automatic way of life. Always save money before you pay yourself. That way, you will always operate in the confines of your disposable income.

Save Often, Invest Often

Please try not to make excuses for why you cannot save even just 5-10% of your pre-tax income in your 401K. I lived in super expensive Manhattan on $40,000 a year and managed to put away $15,000 into my 401K. $40,000 in Manhattan is like $35,000 in San Francisco, and only $25,000 in the MidWest. You just have to make a choice whether you want to build a safety net for your retirement or not.

Hopefully you will continue to make more money the longer you work, making saving more money easier and easier. You'll wake up 10 years from now and amaze at how much money you've managed to accumulate.

It's really up to you. See you at the beach!

Related: Recommended Net Worth Allocation By Age

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