3265: Can You Really Save More Tomorrow by Scott Spann of Financial Finesse on Intentional Spending

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[00:00:30] This is Optimal Living Daily Episode 3265. Can You Really Save More Tomorrow by Scott Spann of FinancialFinesse.com and I'm Justin Malik. Welcome back, this is the Sunday bonus episode where I share an extra episode from the Optimal Living Daily Network.

[00:00:48] When today's comes from Optimal Finance Daily, please do subscribe to or follow Optimal Finance Daily wherever you're listening to this to keep all of this going. Really helps a lot. But for now let's get right to the bonus episode and Diana's commentary as we optimize your life.

[00:01:09] Can You Really Save More Tomorrow by Scott Spann of FinancialFinesse.com We hear a lot in the news about concerns that Americans aren't saving enough for retirement. It's not surprising for news to lead to an increased concentration on saving for the future.

[00:01:25] On average, retirement planning may be the top financial planning priority, but that doesn't necessarily mean that everyone shares a sense of urgency.

[00:01:34] The 2013 FinancialFinesse Generational Research Study highlighted the fact that employees in the under 30 age group were the only group that didn't select retirement as their top financial planning category. Instead, they ranked managing their cash flow at 78% and getting out of debt at 59% as their top two financial priorities.

[00:01:55] This makes sense to me. Financial priorities and vulnerabilities are expected to vary with age. Some of these differences are a result of particular life stages where others may simply be more generational in nature.

[00:02:07] A common message that I hear from people that I meet within the middle or later stages of their careers is, Man, I sure wish I'd saved a little bit more when I was younger.

[00:02:16] It's just too easy to convince ourselves that we can save more tomorrow when we have a better job, when we pay off those loans or when those other life challenges disappear. The problem is, it's never going to happen.

[00:02:29] We will always have life happens moments and so many other goals and priorities competing for the same hard-earned dollars. Looking back at my 20-something self, I fully admit it was hard to convince me that saving for retirement should even appear on my radar.

[00:02:44] As a grad student in clinical psychology, I was working full time at a medical university and had student loans, credit card debt and limited financial knowledge. They don't really teach this stuff in most psych departments.

[00:02:56] During a new employee orientation and benefits meeting, I still remember thinking to myself, Retirement, I'm just starting my first so-called real world job and you want me to think about retirement? I've got plenty of time to save for that later.

[00:03:10] Needless to say, I'm more than understanding when I work with people who share the same sentiment. So how do we change the current trend of low retirement preparedness and encourage people to not just say they will save more later and actually do it?

[00:03:24] One effective technique is to make a small commitment today to start saving more in the future. Sounds simple, right? This small change can have a significant impact. During a recent consultation, I met with a pre-retiree who was the perfect example of the concept of saving more tomorrow.

[00:03:41] Sharon, an unmarried administrative assistant, scheduled a financial planning consultation seeking validation that her retirement income strategy was on track. At age 60, she was just two years short of her planned retirement date. After discussing her specific retirement goals, she first shared her estimated pension and social security benefits.

[00:04:01] The combined income from these sources alone was approximately 37% of her income. Perhaps the most impressive aspects of her retirement analysis was the information she shared next.

[00:04:12] She had already accumulated two years worth of expenses in an emergency savings account and her 401k balance of $600,000 was just over nine times her $65,000. How did she do it?

[00:04:26] Sharon's strategy was to maximize her savings from the beginning stages of her career when employer-sponsored retirement plans were first offered.

[00:04:34] She automated her finances by saving money before she had an opportunity to spend it and was able to save 25% of her salary in her 401k while also gradually building up her bank savings. This didn't just happen to occur overnight, but required gradual increases over time.

[00:04:50] Sharon's secret to success over the past two decades was to put any salary increases into savings without giving herself a chance to spend it. When her employer began offering contribution rate escalation in her 401k plan five years earlier, she took full advantage of that feature.

[00:05:09] But the reality was she had already been following the save more tomorrow approach advocated by behavioral finance researchers such as Richard Thaler and Shlomo Benartzi.

[00:05:19] In fact, a year later during her next financial checkup, she came into the office excited to share the news that she had previously convinced several of her younger colleagues to take full advantage of automatic increases to the retirement contributions over time.

[00:05:34] If you made any New Year's resolutions to start saving more, taking advantage of a contribution rate escalator feature in a retirement plan at work may be the answer to resolving to save more and spend less without any effort.

[00:05:46] Many companies now provide employees with the ability to sign up for an auto rate escalator in their 401k plans, which makes future saving automatic.

[00:05:56] You get to pick a yearly percentage increase and a final savings rate target so that an increase in their salary deferral happens automatically on a set date annually.

[00:06:06] It may be tough to go from saving 5% to 15% in one move, but going from 5% to 6% is quite painless especially if the increase can be timed to coincide with an annual raise.

[00:06:19] You also get to set your target and to change your contribution percentages or put them on hold at any time.

[00:06:25] With this strategy, you would find yourself saving twice as much and may not even feel it along the way, especially considering that the increase may be smaller than your annual raise or cost of living adjustment.

[00:06:37] So I guess it's okay to still say you will save more tomorrow. Just be sure to turn those good intentions into an action plan and make those future increases automatic. You just listened to the post titled Can You Really Save More Tomorrow by Scott Spahn of FinancialFaness.com

[00:06:58] I used to be one of the young people described in this article because in my 20s, retirement was the last thing on my mind.

[00:07:06] I assumed I would save more and start learning about investing when I was making more money, but I've come to realize that building wealth is based on establishing good habits. So if you're not doing it now, you're unlikely to do it later.

[00:07:18] Another thing that helped me switch my stance on saving for retirement is realizing that the benefits aren't reserved for when I actually reach retirement. For about four or five years, I fully funded my 401k, Roth IRA and HSA.

[00:07:34] So that's $19,500 in my 401k, $6,000 in my Roth IRA and $3,500 in my HSA for a total of $29,000 per year that I was putting away into tax-advantaged retirement accounts. This level of high savings for a relatively short period of time got me to cost-five status.

[00:07:55] This means that what I've accumulated thus far will grow through the power of compound interest to what I need in traditional retirement in 30 years, even if I never contribute another dollar.

[00:08:06] If I would have tried to do this later in life, it wouldn't have worked because the magic of compound interest in growing investments requires time.

[00:08:14] The reason why I say it's benefiting me right now is because I have less of a need to save for retirement so I can take a break from my career.

[00:08:23] I can pursue more risky entrepreneurship or self-employment, or I can take on a lower paying job to cover my expenses. With a well-funded emergency fund and a cost-five status, I have less pressure to make a large income which opens up more options for me right now.

[00:08:39] And that should do it for today. Have a happy rest of your day and I'll see you on the Thursday show tomorrow where Optimal Life awaits.