Have you heard the saying the best exercise for 6-pack abs is broccoli?
It’s the same for retirement.
The best retirement savings strategy is making more money.
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I know that’s not skipping lattes, snowballing debt, using other people’s money and other popular savings strategies, but it doesn’t require excessive scrimping or significant risk.
My savings goal at age 66 is $2,500,000. Assuming a 6% compounded rate, I have already saved enough to get to my goal. The last several years, I have saved $30,000 to $50,000 annually. It made things considerably easier to save with a $150,000 salary than in 2013 when I was earning $40,000.
Now I have options. At the end of the month I plan on leaving the stress of a Big 4 firm and working just enough to cover basic expenses.
Excuse: If I were making $100,000 it would be even easier.
To make the best use of this strategy, you do need to know the difference between needs and wants. You can still get the wants, but prioritize experiences over things. If you buy a thing, you will just want the next new thing.
Some examples of wants that I didn’t need, and what I have instead:
- I would love an iPhoneX, but instead I paid $160 for a new iPhone 7 last year, and I will keep as long as it works. I use SmartTalk for $44.64 per month, unlimited everything (except internet is metered after 2Gb.)
- I could afford a new vehicle (i.e. F-150), but instead I bought a 2 year old Hyundai car in 2015 and drove until 2020. When Covid happened, I did buy that F-150 and financed $30,000 at 0.9%.
- Our family could afford a $500,000 house, but instead live in the same house we bought in 2004 for $106,000. Even now, the house is only worth $168,000. But I paid off this year.
- I would love cable, but instead we have a $35 digital antenna, Prime and Netflix. Total cost of approximately $30 per month versus $95.
When cutting costs, concentrate on the higher cost items like housing and transportation. I wouldn’t cut a grocery budget, but eat out less instead. You want to stay healthy enough to continue enjoying your savings when you’re older.
The list goes on and on. We are a family of six with job incomes of right at $200,000 combined. The combined income is about to drop to $75,000 though. I do all of the savings, 33% of my income. My wife does not save, except a forced savings through Teachers Retirement System. It’s not that she can’t save, it’s just we don’t need to save more. Excessive savings could take some of the joy out of life.
Our total necessary expenses are about $4,100 per month. My wife earns approximately $2,400 after tax, TRS contribution and insurance. She covers groceries with that, and most activities the girls participate in. I have covered everything else and will continue to earn enough so that doesn’t change.
The wants are mostly activities for the girls, which are about $1,000 per month. I typically use side income for vacations, but we don’t take too many large ones. Last year we did a 10 day road trip to Niagara Falls and a 5 day trip to New Orleans. Everything else is day or overnight trips.
How to increase your income so you can save more
The first thing you can do is ask for a raise. Ramit Sethi talks about that in his book and blogs. I am in management and know how expensive it is to replace a trained employee. It’s risky letting good employees go, so do not be afraid to ask for more compensation.
Having said that, you need to be worth it. I have always had the mindset to do the work of the position you want, not the one you have. Be valuable to your employer and you will be valued and paid accordingly.
If you have been doing the bare minimum for a while, take six months to step up and keep a list of “wins” to take to your boss when you’re ready to ask.
The next thing you can do is start a business. I don’t mean a full time business, which is a great strategy, but a part time one instead. Start part time when you don’t need the extra money and reinvest in yourself, business or savings. As revenues grow, you can go full time.
I do exactly that, but I do not have plans on growing my service-based businesses. Some of the things I do to earn extra money are clean an office building, prepare financial statements and tax returns, eBay and writing.
You can look at my posts under the “Make Money” header for ways I generate income. The one that I made the most in was the cleaning business. My one client paid $1,600 per month. My expenses are less than 15% since I do all the work myself, taking an average of 5 and a half hours per week.
Alternatively, growing a business is a great retirement strategy to use in a cash out event. Grow your business and when you are close to retirement, sell. Although, the price is based on value in the market, not what you want. I wouln’t solely rely on selling a business for my retirement.
If you were to go with this option, you would sink as much profits back into the company as possible. Take just enough salary to meet your needs, realistic wants and extra to put into a tax deferred savings vehicle, like VTSAX in your IRA or SEP. While you can invest in your business, the market can change quickly and violently, so you should have some savings outside of it.
In total, I currently profit about $12,000 in my side businesses. I save 100% of my side income in A separate account and have used for vacations and to accelerate paying off the mortgage. I keep the side income separate. While I have a savings goal from my regular account of $2.5MM, the side business help finance my freedom now.
The second strategy is marrying the right partner.
First, I want to point out that my wife and I do not have the same money goals. That’s OK, because what we do is support each other and can have individual goals and still maintain a happy marriage and house.
So how do you meet that perfect partner that you want to spend the rest of your life with, that will support and grow with you?
I really can’t tell you, but I can give you our story.
My wife and I met through a mutual friend while we were both attending University. We were acquaintances for over a year before we ever dated. At some point, we became closer friends and hung out together alone.
When we started dating, it was not an audition, I already knew I would marry her someday. We were engaged within four weeks of dating and married ten months later.
I was 22 and she as 20. I graduated the week before we got married. Three weeks after our wedding, we moved over four hours away from her family to start my first job. She dropped out of school to further my career and sacraficed hers.
Marriage takes sacrifice and patience
Our intention was for her to continue her education in Augusta after a year. But, during my time in retail management with Wal-Mart (16 months), I was transferred to four different stores in two States (GA & VA.) On top of that, we had our first child 21 months after we wed. We had a goal of traveling and waiting five years, but we discovered birth control is not 100%!
We had two more children before she returned to school. She completed school after our fourth child was born. In less than two weeks from publishing this, we will be celebrating our nineteenth wedding anniversary.
I tell you our story, not to tell you that you need to blindly follow your husband, but to illustrate what what one marriage that works looks like. While I have never sacraficed like my wife, in 2015 I left a great paying job to stay at home with our two youngest for her to push through school.
I worked from home as time allowed, mostly during tax season. I did not return to work until 2018 when both of our youngest were able to go to Pre-K and Kindergarten with my wife.
We lived off my earnings of less than $20,000 and savings the first two years. The third year she had income, as she started teaching. This frugal experience set us up for freedom for when my income exploded, going from $65,000 to nearly three times that after bonuses in just a few years.
Marital bliss is a mindset. Love and respect your spouse. I am not just content, I am extremely happy with my partner in life.
If you are not happy or fulfilled in your marriage, the problem may be you. If your spouse is mentally or physically abusive or neglectful, your best option may be to get out. Otherwise, choose to be happy in your marriage and a stale marriage can grow anew.
So what are the financial perks of marriage? Obviously we benefit from dual income now. There are tax savings, expense splitting and much more.
The third strategy is to create a plan
I do not believe you can get to your destination without a map. There are numerous calculators online that will tell you what you will need in retirement based on your current age and other factors.
Just do a Google search of “Retirement Savings Calculators” and try out a few. I would use conservative estimates, especially if you’re more than ten years from retirement. In my calculations, I input a 7% return on assets, which is below historical returns for VTSAX when adding reinvestment of dividends. I also only calculate 2/3 of my expected Social Security benefit in case the program experiences cuts when I retire. I would rather err on the side of having too much saved! Over time, I have gotten more conservative, if I continued to use 7%, I could withdraw $1,248 of savings every month and still meet my goal.
I only recalculate once per year. The $2.5MM goal started at $1.6MM when I started my goal; however, inflation has increased and I wanted more cushion. I may have to increase my goal in the future, but have priced in several years of inflation exceeding 3%.
Most of the calculators will tell you how much you need to save annually to meet your goals. I had a few events in my life that exhausted our savings (Great recession, I returned to school for a 2nd degree in 2009, and my wife returned to school) so at age 40, we only have 1.2x our annually salary saved. 5 years later, we are up to 3.9x. That’s on track, if I needed to live off 85% of pre-retirement income. Being frugal, but not doing without, has allowed us to save 16x our annual expenses.
Follow link for what is probably the only book you need on saving for retirement
The fourth strategy is to “Pay Yourself First”
I’m not sure which financial guru came up with this one, but I completely agree.
If you have created your plan, you know what funds are needed to go to your retirement. The rest is for your living expenses.
Highlighted above, I gave some examples of choices I made. If you do not put the money toward you’re retirement first, you will always find something “better” to spend your money on.
It’s so much easier to just stay in the habit of transferring $600 from every paycheck into my savings vehicle.
If your employer offers a 401(k) or similar plan, I would recommend putting there first, especially if they match a certain percentage. Depending on your income levels, a traditional or Roth IRA would be next. The last option would be a taxable trading account or saving in the bank.
My fifth and final strategy is to do what you do best and stay out of your retirement assets.
I believe in Vanguard Total Stock Market and Total Bond Market Funds. I am not a professional stock picker, nor should you be.
Fund managers spend 70 hours per week and have millions of dollars in salaries of employees and software, to just occasionally beat a Vanguard fund. After their high fees, they rarely, if ever, beat over the long term.
Spend your time funding the retirement and set it in a forget. For most people, including myself, this is the best strategy.
For others, real estate may be the key. However, real estate has rarely outperformed the stock market. Owning your own business is a good strategy if you can automate to continue without you, but even then I would diversify into the stock market.
Don’t be the dumb money
Read the Simple Path to Wealth, linked above, it will open your eyes. Simple can still be the best option.
I hope you enjoyed and got something out of the post. If you liked it, I would be very appreciative if you shared.
