“The trick is to stop thinking of it as ‘your’ money.”
– IRS auditor
Previously, we were looking at the answer to the question of whether or not saving money in your 20s really mattered. After all, you’re young, and you have decades of earning potential ahead of you. You should live it up, right?
There are some other ways around the problem if you find that you’re approaching your 30th birthday and haven’t yet begun to save.
In this article, we’ll explore some of those options and see just how much you need to commit to improving your situation to be as well off as the average 22 year old college graduate who saves 15% per year.
We’ve seen the baseline. We’ve also seen what happens when we spend our 20s profligately.
What can we do to improve the situation?
It’s not going to be easy, but it’s doable.
Other ways to make up for not saving in your 20s
Using the same set of assumptions from the previous article, I ran more Monte Carlo simulations to determine how changing behaviors affected median net worth and the probability of still having money at age 97.
Save even more
If a person didn’t save in his 20s, then it’s going to be difficult to dramatically ramp up the savings rate on the 30th birthday, but it’s possible. It’s also, comparatively, the easiest one to accomplish. However, as we saw in the previous article, saving 15% isn’t enough. Now, this person will need to save even more to be in as good of a position as if he had saved in his 20s.
There are two different breakeven points here. The first one is to have the same probability of having money at age 97. That requires a savings rate of about 20.5% starting at age 30. The second breakeven is for an equivalent median net worth at age 97. To accomplish this goal, the 30 year old would need to save approximately 22.3%.
Why are the savings rates different?
The savings rate required to have a successful retirement is lower because each increase in savings is met with an equal decrease in spending. Thus, by saving more of a percentage of income, the 30 year old will have lower expenses in retirement than the person who starts saving 15% at age 22. When you have lower expenses, you need less money to successfully retire.
Too bad he didn’t start at age 22.
Allow me to reemphasize a point, though. Suddenly scuttling 20-22% of your spending so that you can save more is not going to be easy. It will require preparation, intentionality, and intense goal setting. Monkey Brain is going to howl like there is no tomorrow. You’ll be tempted to slip up. It’s not an impossible mountain to climb. There are people who save half of their incomes, but most of them started out that way.
I’m not saying this to discourage you. Not at all. I want to encourage you to save more. However, I also want you to be realistic with your expectations that it’s not going to be a walk in the park. You’ll think that you’re cutting to the bone. You won’t be, but you’ll feel that way. Still, if you ask people who are recently retired what their number one concern is, you’ll find out that they invariably say that it’s running out of money before they die. You don’t want that concern. Make the sacrifices now. Over time, the cuts won’t be noticeable. It’s hedonic adaptation in reverse.
Earn more money
I went to graduate school for my MBA. I even took a one year detour into law school before deciding that I didn’t want to spend my working career in a law library. When I graduated, I received a significant bump in my income, and within two years, we’d paid off my graduate school loans.
I’m a huge fan of increasing income. I’d rather increase income than cut expenses any day of the week.
So, what happens if you increase your income and save 15% of your income?
I admit. This is not the result I expected to see when I ran the simulations. I checked and rechecked my models to see if I’d made a mistake.
Then I looked at the average of the median net worth figures. It was $1.73 million. The median net worth of our original 30 year old who started saving 15%? It was $1.57 million.
For 10,000 simulations, that’s not a huge difference.
What had happened is that our 30 year old who got a pay raise also raised his standard of living. He was not making up any more ground because his expenses in retirement were much higher.
So, earning more money only to spend it all doesn’t do you any good. It’s why so many celebrities and star athletes wind up broke. They spend what they earn, and once they stop earning money, they run out of money (for my take on Allen Iverson, you can subscribe to my free 52 week Financial Game Plan).
Then, the trick must be to
Earn more while holding spending in check
This is actually the path that we took. We increased our lifestyle a little when I graduated from grad school, but not my much.
So, let’s assume that the 30 year old gets a pay raise, but only increases his living expenses by inflation. How much of a pay raise does he need to receive to be as well off as the 22 year old counterpart who saved throughout his 20s?
It turns out that receiving a pay raise somewhere between 65% and 70% will make the 30 year old as well off as the person who saved and invested starting at age 22.
Impossible, you say?
My post-MBA salary was more than a 100% increase over my old Army salary.
You could also invest in yourself and start a side gig. You could get accreditations and certifications that will make you more valuable. You could learn new skills.
It’s difficult, but it’s not impossible.
As we have seen over this pair of articles, investing in your 20s truly is important. You can save and invest in the market, and, if you receive average market returns (granted, not a guarantee, but probably more likely to be successful than your uncle’s sweater lint factory investment idea that he’s been pitching you), you should be in excellent shape when you reach retirement age.
If you managed to skip through your 20s without saving, hope is not lost. However, it’s not going to be easy to make up for lost time. Even though the average 30 year old who did save in his 20s only has about $83.6k saved up, that’s an enormous platform from which to grow. You’ll either have to save significantly more – usually between 6-8% more than the average person who got an early start – or you’re going to have to meaningfully increase your income – somewhere between 60-65%.
Both are achievable. Neither is easy.
Easier yet, start saving in your 20s.
Are you on course, or do you have to play catch up? Let’s talk about it in the comments below!