Carl Richards is a financial planner and best-selling author. In his book The One Page Financial Plan he tells the story of talking to his friend, Brad, who was saving for a long-term goal that seemed almost unreachable. Brad was married and had a child. It was all he could do to meet his current needs and obligations.
Carl asked Brad “Are you saving enough…, and how do you know?” Brad responded, “Carl, how about this: I’m saving as much as I reasonably can.”
I was struck by the wisdom contained in Brad’s common-sense answer. After all, we all have limits on how much we can save for retirement and most of us hit those limits well before we reach the point of saving what the experts consider enough.
If we waited until we could save enough we would probably just give up and not save anything at all. If we are truly saving what we reasonably can, beating ourselves up over not being able to do more will do more harm than good. Saving what we reasonably can is a great place to start.
However, there is a big problem with the save what I reasonably can approach. The problem is human nature. It is easy to fool ourselves into thinking we are saving all we reasonably can when we might not be.
Almost all of us feel like we are already saving all we reasonably can. Some of us undoubtedly are, but many aren’t. If we are not careful the save what I reasonably can approach can turn into an excuse to take the easy way out.
How Much Can You Reasonably Save?
To make sure you are truly saving what you reasonably can you need a way to periodically test what is reasonable for you. Ric Edelman, in his book The Truth About Retirement Plans and IRAs, described such a test.
Edelman suggests increasing the amount you invest in your retirement plan at work by 1 percent of your salary. If you make $50,000 per year, and you are paid twice a month, this would increase your retirement savings by about $21 each pay period. Your paycheck would decrease by somewhat less than $21 since your tax withholdings will go down.
If you don’t notice the difference (if it doesn’t hurt a little) you are not saving all you reasonably can. Increase your savings by another 1 percent and repeat until it starts hurting.
If it does hurt you might really be saving all you reasonably can. Try and keep your savings at the increased level for at least a couple paychecks and see if you can adjust. After all, saving what you reasonably can shouldn’t be completely painless.
Save More Tomorrow
The amount you can reasonably save for retirement isn’t the same today as it will be in the future. Fortunately, for most of us this amount increases over time.
The easiest time to ramp up your retirement savings is immediately after you get a pay increase, before you get used to the extra money. Therefore, the final step to ensure you are saving all you reasonably can is to commit now to save a significant portion of all future pay increases. The formal name for this is the Save More Tomorrow plan. I wrote about it in a previous post called “Use the ‘Wimpy’ Savings Plan to Increase Your Savings Rate”. Use the links above to learn more about how this powerful tool can help you increase the amount you can reasonably save over time.
The Save What You Reasonably Can Plan
To review, The Save What You Reasonably Can Plan has three steps:
- Immediately start saving all you reasonably can for retirement.
- Periodically test the reasonableness of what you are saving by increasing your retirement savings by 1 percent of your salary. If it doesn’t hurt, repeat.
- Save More Tomorrow. Commit now to save a significant percentage of all future pay increases.
It will take time but this reasonable plan will gradually decrease the distance between what you can save and what you should save. Stick to the plan long enough and one day saving what I reasonably can will turn into enough.