It’s funny how our minds are wired sometimes. I was thinking about how there are significant differences in the way most of our brains differentiate between spending and saving.
Many people put retirement saving on the backburner because it is so far away and the number needed is so large. We can’t ever imagine how we will get to that large target.
Yet when we come across a large purchase or amount of spending, we break down that spending into chunks. For example, monthly payments. The likes of after pay and other buy now pay later schemes make this a bit too easy.
Break down retirement savings into smaller chunks
Most of us would be better off doing the opposite. Breaking down savings required into smaller chunks and expenses left as one off larger chunks.
This will encourage more saving and less spending which can only be good for us.
Let’s say you are 40 and are wanting to retire with $1 million in cash and investments at age 65, starting from zero. Income of $75,000 after tax and expenses of $58,000. Both expenses and income increasing each year with inflation. We will assume modest investment returns of 5% after fees and tax. Inflation of 2.5%.
Seems like a daunting task.
It’s too easy to start thinking along the following lines. I have an annual surplus of $17,000. In 20 years I will only have $425,000 so why even try? Not even halfway to the target.
But this misses a few important points.
1/. Compound interest
2/. Investment returns
3/. Your $17,000 surplus will grow each year in this example.
In this example you would have just $330,000 at the halfway point, after 12.5 years. Easy to get discouraged right? But it is towards the tail end that the magic happens thanks to a rising budget surplus and compounded investment returns. Ending up with $1 million after 25 years.
They still seem like large numbers and large timeframes even after knowing that. So how can you stick the path? Do the same as you do with your expenses. Break it down into monthly payments.
In this example, it would be saving $1,415 a month in year one, $1,450 a month in year two, $1,490 a month in year three, etc.
These numbers don’t seem so scary to someone with the assumed income and expenses. Not as scary as one million anyway.
Whereas, flipping the switch on your spending, you want it to sound scary. A $20,000 car on a 5 year 8% loan, will set you back $24,000 plus. Not $405 a month.
Recognise when your mind is playing tricks on you and make it work in your favour. Not against you.
If you need help with your personal retirement planning, then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here