Pat and Curt would like an above average retirement with income of $70,000 per year. They figure they will receive $25,000 through government benefits, leaving them responsible for $45,000 per year. The “Rule of 20” tells them to multiply this amount by 20 and presto! that’s how much they’ll need to save for retirement: $900,000. In 25 years when they retire, they’ll actually need $1.5 million to account for inflation.
$1.5 million! Pat and Curt are 40 with two kids, a mortgage, line of credit debt and a dog. Assuming they have $150,000 saved for retirement, they’ll need to save $1300 per month – per month! – to get to their goal.
There are two methods of planning your retirement savings: goal-based planning and budget-based planning. Goal-based planning by all accounts sounds like the rational and superior method. Choose your future goal and then do what you need to do to reach it. It’s proactive, logical and motivating. But what if it’s not? What if saving $1300 per month is such a ridiculous notion to you that you do the exact opposite – save nothing. It’s paralysis caused by an impossible goal.
That’s where “second-rate” budget-based planning comes in. Budget planning is what it sounds like – make a budget and see what you have left over to save for retirement. You have $200/month to save? $100? $50? Great, start there. It’s a lot better than saving nothing under high-pressure goal-based planning. Maybe you can’t save anything right now. But you make a plan to obliterate your credit card debt and attack retirement savings afterwards. Or maybe you expect a raise in six months, so you make a plan to start saving then.
Really the answer, as it does so often, lies in the middle. Calculating a goal-based amount using the Rule of 20 is a good idea because it gives you a (very) rough number to shoot for. If it’s possible to save that much, wonderful for you! If the number makes you want to crawl under a rock, forget it for now. Save what you can now. Adjust when you can later.
That’s not second-rate. That’s real-life.