Save or live the High Life? AKA Normal or the Bernie's Red

Question: I just turned 24, and the constant pressure from financial advisers to “save save save” for retirement makes me anxious that I’ll never be able to retire. I contribute 10% of my salary to my 401(k) each year - some of which my company matches - and I recently took on a second job to save for a home. Still, I feel miserable. My friends cruise around in BMWs, but I’m afraid to spend a dime on myself lest I ruin my future. I’ve looked at retirement calculators, but most don’t let you enter an age below 25. So I have no idea whether I’m doing enough, too much or just the right amount. What do you think? Are my worries are justified? —Jessica, Boston, Mass.

Answer: In the spirit of full disclosure, I must confess that I’ve been a bit of a cheerleader when it comes to encouraging people to save. I emphasize saving for two reasons. One is that it’s essential. No saving, no retirement. It’s that simple. And the sooner you get into the habit of regular saving, the better your chances of being able to retire in comfort.

That said, I agree that some advisers can get too strident. They create the impression that unless you’re salting away most of your salary you’re a spendthrift. Sure, contributing to 401(k)s and other retirement accounts is crucial. But you don’t want to go through life feeling guilty every time you treat yourself to dinner at a decent restaurant.

I mean, you do have a life to live before retirement. And what’s the point of retiring in comfort if you lived a pinched existence during your career? What’ll you do in your dotage? Reminisce about how much fun it was to forego family vacations so you could boost your 401(k) contribution rate yet another percentage point?

Clearly, retirement planning has got to strike a balance. You want to save enough so you’ll be able to enjoy retirement. But not so much that you can’t also live a satisfying life during your career.

Live below your means

I think the best way to achieve that balance is to adjust your expectations so that you’re content living a little bit below your means. Let’s say your salary is high enough that you can buy a BMW, but doing so would require you to spend every cent you make. Well, maybe you decide to go with a moderately priced Toyota instead so you have some dough left over that you can plow into retirement savings.

It’s that sort of reasonable compromise you want to shoot for in retirement planning, whether it’s choosing a car or a home, planning vacations or whatever.

You don’t want to go to extremes. If you try to live like an ascetic not only will you not enjoy life, but you probably won’t be able to stick to an unrealistic savings regimen anyway.

Rather, you want to make choices that will allow you to live comfortably, but not extravagantly during your career, which should also allow you retire without having to ratchet down your standard of living.

Get an estimate

As for figuring out how much to save, our cleverly named What You Need To Save calculator can give you a quick approximation. Just plug in your age, salary and the amount you’ve saved already, and voila! You’ll get an immediate estimate of how much you should be putting away to be able to retire with 80% of your projected pre-retirement salary (minus your annual savings) at age 65. (As you’ve noted, the lowest age you can enter is 25, but it’s not as if one year will make a radical difference in your recommended savings rate.)

I would expect that someone in their 20s will find that they’ve got to save somewhere in the neighborhood of 10% of their salary to have a decent shot at a secure retirement. The figure might be lower for someone who’s already got some savings set aside, as you do. The figure might be higher if your income is high for the simple reason that Social Security will replace less of your pre-retirement income, which means you’ll be relying more on your savings to provide what Social Security can’t.

Expect the unexpected

Whatever figure you arrive at, you should know that, as a practical matter, anytime you’re making projections many years into the future, you’ve got to take the results with more than a few grains of salt. A lot can happen over 30 to 40 years. The market might not deliver the returns you’re hoping for, your investing strategy may hit unexpected snaps, layoffs, illnesses or family obligations may interrupt your savings regimen - you get the picture. Life isn’t as predictable as a spreadsheet.

So if possible you want to build a cushion into your savings regimen, maybe shoot for 12% if 10% is called for. If you can’t manage that, then set aside a few extra bucks when you can - save part of a bonus or a windfall if you’re lucky enough to receive one. It’s also a good idea to monitor your progress periodically, say annually, by going back to our What You Need To Save tool.

At your age, I wouldn’t get too fixated on a particular percentage, though. Fact is, at the very beginning of your career, developing the habit of regular saving and putting away at least something on a regular basis is at least as important as the actual amount you save. By getting an early start, you’ll avoid the pitfall of finding yourself so far behind in your 40s or 50s that you’ve got to resort to shock savings therapy to have any hope of retiring before you’re 80.

Finally, remember that the savings target you eventually settle on has got to make sense in the context of your life as a whole. It’s okay if you’ve got to exert control over your spending impulses or even decide that some purchases are off limits, at least for now.

But don’t get so caught up in frugality that your drive to save dominates your life and sucks the joy out of living. Because if you can’t take pleasure from life today, it’s hard to imagine that you’ll truly be able to enjoy retirement tomorrow.