Living on One-Third of Your Income
Would it scare you to think that you had to live the rest of your life on one-third of your current income? Would it shock you to know you already do? Think about it. What actually happens to all the money you earn? Give or take a few percents, 33 percent of your income belongs to Uncle Sam. Another 33 percent should be going to savings and retirement. That leaves 33 percent for you to live on day to day.Scary? Yes, but is it really true?Well, it is and it isn’t. For far too many of us, it’s not true because we are not saving that 33 percent for retirement or the holidays or even those new tires we need next year. And that should scare us all the more.Does it really matter that we are spending more and saving less? In the short run, maybe not. Without savings you can always go deeper in debt to meet your needs and wants. But what about the long run? A time is coming when there will be no earned income. That time is called retirement. As exciting as retirement sounds, it is also known as that time when you will have to live the rest of your life on a third of your current income. The good news is that in retirement you should only need that one-third. That’s because without earned income, you won’t need that third for Uncle Sam. And since you will be in retirement, you won’t need that other third for retirement savings. The bad news is that most retirement income is taxed and your spending may continue to exceed your income. The even worse news is if you aren’t saving that one third now, you won’t have it when you need it for retirement.So maybe you know all that already, and what you really want to know is what you can do about it. There is much that can be done.Start with the basics. Establish a spending plan, and track your spending. Once you know where your money is going, make spending adjustments. Also make some financial goals. Keep these goals simple but specific. You may decide to increase your monthly savings by a certain amount or reduce your spending. The key to building wealth over time is consistency. Find the money to pay yourself first, and then pay yourself first every month. Even if all you can save is $10, do it. Getting started is the important thing. So how is $10 a month going to meet your retirement needs? It won’t unless you are getting by on $30 a month now. Your retirement income should not be just the money you are able to save over the years. The money you save and invest is an important part of your retirement income, but it should not be all there is.In addition to your own savings, investments and individual retirement plans, retirement income comes from employer-sponsored retirement plans, pensions and Social Security. Social Security is not a retirement plan. At best it will provide about 40 percent of your retirement income needs. Employer plans and pensions on average provide about 20 percent. That leaves about a 40-percent gap to fill. You can close that gap by saving now or by continuing to work beyond your retirement. If your idea of retirement is not working, start saving.A new national campaign has gotten under way to help people increase personal savings. America Saves, located at www.AmericaSaves.org, provides tips on how to save and build wealth. The site also includes a Personal Wealth Estimator that allows individuals to track their savings.Bob White is a financial specialist of family programs with the Alabama Cooperative Extension System. (334) 844-2235.