Save and Invest

This simple formula can help you spend less and save more of your next raise


Most Americans are not saving enough for retirement, according to Morningstar's new report "More Money, More Problems: How to Keep a Bigger Paycheck From Spoiling Retirement." And getting a raise can actually exacerbate the problem, rather than make it easier to put money away.

That's largely because of "lifestyle creep," or the tendency to raise your standard of living and spend more once you earn more, the report says. It's a double-edged sword: Not only are you spending more money before retirement, but you will also need more money during retirement to keep up with your new lifestyle.

Unfortunately, savings habits don't tend to keep pace with wage increases. While people who save the same percentage of their income save more in absolute terms — 10% of $75,000 is more than 10% of $65,000 — Morningstar's report contends they also need to strive to save more relative to how much they are now earning, so that they can keep up with their new lifestyle.

How can you actually save more? Spending less is the obvious solution, though that's easier said than done. To help, Morningstar came up with a simple formula to follow.

Follow this spending rule

The dollar amount that you should aim to save depends on countless factors: how much you make, your standard of living, your age and more. There's no single "right" number.

With that in mind, Morningstar modeled three different savings formulas to find the most effective and easy-to-use, using data from the 2016 Survey of Consumer Finances.

The authors of the report note that each equation is a good starting point for saving, but can easily be individualized to account for your spending habits and goals:

  1. Spend twice your years to retirement: If you have 20 years to retirement, you would freely spend 40% of your raise and save the rest.
  2. Save your age, as a percentage of the raise: If you are 30 years old, you would save 30% of your raise.
  3. Save at least 33% of your raise: If you get a $5,000 raise, say, you would aim to save $1,650.

The report found that "spend twice your years to retirement" is the most effective, in terms of saving the most, regardless of age. The other two formulas are less effective for older savers — 45 for the second rule and 35 for the third rule — as the percentage of their raises they are meant to save becomes larger and harder to manage.

If you are looking to implement one of the rules, consider your current savings rate and what your goals are. If you are on track to get a raise this year — or a one-time bonus, like a tax refund — calculate how much you could save under each of the three formulas. Consider what it would take to save the highest percentage.

That said, "spend twice your years to retirement" also typically requires saving the most money of the three rules, especially for younger savers, which can be hard to sustain, particularly when your income is lower. Instead of adhering strictly to that percentage, then, it's OK to adapt the rules as needed. The important thing is finding an equation that works for you and your family long-term.

You might be 30 years away from retirement and decide to stay at that spending/saving ratio for a few years if you have other financial goals. Or you might find saving 25% of your raise is the easiest starting point for you right now, with the goal to gradually scale up to 33% over the next few years. The point is to have a concrete number in mind, and make changes as necessary.

"[The rules are] good starting points for families, especially if families are unlikely to get a more detailed analysis, but ideally retirement plans should consider personal characteristics and needs," the report says.

Once you do, saving more of your raise and avoiding lifestyle creep will be easier than ever.

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This simple equation will tell you if you're saving enough for retirement
This simple equation will tell you if you're saving enough for retirement