Spend Now And Still Retire Well? It’s Possible

One of the great tensions in modern life is our own finances: How to earn, spend and save enough, in proper measures.

Oddly enough, as one’s income grows these kinds of problems grow with them. A person on a restricted income simply cannot spend, while a person earning enough for the occasional frill often will spend that money heedlessly.

That urge to spend leaves out the third category, saving. We know saving is crucial, of course. Besides the short-term goals we might have of buying a home, getting married or financing college for kids, there’s the long-term goal everyone faces: retire well and on time.

How can you have it all? By flipping the order of things, that’s how.

Make retirement first. Target a fixed number you must set aside to pay your retirement “bill,” each month, as if it were a car payment.

The thing is, it probably doesn’t have to be much more than a car payment — if you start early enough. Five hundred bucks a month is $6,000 a year.

If you start in your early 20s, you can arrive at your early 60s with nearly $1.4 million by setting aside just that $500 each and every month without stopping. Compounding at a market rate of return will get you there.

Say you make a U.S. average wage of $44,322 (that’s the estimate in 2012 by the U.S. Social Security Administration). Could you find a way to remove that $6,000 without feeling too much pain?

If you did, the net effect would be a gross salary of $38,321. But remember, lower gross pay means your state and federal tax bill declines. The results vary according to how many other deductions you take. However, the dollars you take off the top are the dollars upon which you pay your highest tax rate.

Get aggressive

In effect, the impact of a more aggressive 401(k) contribution is lower taxes, resulting in a higher paycheck than you might assume at first. The government is helping you save.

If you have an employer match, so much the better. You won’t be able to completely erase the “cost” of paying for your retirement, but you certainly will blunt the pain of it.

After that, cover your basics (mortgage, food, taxes, insurance) and whatever is left is yours to spend, worry-free. You’ve got retirement covered!