For thousands of years, Aesop’s cautionary tale of the ant and the grasshopper has taught us the importance of working and saving for the future. The ant works all summer to store up a winter food supply. The grasshopper, who fritters away the warm weather partying and playing, finds himself on the verge of starvation in the bitter cold months.
It’s an effective lesson. As a kid, that story scared me, especially those versions of the fable where the ant refuses to help when the grasshopper comes begging for help. I’m not alone. As financial advisors, we regularly meet people who are doing a great job of saving for retirement but are so focused on that objective that they struggle to enjoy the present.
Because our professional objective is to help families live full and rich lives, we often find ourselves in the seemingly curious position of encouraging these anxious clients to spend some of their money today on whatever makes them happy.
Make no mistake; as a nation, we should be saving a lot more money for retirement. A 2018 study by the National Institute on Retirement Security, using data from the Federal Reserve, showed that retirement savings “are dangerously low.” It pegged the retirement savings deficit at between $6.8 and $14 trillion. A Northwestern Mutual survey found that 21% of respondents had nothing saved for retirement and about one-third had less than $5,000 socked away for their “golden years.”
On the flip side of those stats are millions of disciplined savers of all ages who are on-track to fully fund their vision of retirement. I have the pleasure to work with one of those people. For purposes of this article, we will call her Justine. Justine is a successful, single 30-something professional who earns a good living and has been saving for retirement since her first paycheck. During a recent meeting, Justine, who loves yoga, expressed a wistful desire to visit Thailand for a yoga event. When I asked why she hadn’t booked her trip, Justine looked puzzled and said, “I can’t spend that kind of money now. I need to be saving it for retirement.”
I love that Justine’s default setting is “save,” not “spend.” However, I carefully explained that her disciplined on-going adherence to a budgeting plan called TSL has made it possible for Justine to spend money on herself today – including for occasional indulgences like the yoga trip.
TSL stands for Taxes, Savings, Life. This system is an easy-to-understand way to get a handle on your spending and savings. To start, you divide your gross income into three buckets: 30% for taxes, 20% for savings, and 50% for life (meaning everything else). Depending on your circumstances, you may want to tweak those percentages. If you have a high income, your tax bite could be more significant. Getting a late start on investing for retirement? You might want to boost your savings percentage. Conversely, if you are confronting health or other life issues that you think might limit your future opportunities, you may want to expand your current resources by reducing savings.
The Life bucket is obviously a big one. It funds a wide range of expenses, including food, shelter, clothing and kid-related costs. But whatever remains is yours to spend as you see fit.
The keyword in that last sentence is “you.” Everyone’s circumstances and definition of happiness are different. You may need or want a larger house. Perhaps you love to travel. Or maybe you’d like to make significant contributions to a favorite cause. If you want to retire early or simply rest easier knowing you have a surplus of money in the bank, it’s OK to “spend” some of your discretionary Life money by increasing your savings rate.
As with most aspects of life, we should strive for a measure of balance in our financial strategies. Yes, we should all be ants, first and foremost. But when we see that our winter stores are filling up nicely, we can – and should – take time to play in the summer sun, just like the grasshopper.
I’d ask Justine to chime in on the importance of balance, but, last I heard, she was in Thailand.