Retirement planning advice tends to be based on the principle of “spend less, save more.” However, in the early stages of preparing for retirement, it is hard to think about saving for it. Your income might not be enough and retirement itself might feel light-years away. Still, you might be thinking, “how can I maximize my retirement earnings?” Maximizing your earning potential is the first phase in planning for retirement. It’s all about increasing your income so you can maximize your retirement earnings for the future.
Why Focus On Your Earnings Instead of Your Retirement Savings?
According to the 2020 Retirement Confidence Survey, less than half of Americans have thought about how much monthly income they will need in retirement. With 37% saying their overall cost estimates turned out to be low, financial planning for retirement is essential. Planning for retirement will ensure you have a steady retirement income that will enable you to enjoy your retirement instead of worrying you might go broke. Maximizing retirement income will set you up for success in the future. It is about “earning more to save more.”
Earn More to Save More
Traditional advice of spending less to save more is not useful in this first phase of preparation for retirement. You might not have any earnings leftover to save or you might have debt. Early on, saving at least 15% of your income for retirement might just not be possible. At least not yet. As Michael Kitces puts it “there really isn’t much of any spending to cut in order to spend less.”
So for this first phase, it is about earning more to save or save more. Earning not just in terms of your salary, but also in experiences and education. Research shows that people with a master’s degree or doctorate can earn a much higher starting salary than those with only a bachelor’s degree. College grads are also more likely to be employed than mid-career high school grads, according to the Georgetown University Center on Education and the Workforce.
Be aware of how much you are investing in these increased earnings. If you take out a loan to pay for school, you will have a debt to pay. In the US, two-thirds of college students took on debt in 2018. What you have to think about and evaluate is if your degree will pay for itself. Having a well-thought-out spending plan will ensure you pay off your debt while maximizing your retirement income. You will be able to save at a higher rate in the future by increasing your lifetime earning potential.
How To Maximize Retirement Earnings
There are many routes to take in order to increase your income. You could start a side business, look for a more highly-compensated job, or ask for a raise. If you have marketable skills, freelancing in your free time is an option. Similarly, you could work part-time on the weekend. It is all about making opportunities for maximizing your retirement income. Driving income from various sources can help ensure you have enough to start saving.
Take Advantage of Compounding
The compounding effect is an example of how the earning phase of retirement savings begin to pay off. The compounding effect refers to generating earnings from previous earnings or investments. The more money you earn early on, the more it will impact your future savings. Increasing your earnings over time will ensure a smooth ride for you on your retirement savings journey.
Keep in mind that increasing your earnings does not mean you should spend more. Earning more but also spending more negatively affects your ability to maximize your retirement savings. A recent Morningstar report shows that most Americans are not saving enough for retirement. Morningstar cites this frequent occurrence because of the tendency to raise your living standards as you earn more, or “lifestyle creep”.
Spending more money means that you will need more during retirement, in order to keep up with your lifestyle. The FIRE (Financial Independence Retire Early) movement is characterized by people who increase their earnings while keeping an average lifestyle. This type of movement is the antithesis to lifestyle creep, focusing on saving as much as possible prior to retirement.
The First Step in Long-Term Retirement Planning: Maximize Your Earnings
The first phase in your preparation for retirement is maximizing your earned income without massively increasing your spending. It is about increasing your earnings so you can increase your savings long-term. Having a clear retirement saving strategy will ensure that your money is allocated wisely, throughout your retirement journey. Working with a fiduciary financial advisor ensures your retirement plan is always centered on your unique situation and goals.
In this series, we’ll dive deeper into each of these phases and how they relate to your unique retirement planning journey. To identify which phase suits you best at this point in your life, as well as to learn actionable frameworks and strategies, download your free copy of our latest cost-free guide, The Road to Retirement.
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Real financial planning should pay off today, not in 10 years' time.