Top of Mind

Earn More or Spend Less?

One issue that receives little attention from retirement plan sponsors is the capacity of their plan participants to save for retirement.  While there are some employees who don’t save for retirement for reasons other than financial capacity, most non-savers simply don’t have the capacity (or believe they don’t have the capacity) to save for retirement because they are living “paycheck to paycheck.”

There are certainly some individuals - typically, low-wage earners - for whom saving in a retirement plan should simply not be a priority because a) Social Security is going to replace a lot more income in retirement than a higher-wage earner and b) they have bigger financial fish to fry (e.g., establishing an emergency fund, addressing crippling debt issues, etc.).  However, there are many people who, with the proper guidance, could have the capacity to save into a retirement plan.

The issues that prevent retirement savings are often not complex. Simply put, most issues resolve around two basic concepts: earning more or spending less.

Earning more is not necessarily about working a second job, but rather completing some tasks that provide a little extra money. That extra money can then be directed to a retirement or other savings account (or used to reduce high-interest debt).   Ultimately, the effect of the extra earnings is magnified by the investment income earned on those contributions.

And the tasks? Just Google “side hustle,” to find many ways that an individual can make a few extra bucks. Sure, some are scams, but many are not (e.g., selling your excess clutter, getting cash back from buying things you would normally buy anyway, etc.) and, with a bit of homework, most anyone can earn a little extra money.

The second concept - spending less - has similar misperceptions, such as “cutting out my daily latte from Starbucks” (my most hated retirement savings strategy ever) or sacrificing other things that are a source of enjoyment.   Often, spending less can be as simple as getting a handle on what is spent in the first place!  I can speak from personal experience that most people would be shocked to find out what they are spending if they tracked it every day.  Once spending is tracked, the mere fact that an individual is conscious of money spent may cause spending to decrease, with no significant sacrifice in life enjoyment. 

After tracking spending, the next step is to set a monthly budget for each category of spending, with a goal of not exceeding those budgeted amounts.  While there are extreme budgeters who manage to cut their spending dramatically (50% or more), significant savings can still be obtained without giving up a lot; in fact, much of cutting expenses has to do with reducing the cost of items you already purchase, such as utilities, groceries, etc.  In fact, the result is often being able to enjoy many of the same things, just for less money.  Far from giving up that latte!

While I am generally in the “spend less” rather than the “earn more” camp in terms of how retirement plan participants can improve their savings for retirement, for many participants the combination of both is the key to savings success.  And the savvy plan sponsor, through financial wellness programs and other educational efforts, will address these critical issues so that participants have the capacity to save.

Are you conducting this type of education with your plan participants? Feel free to fill me in on the details via Twitter or at  

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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