KTAF NEWS

At a recent meeting with friends (who happen to be clients of our firm), the wife asked me if she should buy some expensive shoes. This couple works hard and has a good income. They are excellent savers, putting away at least 30% of their income into retirement funds and after-tax accounts. They drive nice cars and have a beautiful home — all affordable to them.

So, why the question about a pair of shoes?

We see this segmentation of how people think about how they spend money frequently.  Certain items (a nicer car, or perhaps nicer clothes) seem more like reasonable necessities,  while other items (a better cabin on a cruise vacation, or nice shoes) seem like a possibly unnecessary luxury.

We get many questions about budgeting and what is reasonable to save instead of spend, and our advice is always the same. If a family is saving “enough” of their income, it doesn’t matter what they spend the rest of the money on.

The goal of saving towards retirement is to achieve a pool of funds that will likely guarantee a stream of income that fulfills a desired lifestyle for the remaining lifetimes of a couple. The more you save and the earlier you save, the easier it is to hit that target.

How much is “enough” to save?

That depends on how much money is already saved, how much the family wants to spend in retirement, and how much time is left to accumulate the retirement funds.  For many young families in their 20s and 30s, saving 15% of income steadily usually works out well.  For families that start later in life, a higher percentage of income should be saved. For the occasional family that is approaching retirement with inadequate savings (proportional to the amount of money they want to spend in retirement), we will just tell them to work at least part time a longer time period, or to lower their spending expectations.

Each of us has things we like to spend money on.  As long as savings are adequate (both prior and current), you should buy what makes you happy or your life easier.  Many studies suggest that buying experiences rather than “things.”  But this is not universal, and many people greatly enjoy tangible luxuries.  The point is-no judgment from us as financial planners on how you spend your money after saving enough.

So, going back to our original shoe shopper, she was in a family that saved aggressively at an early age. We told her that she can spend her other “non-savings” money on whatever makes her happy. In her case, she should buy the shoes!