Your retirement might not like your small salary

Fine With a Small Salary?

by Richard Barrington


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In what may be a sign of how expectations have been lowered by the bad economy in recent years, most Americans don't feel they need to make six figures to be successful, according to a recent survey. But while it's fine to aim for relatively modest financial goals, if your goals are too modest, they may sell your retirement short.

A study from earlier this year by CareerBuilder.com found that 75 percent of Americans would feel successful with a salary under $100,000. Twenty eight percent of survey respondents said they would need to make between $50,000 and $70,000 to feel successful, while 23 percent said they could feel successful earning less than $50,000.

The trouble with low expectations

The problem is overly modest financial goals may be a sign that Americans don't fully understand how much money they will need in retirement. Before you settle for less, here are five questions you should ask yourself.

  1. Are you factoring in the need to save for retirement? If you are content with your salary because you can easily pay all your bills, does that include being able to put aside money for retirement? Americans' savings rates have been chronically low, and until you are adequately saving for retirement, you aren't really meeting all your financial needs.

  2. Are your retirement goals adjusted for inflation? $100,000 may sound like a lot of money, but at a three percent inflation rate, it would be worth just over $41,000 in 30 years. Especially if you are young, your retirement years (in particular the back end of your retirement years) are a long way in the future. Make sure your saving and income goals for those distant years are adjusted for inflation and not based upon today's dollars.

  3. Are you in a high-risk occupation? For reasons including physical risk, stress or simply the demands of the job, some occupations tend to have shorter careers. If that's true of your job, then you should have higher income goals. This isn't simply to compensate you for the risk or difficulty of what you do; it is also a practical necessity. A shorter career means both fewer earnings years and a longer retirement period. That requires higher savings rates, which people can generally only accomplish by earning an above-average income.

  4. Have you accounted for the size of your family? One drawback of a generalized financial survey is that the income figures involved don't take into account differences in personal situations. For example, there is a world of difference between a single person earning $70,000, and someone with five kids trying to get by on the same salary. Before you settle on income and savings goals, make sure you have accounted for the size of your family, including your plans for future additions to that family.

  5. Have you adjusted your goals for where you live? One other way that broad national studies need to be adjusted for individual situations is to account for cost-of-living differences. An annual salary of $50,000 goes much further in a rural area than it does in New York City.

If Americans really are willing to get by with less money, the best way for them to do it would be boost their savings rates so they are spending less now, and putting more aside for the future. Otherwise, they may regret those modest income goals when retirement arrives.

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