How to save more for retirement

If you’re struggling to save for retirement, you have company: Only half of Americans are saving at least 5% of their income, according to an America Saves Week survey, and even that is short of the widely recommended 15%. America, it turns out, does not save enough.

There are plenty of reasons for this shortfall: Slow wage growth, a poor financial education system and limited access to workplace retirement plans all make the list. But also, it’s just more fun to spend than save.

And we are spending, as newly released Personal Capital data points out. The robo-advisor analyzed 1 million user accounts from both its free financial analysis service and its paid investment management offering — nearly 150 million transactions in total — to get a handle on where our money is going.

First, a quick caveat

Personal Capital users are not the everyman. While a large portion of its tracking and analysis service is free, its fee schedule for investment management was clearly written with the 1% in mind: There’s a tier for $10 million and over, if that tells you anything.

That doesn’t mean the average account holds that much. Assets under management average $300,000 per client. But that figure is still high among robo-advisors, which tend to draw young, new investors. (At Betterment and Wealthfront, accounts average $24,000 and $71,000, respectively.)

Then there’s the simple fact that even the unpaid account holders are using the service to track their spending, which makes them unlike most people — who, well, don’t do that. Perhaps because of that, the research results diverged a bit from most when it comes to saving for retirement: Personal Capital says that in 42 out of 50 states, its users are prioritizing retirement contributions above other expenses.

That aside, there are some interesting nuggets here we can all relate to.

Convenience costs money …

Many of the spending trends seen in Personal Capital’s analysis can be lumped into one category: We spend money on things that make life easier. That includes car rides so we don’t have to drive, food we don’t have to cook and coffee we don’t have to make.

Of the accounts in the analysis, the average person ate dinner out roughly 14 times a month, with total restaurant spending of more than $380. (As you are no doubt aware, there are 30 or sometimes 31 dinners in a month … this is a substantial portion of them.)

The average account also showed $322.47 spent on groceries each month, an amount that may seem low until you consider the restaurant spending.

Other notable expenses in the report: $17.73 per month at Starbucks, $68.96 on ride-sharing services like Uber and Lyft, and $475.79 per month on travel. (Not in the convenience category, but worth mentioning for its hilarity: Children, who do not make life easier, cost the average account $148.47 per month. Those of us who have them know that’s roughly 100 times too low.)

… and it could cost us at retirement

There’s no reason we shouldn’t occasionally eat out or stop for coffee on our way to work. But there’s also no reason to do it every day — or, in the case of those dinners out, every other day — if it’s to the detriment of retirement savings.

Except there is a reason, at least from a behavioral finance perspective: We’re much more likely to put today’s wants over tomorrow’s needs. We want to save for retirement, but we procrastinate doing so.

It’s easy to convince ourselves that little expenses here and there don’t make a difference, that a $3 coffee won’t make or break retirement. But it actually could, over time.

“We’re experiencing a volatile market that is out of our control, but our incremental day-to-day spending is something we do have control over. And more importantly, daily spending habits have a real impact on the amount of money we need to retire,” Bill Harris, CEO of Personal Capital, said in a release about the data.

Consider this: Just $3 saved every day is $1,095 a year. Invest that each year at a 7% return, and it could turn into more than $165,000 in 35 years (largely thanks to compound interest).

Is that enough for retirement? Nope. But it might be enough for a couple years of retirement, plus more with other spending tweaks. Cut back the really expensive stuff, like that dining out, and you’ll really be cooking — literally, but it’s also nearly enough to max out a Roth or traditional IRA. Those contributions could amount to close to $700,000 after 35 years.

Use behavioral finance to save more instead

Reading this, you might be feeling convinced. But there’s a big gap between that and actually changing those ingrained spending and saving (or not saving) habits. To fill that, we can use those same behavioral finance findings to our advantage.

One of the easiest? Save future dollars, or Save More Tomorrow, a theory championed by behavioral economists Richard Thaler and Shlomo Benartzi. This uses our natural procrastination tendecy to our favor. Continue spending as normal, but to make up for that, save the extra money that comes from raises and bonuses. Done consistently, this is a real way to build wealth — it could add up to $1 million by retirement, according to NerdWallet’s recent analysis.

Another suggestion is to ease into spending, by allowing your employer to take the lead. Many companies are opting to automatically enroll employees in their 401(k). Some even automatically increase employee contributions by a percent or two each year.

Done this way, saving more money becomes a slow burn, and you don’t even have to make the decision to do it. You might not notice that you’re gradually saving a greater percentage of your income over time; if you do feel squeezed, you can always cut back contributions.

Finally, consider the hot-cold empathy gap. This terminology comes from George Loewenstein, a professor of economics and psychology at Carnegie Mellon University. The basic premise: We don’t make our best decisions in the heat of the moment. (This is why you bought a bag of frozen tater tots last time you went to the grocery store hungry.) Those automatic 401(k) contributions can help with this, as can setting a budget at the start of the month that includes savings as a line item. That way, you’ve saved before you start spending.

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Twitter: @arioshea. This article first appeared in NerdWallet.