Feb. 26, 2019

This paid piece is sponsored by The First National Bank in Sioux Falls.

By Adam Cox, executive vice president and chief wealth management officer

Financial planners have a long-held, simple rule about saving for a comfortable retirement: put away 10 percent of our before-tax income and invest that money for the long-term futures. I think the 10 percent rule is outdated, and anyone who follows it won’t have the comfortable retirement they want.

Here’s the 10 percent rule origin story: It came at a time when the vast majority of Americans had pensions and an expectation of full Social Security benefits for retirement. Health care and education funding weren’t given a second thought. It also assumed that after retirement, you didn’t have many golden years, so you didn’t have to think about longer-term health care and living costs.

In reality, your savings goal may need to be much more than 10 percent. Why is that? Pensions are generally a thing of the past, we’re living longer, health care costs continue to rise, and the cost of living will never decline. Saving at a 10 percent clip may leave you disappointed when you hope to retire.

So if it isn’t 10 percent, how much more should it be? It depends on your own unique circumstances. However, a good rule of thumb is to try to save 20 percent or more each year to ensure you’re saving enough to meet your goals and maintain your lifestyle in retirement.

If you’re not there yet, don’t panic! Even small changes can get you closer to meeting your retirement goals. One of the most interesting small changes is to think about what you really need to live on now and how you can reserve the rest for savings, investment and retirement.

What does Shaquille O’Neal have to do with the 10 percent rule?

While it’s true that celebrities and athletes can be notorious for their financial missteps, there are some who have gotten it right. Longtime Tonight Show host Jay Leno has yet to spend a dollar of his earnings from the show, living instead on endorsements and his stand-up gigs. Likewise with NFL tight end Rob Gronkowski who lives only on his endorsement earnings without touching his NFL paychecks. Jessica Alba, a mother of two young daughters, started The Honest Co. as a way to sell organic products to ethically minded consumers. Today, her company generates hundreds of millions in annual sales. But despite these achievements, it’s hard for the average American to learn much from their successes and apply it to their own lives.

And then along comes a story about Shaquille “Shaq” O’Neal and his formula for financial success. Yes, this is the same Shaquille O’Neal who as a 20-year-old famously blew through his first $1 million in just one hour! Having learned from this mistake early in his NBA career, Shaq has transformed himself into a successful investor and businessman.

What makes Shaq a financial all star? His simple formula for wealth accumulation: living on no more than 25 percent of his annual income. That’s right, 25 percent! Now, granted, it’s easy to imagine living on just 25 percent of your income when you earn as much as Shaq did during his basketball days — over $280 million over his storied NBA career, not including many millions more each year in endorsements. Assuming his annual compensation was conservatively $30 million, I’m guessing most of us could scratch out a living on $7.5 million a year.

One of the best ways to get to that 20 percent savings number I suggested before is to think like Shaq and budget. It’s as simple as that. Figure out what percentage of your income you need to live now, accounting for all your needs and wants, and trimming back where you can. What’s left can give you that comfortable retirement you want.

Whether your personal savings goal is 10 percent or 75 percent, we’re here to help you along life’s financial journey. Contact us today!