For the 100 million of you who will get a tax refund this year, the former head of retirement solutions at J.P. Morgan has a great and very simple idea.
Don’t spend all your refund.
And don’t save all your refund.
Instead, says Anne Lester, split the difference. Spend half living, and save the other half in your 401(k), IRA or other retirement vehicle.
And don’t just do this with your refund, she adds. Do it with every raise or extra money that comes in.
“Saving is so hard,” she tells me. “One of the best life hacks is to commit to saving half of any raise or any windfall.”
Lester, who spent nearly 30 years at J.P. Morgan Asset Management, including 15 running the Retirement Solutions team and overseeing the target-date funds, has been thinking more about the behavioral aspects of money since retiring in 2020. We all find it incredibly difficult to save money, she says. (Chapter heading in the book she’s writing about personal finance: “You suck at saving, and it’s not your fault!”)
There are, of course, all the financial pressures of the day to day, from rent to gas to food and the like. But there’s also the so-called “hedonic treadmill”–a well-established psychological phenomenon also known as lifestyle creep. As Lester says, yes, “It’s a thing.”
Today’s successful middle-aged lawyer isn’t that much more thrilled by his expensive Beemer than he was with the first Chevy he got at age 19. We adapt very quickly to every raise and every upgrade in our financial position. We become used to more, and better.
(My friends don’t believe how cheaply I eat, even with today’s soaring food prices—but that’s a story for another day.)
As a result, spending more eventually leaves us no happier than we were before. Hence the “treadmill”: you have to keep moving upwards to get another happiness kick.
This is why, for example, real personal disposable income per person has tripled in the United States during my lifetime, and I cannot say that people seem three times as happy to me. Or even twice as happy. To be honest, they don’t seem to be any happier at all.
Maybe it’s just me, but people seemed a lot happier back in the 1990s than they are today—even though in constant dollars they earned a third less.
And that’s where Lester’s savings hack is so great. You’re used to living on disposable income of, say, $40,000 a year. You get a 5% raise, or $2,000. If half of that money goes into your retirement account, you get some of the gains here and now. But you experience only half the lifestyle creep.
“You stay off the hedonic treadmill,” says Lester. (Or, at least, you go up it more slowly)
This simple hack can go a long way. I ran some simple numbers as an illustration. Using some very rough, back-of-the-envelope numbers, an average person who saved half their raise and half their tax refund every year throughout their career and invested it in the stock market could easily end up with half a million bucks in their 401(k) by the time they retired. Really. That’s about three times the actual amount that the median person aged 65-74 currently has saved, says the Fed.
This is just from saving half of every tax refund and half of every raise. Nothing else.
(My assumptions here? Based on data: Starting salary of $35,000 a year, 2.2% annual raise, a refund worth 6% of income, and an annual stock market return of 6%. Use whatever you like.)
And it’s really simple. You can basically make it a rule for life and stick to it. When we spoke, Lester casually said something that really struck me. When it comes to money matters, she said, “Most people don’t really care that much. They just want the money thing to go away.”
I suspect she’s right. Which is why simple, easy to follow, and easy to remember rules like this one can be so great.