Video Posted: May 28, 2025
This is John Smallwood, and we are back on Money Isn’t. Today I’m excited about the topic that I wanted to have a conversation about. In my book It’s Your Wealth—Keep It, Amazon bestseller, I did a chapter on the psychology of the savings rate. When I wrote that chapter, I had the difference between a 5% saver, 10% saver, and a 15% saver of their gross annual income, and the difference in the psychology of the human being.
I think what’s interesting is that there’s a perspective that I see out there: people believe, “Well, I’ve maxed out my retirement plan.” And they’re putting in maximum contribution. In my brain, maximum retirement plan contribution means the maximum amount allowed by the IRS to go in for that year. So if it’s a traditional 401(k) plan and you’re under the age of 50, it’s around $22,500 give or take. If you’re over 50, it’s over $30,500. Then there’s the availability technically under the 401(k) rule that you could actually put away $63,000. What’s interesting to me is people will say, “I’m putting the max in my 401(k) plan, I’m putting 10% of my salary a=way,” but you’re making $150,000, that’s only $15,000, $7,500 below the max. So there’s a distinction between max and maximum savings rate, and that’s what I wanted to dive in today—about the psychology of the saver.
There’s a certain part of this which is about lifestyle. I want to enjoy my money, I want to have enjoyment now, but I also want to have enjoyment later. For many people, they’re not going to have a liquidity event. We’re not going to sell the company for a ton of money or have tons of stock options. We live in what’s called the “defined contribution society.” Years ago, we were in a defined benefit society, which means I work for a company, they put away money in a pension plan, I put money into Social Security, and I retire. Those two to three income streams were enough to make it happen. Now, there’s no pension and Social Security is not enough to maintain lifestyle. Defined contribution means we have to put away for ourselves. We’re 100% responsible for our financial future.
My perspective is: if you are a low saver, if the money is not getting saved and/or gifted, it’s being consumed. By default, you are a high spender. With that high spending, you put yourself in a position that it becomes harder to accumulate wealth—to actually get to the point where you can live off of your own capital. That’s really the definition of wealth.
Let’s assume I’ve got a 35-year-old making $250,000, and there’s a dollar saved just to have a starting point. Their lifestyle, after-tax money, is 90% of what they’re bringing home. If I do that, and I don’t change anything, I’ve accumulated $1.2 million by age 67. The holdings we’re using are 60% S&P, 40% bonds. We’re using a simulation timeframe from 1989 through 2023. The average rate of return during that time frame is 9.44%. I don’t have volatility-adjusted returns. I don’t have management fees on it. I don’t have inflation in this.
Source: My Wealth Curve (Smallwood Wealth Management)
But if I live off $180,000 and I have a $1.2 million portfolio, how many years do you think that’s going to last? At what point do you run out of money? You can see this chart is actually declining. If I just expand the plot range a little bit further, it’s about 10 years assuming you were getting that return. So the future you is now pissed off at the past you, because during your youth, you were spending too much money and you weren’t worried about taking care of the future you. At that point, you need to dramatically reduce lifestyle or run out of money.
But the reality is there’s a psychological blend, that I have seen over and over in the clients. There are clients that come in here that are massive savers and they don’t enjoy their wealth. There’s people that come in here and they make a lot of money, they save a little bit of money, and they don’t enjoy the way they’re spending their money and seem to be a victim to their spending. Then there’s people in the center: they’re saving a decent amount of money, their expenses are their expenses, and they don’t really know where they’re going.
This is something that we have control over. Many people come in and say, “I want to retire at 60.” I say, “you’re 55 and you have $500,000 saved up and you make $300,000. Do the math. It’s not going to work.” This is about getting realistic about what’s happening. But what I want you to see here is: in financial planning, in wealth management, there are certain macros that need to be deployed on an ongoing basis. Meaning, if I don’t have the proper savings rate and I default back into that, everything has an equal and opposite reaction. That means I spend too much money, inflation is going to impact me, and all these other things.
Source: My Wealth Curve (Smallwood Wealth Management)
If I just simply move this from 90% to 85%, all of a sudden you see the curve is already different. The curve is not declining. That’s decreasing the lifestyle from $181,000 to $171,000. Just going from $8,800 a year to $10,000 a year saved creates $2.6 million of outcome versus $1.2 million. Which person would you rather be?
Now, there are other pressures. And in a really solid wealth plan, you’re going to look at taxes, you’re going to look at lifestyle, and you’re going to look at the enjoyment of the money being spent. In economics, there’s a thing called marginal utility: how much enjoyment do I get from the money that I’m spending? But if I get enjoyment from something, I spend money on something, and my enjoyment outweighs the cost, then there is technically no opportunity cost. That’s not an expense—it’s an investment in your enjoyment factor. When I pay my energy bill, I get to have all these lights in my studio. That’s not an expense—it’s an investment. You’ve got to think about this from a different perspective.
But I also get enjoyment from accumulating wealth. And I know there’s all this financial pressure that’s going to be in my future. The only way out of financial pressure is to have more money. If inflation is higher, I need more money. If inflation is lower, I have excess money for other things that might happen. The equal and opposite reaction is: if I am a low saver, my withdrawal rate becomes disproportionately high in retirement, which increases the probability of running out of money.
But when you look at the expenses, it’s very hard for us as a wealth manager to say, “Oh, you just need to save more.” I hear this so frequently: “When I have money, I’ll come talk to you.” I’m like, “Well, last I checked, you have a job—so you have money.” At what point do you realize that’s your money? It’s your money, and you need to keep that money. The more of it you keep, the happier you’re going to be in your future.
If I’m looking at $181,000 of lifestyle costs, and $47,000 of taxes, plus New Jersey taxes of $12,000, I’m talking about $240,000 of money leaking out. Financial leaks everywhere, with many things that I do not even get enjoyment from in the plan. Maybe I have five streaming services I haven’t watched in 18 months, and I’m paying $100 a month. Well, if I go back and find the redundancies, if I find where money is leaking out, each thing we recover adds an incremental jump, potentially an exponential jump, to the plan.
We’re not even talking about pre-tax, post-tax, 401(k) matches, or whatever. We’re just talking about the power of wealth accumulation. If I earn a certain amount of money, there’s a certain optimal savings rate. That savings rate is going to be dictated by your goals, dreams, future liabilities, and future obligations.
You have four kids, and you want to educate them. Those are liabilities, right? But they could also be considered obligations. They’re also fabulous investments in the children you brought into this world. What’s the ripple effect you’re going to get from making those investments? The greatest thing you could be thinking is, “I’m going to provide an education for this child, and that child is going to be able to become what they want to become.” That’s an investment. But it’s part of the things that hurdle you—stop you—from creating wealth, if you’re not planning properly.
Your current situation is like a chess game. It’s in motion. You’re playing with many factors. You’re interacting with different people at different times saying different things. It’s a myriad of chaos. You need to get rid of the noise and ask what is it that I want? I want things to be in proper balance and coordination. If I make $100,000 a year and save 10% to 15% of my wealth, which is hard on $100,000, I’m getting ahead because most people are saving much less.
I do that and save efficiently. I have cash. I have stuff in the market. I participate in my company’s retirement plan and maximize that company match. I buy a house. I get the mortgage interest deduction. I’m building wealth. I open a brokerage account. I buy life insurance. I protect my family with the maximum amount of coverage. But all these things need to be in optimal balance. And when they are, it works tremendously. When they’re not, I can’t guarantee anything because life happens. But if you’re optimized in your savings, in your protection, and in your vision of where you’re going, which will be different tomorrow than it is today, based on how the world affects you, then you’re in a much better position.
You need to constantly focus on how to bring the waste out of your expenses. These expenses are just there. We’re all guilty of this. I’m not preaching like we’re perfect. We’re human. And being human, we’re subject to erosion principles. Our bodies get old and sick, which creates ripple effects. Sometimes they get better with age.
You can start at any time. That’s the point when you have knowledge and you realize this is your money, you should keep it. It’s your wealth. And if I want to command my wealth, I shouldn’t be overpaying taxes, fees, interest, or lifestyle expenses. Why am I doing that? Why are you spending money on things you’re not even enjoying?
I’ve had this conversation five different times in the last two months with different people about things they own and spend a tremendous amount on, but they’re not enjoying them. If you’re getting what you want out of it, you’re happy. But if your macros (your savings rate, tax rate, lifestyle rate, and benefits) are all in coordination, the plan has a much higher probability of success. Through coordination, you can get maximum protection with the least cost, recapture money, and have fun. It’s not about where I put the money, it’s about how I put the money. It’s not about a product.
Let’s use a golf analogy. I can go buy the greatest set of clubs, but I’ll still be roughly the same golfer tomorrow. I could be out on the course with Jordan Spieth, Tiger Woods, or Scottie Scheffler, and say, “Hey, you’ve got to use these vintage 1935 clubs and balls.” They’re still going to kick my ass. Why? Because it’s not the club, it’s the swing. Their swing is coordinated. My swing is not—yet. I’m still practicing, but so are they. And that’s what makes the difference.
Your financial plan is the same thing. It’s not about the product. It’s the coordination of the swing. The swing in wealth management is your savings rate, your tax structure, your diversification across asset classes, your liquidity (cash), and your guarantees. It’s about organizing all those products in a unique way to meet your unique life.
Your swing is: How do I accumulate enough money to maintain the standard of living I have today? And that standard of living today will be different tomorrow. If you make $100,000 today, and $200,000 ten years from now, your lifestyle has crept up. Expenses rise to meet income. So the plan should be a one-year plan, repeated as many times as needed. If in the last five years of my working life, I get my income up to $1 million a year, and my lifestyle has crept up, do I want to continue living that lifestyle? Or retire and live on 50% or less? Most people do the latter because they didn’t do the planning upfront.
I wanted to talk about savings rate today. On our website, Smallwood Wealth, you can request a free copy of It’s Your Wealth—Keep It. Thank you. Have a wonderful day.
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