Ah, man! Not another personal finance article! Is there anything more boring than personal finance? Oh, boy…I just don’t know if I can do it. I’d rather be knitting 2 pairs of socks for my dog. (Get it? 2 pairs? Zing…) Hey, I know this stuff is boring for most people (except you nerds, who are on the edge of your seat). But, here’s the thing I want you to understand. All you have to do is the initial setup and set up automatic payments, and it’s basically DONE! So, try to suffer through and just do it. Once it’s done, it’s done, and an annual review should be sufficient from here on out.
Before I begin this post, I’d like to be clear: I’m not breaking much “new ground” here as far as investing for retirement goes. The real reason I’m writing this article is to attempt to SIMPLIFY the process. A lot of articles go into so much detail that people lose interest before they get through it. So, I want to make this simple and a quick read. I’ve purposely left out a lot of details to this end. With that said, we begin…
So, it’s a pretty well-known thing that Americans, in general, don’t save much money. The personal savings rate is somewhere between 2-4%, which has dropped from the 1970’s when the rate was more in the 13-15% range. I have a couple of theories about why this is, but I think I’ll save those for another post and focus this one on what YOU can do to change this in your own life (assuming it needs changed, and you want it to change, of course).
The first step in any change is figuring out why you’d want to make the effort. If you don’t have a good reason, you’ll abandon the change when the first challenge comes up, right? “Eh, forget this”, you’ll mutter under your breath. So, you have to figure out what the point is, for you personally. It doesn’t really matter what my reasons are, it matters what yours are. So, do you want to be able to retire early? Or at all? What kind of retirement do you want to have? Do you want to travel, or do you prefer to stay home? You only need one compelling reason, so just get one that works for you and let’s move on to the steps needed.
1. How much do I need to save? Well, for the purposes of this article, let’s focus less on the big picture and more about what you can do right now. So, let’s try to save 15% of your gross household income. That said, if you can’t start there, just do what you can and we’ll increase that over time. Maybe you can start with 5%, or %6. Even if you can only start with 1%, do it! 1% is better than nothing. Just do something! Once the habit is formed, you’ll have a better chance of increasing it later than if you waited until you could do 15% all at once.
2. Here’s a great place to start saving: If you have a job with an available matched 401k, you definitely want to take advantage of that. A 401k is a great place to start saving if it’s matched (most are). For example, let’s say your company offers to match your contributions up to 6% of your gross income. You can set it up with your job to automatically save this money with every paycheck, and it’s great because it comes out pre-tax! So, you’ll put in 6% and your company will put in another 6%. That’s like giving yourself a 6% raise! Also, another important detail is that this enables you to invest first, without the risk of spending the money on anything else, because it comes out of your check before you get it. That’s a great benefit.
3. After you’re contributing to your 401k to the full company match, if you still have money left over to save, don’t over-contribute to the 401k. Just max your match, then open a Roth IRA. You can invest up to $5,500 each year into your Roth (your spouse can do another $5,500 in his/her Roth), so that’s another $11,000 each year saved. One thing to note, with a Roth IRA, you’ll be funding this with after-tax money. (That might sound like a negative, but it’s actually a good thing since your withdrawals during retirement will be tax-free.) Since the Roth IRA is not typically related to your job, you’ll probably have to set this up with an investment advisor. However, you can still set up the monthly withdrawals to be automatic, which I highly recommend. Otherwise, you’ll find somewhere else to spend that money.
4. If you still want to save more money, you can go back and begin funding your 401k beyond the match.
Here are a couple of tips to increase your contributions as time goes on: If you get a 3% raise at work, consider increasing your 401k contributions at that point. You’ll be saving more, but you won’t miss the money since you never saw it. Another great place to save is annual bonuses, if your company gives them. Even tax time is a great place to save. If you get $2,500 in a tax refund, you can drop that right into your Roth IRA and you never missed the money.
One last note: Don’t get “paralysis of analysis” on choosing your mutual funds, worrying about expense ratios, timing the market, etc. The most important factor in retiring with some wealth is that you saved consistently. It’s VERY important to save every month (preferably automatically), no matter what the stock market is doing, and no matter what your friends tell you. Just keep saving, keep saving, keep saving… One day, you’ll look up and realize that you’ve accumulated a pretty sizable pile of money, and you’ll have options that very few other people have.
You CAN retire with dignity. All it takes is some planning, some time, and some financial discipline.