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4 Simple Ways to Save Enough for Retirement

4 Simple Ways to Save Enough for Retirement

Odds are you’re one of the nearly 60% of Americans moderately or very worried about not having enough money for retirement. Regardless of your age, profession, income or social status, a desire for retirement savings continues to top seemingly every personal finance poll. The question is: what simple things can you do to calm your nerves and instill the confidence you need as retirement approaches?

Stop Refusing Free Money

Recent data suggests as much as 80% of companies who offer retirement plans also offer to match employee contributions, up to an average of nearly 5% of each employee’s pay. Effectively, that’s a 5% bonus every single year just for contributing enough to meet your employer’s match program. Ask your Human Resources contact if you’re eligible to participate in your company’s retirement plan. Stop refusing free money!

Max Out Traditional Retirement Plan Contributions

If you are to have any any chance of saving enough for retirement, you need to save much more than the minimum to meet your employer’s match. For most traditional workplace retirement accounts, the 2014 maximum contribution was $17,500. If you contribute most, or all, of the maximum consistently year after year, you’ll be well on your way to a robust retirement

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For self-employed workers and non-traditional retirement accounts, check with your financial advisor for annual limits to be sure you’re maxing out in compliance. You do have a financial advisor, right?!

Assuming you’re 30 years old, make $75k per year, plan to retire at age 65 and earn 6% rate of return in your 401k, the below chart shows effect on your bi-monthly paycheck and the monumental difference between just contributing to get the match versus maxing out the $17,500 allowable.

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Bankrate.com 401k Calculator

    Go to BankRate.com’s 401k Contribution Calculator to customize your own scenario.

    Tax-Advantaged Savings

    Contributing to traditional retirement accounts is fundamental, but what if your contribution limits are too low to allow adequate savings? Or what if you’re concerned about the taxes you’ll pay down the road on the traditional retirement account income?

    A healthy retirement plan should include tax-advantaged savings like a Roth IRA, if you you qualify. Tax efficient investments like municipal bonds may make sense for a conservative portion of your savings. An often-overlooked savings vehicle, perfect for tax-advantaged retirement income, is a cash value life insurance program.

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    Cash Value Life Insurance may not be a good fit for everyone but the tax-favored savings accumulation, flexibility and death benefit are attracting more and more savers, especially young professionals.

    Protect Your Savings

    If you’ve followed the nuts and bolts of saving for a healthy retirement listed above, you will be in good shape. If you’re truly a saver, protecting what you’ve worked so diligently to build should go hand in hand with your plan. Protecting your savings means a few different things:

    First, don’t take more risk than you’re comfortable taking. Unless you’re burying coffee cans filled with cash in your backyard, every retirement savings plan includes some measure of risk. Fully understand the risk in your investment program or keep asking your financial advisor more questions until you understand and are comfortable with your investment plan. A properly allocated and diversified savings plan helps guard against any major economic swings.

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    Ensure you don’t get wiped out by insuring your plan. Life insurance and long term care protection should be part of every healthy retirement plan. Owning adequate life insurance can prevent financial ruin and emotional distress for your Family during the savings years — just watch a few of the short videos at non-profit LifeHappens.org to see what I mean. U.S. Department of Health and Human Services statistics show that 70% of people turning Age 65 will need some type of Long Term Care services. Lifetime income annuities may also be a nice compliment to your retirement plan as you get closer to retirement age. These annuity programs can guarantee an income for life but still enjoy a potential market rate of return. It’s important to note the earlier you secure these important retirement protections, the cheaper they will be.

    Saving enough for retirement may seem like trapping a unicorn or finally spotting that pot of gold at the end of the rainbow. In other words, it may seem like a fantasy. While your individual retirement goals are different from your neighbors’, follow these four simple concepts diligently and you will absolutely retire with confidence. Saving enough for retirement is simple. Not easy. Simple.

    “The ability to discipline yourself to delay gratification in the short term in order to enjoy greater rewards in the long term, is the indispensable prerequisite for success.” Brian Tracy, Leading Speaker, Author and Entrepreneur

    Featured photo credit: betacam via freeimages.com

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    Last Updated on September 2, 2020

    How to Set Financial Goals and Actually Meet Them

    How to Set Financial Goals and Actually Meet Them

    Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

    In this article, we will explore ways to set financial goals and actually meet them with ease.

    4 Steps to Setting Financial Goals

    Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

    1. Be Clear About the Objectives

    Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

    It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

    Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

    2. Keep Goals Realistic

    It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

    It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

    3. Account for Inflation

    Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

    Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

    For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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    4. Short Term Vs Long Term

    Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

    As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

    By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

    How to Achieve Your Financial Goals

    Whenever we talk about chasing any financial goal, it is usually a two-step process:

    • Ensuring healthy savings
    • Making smart investments

    You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

    Ensuring Healthy Savings

    Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

    This is the focal point from where you start your journey of achieving financial goals.

    1. Track Expenses

    The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

    Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

    If you’re not sure where to start when tracking expenses, this article may be able to help.

    2. Pay Yourself First

    Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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    Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

    The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

    Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

    3. Make a Plan and Vow to Stick With It

    Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

    Nowadays, several money management apps can help you do this automatically.

    At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

    Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

    You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

    4. Make Savings a Habit and Not a Goal

    In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

    Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

    • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
    • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
    • If you go shopping, always look out for coupons and see where can you get the best deal.

    The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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    5. Talk About It

    Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

    Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

    6. Maintain a Journal

    For some people, writing helps a great deal in making sure that they achieve what they plan.

    If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

    When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

    Making Smart Investments

    Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

    1. Consult a Financial Advisor

    Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

    Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

    2. Choose Your Investment Instrument Wisely

    Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

    Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

    As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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    3. Compounding Is the Eighth Wonder

    Einstein once remarked about compounding:

    “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

    Use compound interest when setting financial goals

      Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

      Start saving early so that time is on your side to help you bear the fruits of compounding.

      4. Measure, Measure, Measure

      All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

      If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

      Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

      The Bottom Line

      Managing your extra money to achieve your short and long-term financial goals

      and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

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      Featured photo credit: Micheile Henderson via unsplash.com

      Reference

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