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how to save successfully for retirement
There are no tricks, just a few common steps
The current record $1.5 billion Powerball jackpot is all the rage. You can see in the news people everywhere patiently lining up around the block, hoping to get the piece of pie and strike it rich. Even Charlie Rose’ face glows when the jackpot is mentioned. Without a doubt, this kind of money can pretty much set you up for a golden retirement. But it’s also no secret that with the odds of one in 292.2 million for winning any Powerball jackpot, you have a better chance of betting hit by lightning many times over.
So how do you save effectively for your retirement? There are no tricks or secrets; successful retirement investors all share a few key traits:
1. Start saving and investing very early. Time is a very powerful machine, with money making being one of its key functions. When you are young, you have relatively few liabilities and obligations compared to older people. It’s true that you may temporarily have lower earning power and therefore can afford to invest less amount of money. But time is on your side, and the power of compounding over time will sure give you a distinctive advantage. For example, at age 25, you start investing $150 monthly and earning 7% return annually, you could have accumulated $386,297 in your bank by the time you retire at 65, according to Merrill Lynch Wealth Management. But if you start at age 35, you would have to cough up twice as much monthly to come close. Besides, squirrelling away a smaller amount of money over a longer period of time feels less painful than taking a bigger bite out of your earnings just to catch up. Like a steady diet, you would more likely to stick with the program.
2. Match saving to a purpose, not just a number. This is about focus. You might have heard that in order to secure a comfortable retirement, you must have saved x, y or z million dollars. But investors who are successful in pursuing their retirement goals have thought not just about accumulating a large sum of money, but also about the specific "job", such as, covering medical expenses, the money will do when they get to retirement. It’s called "intentional investing." Thinking in terms of "buckets" can be helpful too - deliberately saving different amounts of money toward each goal and allocating your investments based on how near or far away each goal is: Paying off the home mortgage? Ten years, $100,000; helping pay for grandson’s collage? 15 years, 50 grands… The more clearly you can visualize what the money you are saving and investing is meant to do for you in the future, the easier it is to focus on creating a strategy to have enough money in place and stick to it. Posting photos of your goals or writing those down can make them more intentional as well, because it gives you a concrete picture of what you are aiming for as you juggle everyday spending and saving priorities.
3. Plan for emergencies. The world is often unpredictable, and unexpected events happen in life that have to be dealt with financially. A very sick family member, a large tree through your roof, or a sudden loss of job may all likely derail your perfectly thought-out plan of saving for retirement. Having a separate emergency fund to cover large, unexpected expenses helps successful investors avoid tapping into their retirement investments to pay for them, and therefore keep them on track. The current consensus among financial planning experts is to save enough to cover at least six months' worth of living expenses. In addition, don't forget the importance of having adequate insurance to protect yourself and your family against the huge financial impact to retirement savings that an accident or health issue may cause. That may include life and disability insurance, auto insurance and property and liability coverage for your home and other properties.
4. Automate your savings. Forking over a piece of your hard-earned dough to a place where you can’t touch for years can be painful. However, current legislations that allow having money automatically depositedfrom a paycheck into a workplace retirement account, such as a 401K or 403(b) plan, or from a bank account into an IRA or SEP-IRA can make investing or accumulating for the future virtually effortless. In some cases, you may even have to “opt out” in order not to contribute to your retirement plan. If there is an opportunity to make automatic increases each year, take advantage of it as well, since consistently increasing your contributions can make a huge difference: Based on Merrill Lynch Wealth Management’s calculation, a 35-year-old worker who invests just $250 per month ($3,000 per year) every year for 30 years and enjoys a 7% annual return can see his nest eggs grow to over $300,000, while if he increases his contribution by $50 each month for 5 year, he will find himself nearly twice as rich when he reaches retirement age. In the meantime, though autopilot is efficient, don’t forget to be proactive in managing your retirement accounts, and rebalance your investment portfolio each year, in most cases, so that you can achieve optimum returns.
5. Take advantage of your employer's matching contribution. Many companies offer a retirement contribution matching program, typically in the 401K. While you can typically contribute as much as $18,000 (in 2015 and 2016), the company may match yours up to 6% of your gross income, if you invest at least this much. A $50,000 earner can receive $3,000 a year, which is by no means chump change, just by saving for retirement. If you are one of those fortunate enough to have a company match, there is no good reason not to use it. This is free money, and you are basically getting a return right away – no lottery has this sort of odds! What’s more, because the money for a workplace plan can be taken out pre-tax, you may have additional tax savings as well. That could be another few thousand grands. So even if you can’t afford to save the entire $18,000 allowed per year, at the very least, make sure you contribute enough (commonly 6% of your annual gross pay) to your workplace plan to take full advantage of your company's match.
6. Create a diversified portfolio of investments. With money for retirement, many adopt a cautious stance. Who can blame them? This will be one of the few financial resources that they can fall back on once their earning years are over. Perhaps the term “nest egg” has a literal meaning here since you have to take gentle good care of it. However, even if you lean toward being conservative with their investments, successful retirement saving calls for adding some stocks, preferably stock funds, to the investment mix to help them stay ahead of inflation, given that you are willing to take on some more risk. If you hold only cash, at a modest annual inflation rate of 2%, the value of your $100,000 will shrink to $60,953 in 25 years, as concluded by Merrill Lynch Wealth Management. Other “safe” options, such as corporate bonds and treasury notes, can barely keep you above water in today’s low-rate environment. On the other hand, the stock market, represented by S&P 500, has returned over 10% annually since 1928, according a New York University study. It’s true that stocks are volatile, and they can fall sharply in uncertain times. But after a crush, the market always comes back, and goes higher, rewarding the patient. What’s important is to monitor your investment allocation and rebalance as needed.
7. Be conservative about spending. We need money to make money; how much money you are able to set aside directly impact whether you can successfully save for retirement. You can’t be expected to invest when your pocket is empty. If you are like most and earn a finite income, you need to commit to spending wisely in order to invest more. That means living below your means, creating and following a budget, and trying your best to have little or no debts. To achieve your spending goals, you need to know your financial situation. Sit down and do some math; once you see that after mortgage payment, utility bills and grocery purchases, etc., a family trip to Hawaii will but you in the red for the rest of year, you will think twice about building your man-cave. Being transparent about your financial situation can also help you let go of the competitive side of spending and realize that keeping up with the Joneses requires taking on far too much debt, and is a financial and emotional drain. So next time when your neighbor drives home a sleek bright yellow Ferrari, you can just smile and say “congratulations”, then turn around knowing that you have a sound idea about finding the money to invest for a secure retirement.
It seems every decade will witness at least one major financial downturn, be it domestic or global, that throws everyone’s financial situation in turmoil. You must stick to your gun, yet be flexible, adaptable and prepared, simply because the unexpected, and sometimes even the unthinkable do happen that might thwart your plans. But ultimately, a successful retirement investor will always make deliberate efforts to keep his savings on track no matter what life throws his way.
The Golden Gate Bridge took only four years to build, but your golden retirement may need decades. Persevere, and you will success!