When you’ve got bills to pay, debt, little to no savings and a family to feed, saving for retirement has a tendency to go on the back burner of financial priorities. But waiting to focus on retirement causes you to lose a key financial advantage of youth: how systemic investing grows your portfolio. According to the Employee Benefits Research Institute (EBRI) 2012 Retirement Confidence Survey
, 60% of workers report having less than $25,000 in total savings and investments; 30% of those have less than $1,000 saved for retirement. Though you may not have much spare cash to contribute, the sooner you start and the more methodically you contribute, the greater leverage you'll achieve for even small contributions. Here are five ways to make retirement feel like a real priority -- even if it’s decades away.
Calculate the meaning of a month.
The EBRI survey revealed that 56% of those surveyed had not done a retirement needs calculation, but if you don’t know what you need or have a way to measure progress, you’ll abandon your commitment to retirement savings when other financial needs arise. Further, research also reveals that how you view your retirement goal makes a huge difference.
One Center for Retirement Research at Boston College
study tested the saving impact of very specific retirement needs, versus the larger “lump sum” dollar amount that most retirement plan marketing materials and calculators showcase. Study participants were shown two advertisements: One featured a specific dollar amount they’d need to have saved to cover each two-week period of retirement, while the other featured a lump sum. When shown the bi-weekly dollar figure, participants committed to saving 20% of their salary to reach the retirement goal. With the larger lump sum, they projected needing to save just 14%. Give retirement savings a dose of reality with some rudimentary math: Calculate 70% of your current salary, and divide that number by 12 to project what your monthly living expenses might be in retirement. Keep the number top of mind by hanging it in on your computer or on your refrigerator. Though your lifestyle and income will change over the years (and you’ll want to recalculate with those changes), viewing retirement as a monthly calculation gives meaning: Every time you contribute the number you’ve calculated into your retirement account, you gift one month of retirement income to your future self.
Know the dollars and cents to tax benefits.
You probably know there are some tax benefits to saving for retirement, but what are they really worth? In 2012, the allowable individual retirement account (IRA) deduction is $5,000 for workers under the age of 50, and $6,000 for workers above 50, provided they meet certain income criteria. (Single filers with an employer-sponsored retirement plan must make less than $57,999, or joint filers less than $91,999, to get the full deduction). Every dollar counts: A person in the 32% tax bracket that put an extra $1,000 towards his or her IRA this year could owe $320 less in taxes. If you haven’t maxed your pretax contribution amount yet this year, you’ve got until April 17, 2013 to do so.
Keep it in front of your face.
Know the balance in your retirement account, and what your money is invested in, at any given time. Likewise, if you have changed jobs and left a retirement plan behind, secure the necessary paperwork with your former employer and transfer the funds into a rollover IRA with a financial institution that offers low fees, no-load mutual funds, and easy online access to your accounts so you know exactly what your money is doing at any given time. If your workplace offers a virtual portal to check your retirement progress, make a note on your calendar to check in quarterly.
Make progress by spending less.
In truth, you have no control over the economy, or even your income, so seize power over the two aspects of your financial life you dictate: your lifestyle and your spending. Though financial planners commonly recommend saving at least 70% of one's income for each year of retirement, monitoring how you structure your finances and lifestyle early on is the best way to ensure you’ll retire comfortably. By keeping monthly expenses at or below $4,000 a month, for example, a married 30-year-old couple who hasn’t yet saved a dime toward retirement and collectively makes $80,000 a year could easily afford to contribute $400 a month each towards retirement savings that is invested in a balanced portfolio with an average 8% return. Not including any Social Security benefits or employer match (and accounting for 3% inflation), that couple would have more than $2 million saved by age 65.
Make retirement saving a non-negotiable expense.
Make retirement contributions a non-negotiable expense in your budget, and contribute at minimum, the amount that takes advantage of free money your employer offers in a match -- or up to the pretax contribution benefits that reduce your taxable income. Most importantly, resist the urge to “pull the chute” on your plan in tough times. In the working paper 401(k) Participant Behavior in a Volatile Economy
by the Center for Retirement Research at Boston College, researchers found that 401(k) participant behavior is influenced by the economy -- particularly among younger generations of workers, whose participation rates in 401(k) plans dipped significantly following both the 2001 and 2008 recessions. Though the savers may have reduced contributions because money was tight, slashing expenses in other areas would have ultimately cost far less than changing course -- even when the changes seem insignificant. For example, the typical 30-year-old worker reduced his contributions by $138 between 2007 and 2010. Had that saver increased contributions by just 1% each year instead of reducing them, his account balance at age 62 would be nearly $12,000 greater.
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