Most people know they should be saving for retirement. It never ceases to amaze me how little time and effort people put into thinking about something that has such a large impact on their quality of life.
People prioritize all types of things of lesser significance above saving for retirement. One hears all kinds of excuses for this irrational behavior: “I will never retire”, “It’ll all work out somehow”, or “I won’t live long enough to run out of money”. Really? Here are a few ideas to make it a bit less onerous:
1. Start early. The younger you start saving, the less you actually have to save because your money has longer to do the work for you. Did you know that if you saved $2,000/year starting at age 25 for 10 years, you’d end up with more money at age 65 than if you saved $2,000/year for 30 years starting at age 35? That’s the power of compound interest!
2. Automate, automate, automate. The best way to overcome procrastination is to eliminate the need to do anything. Having a portion of your paycheck go automatically into your 401k is the easiest way to do this. For the self-employed, setting up an auto-transfer to your SEP IRA or solo 401k is another way to automate. Another option many 401k plans now offer is the auto-increase feature. This option allows you to increase your contribution rate by 1% each year. This feature can allow you to start with a smaller percentage contribution and increase it over time to reach the level you should be at as your income increases. Just make sure you are contributing enough to take advantage of any corporate match.
3. Keep it simple. Many people have a hard time making a decision when faced with too many choices. Many 401k plans now offer target retirement funds. Instead of investing in several different mutual funds to diversify, you can just choose one fund with a date that is near the year you plan to retire and then the fund will invest in a diversified portfolio of underlying mutual funds that gradually gets more conservative as you near retirement. Some 401k plans even make a target retirement fund the default choice. Cash is not a good place for your retirement nest egg as it doesn’t keep pace with inflation.
The important thing is to do something and stop coming up with excuses. The earlier you start, the more flexibility you’ll have in your later years.