Every six years you delay saving and investing you cut in half the lifestyle you will have in retirement. You owe it to yourself and your family to make certain that your financial New Year’s Resolution are kept this year. Here are ways to save and to invest that are simple and specific enough to keep.
Tell someone. Goals that are shared are ten times more likely to be acted upon. Don’t wait until you have everything set up to seek out accountability.
Set goals. If your goals aren’t concrete and specific they won’t be achieved. Your savings goals should be a specific annual percentage of your Adjusted Gross Income (AGI). We recommend saving at least 10% of your AGI in tax-free retirement accounts and another 5% toward retirement in taxable investments. If you are behind on your savings (over forty with less than three times your AGI in investments) you may want to save more in order to catch up.
Translate your percentage goals into specific numbers. I receive correspondence from readers on a regular basis who assume this advice somehow doesn’t apply to them because they are rich and my average reader isn’t or because they are lower income and my advice is targeted at the rich or some other nonsense.
If you are accustomed to living on $200,000 a year, you will need to save enough in order to retire with that same standard of living. Once you retire, it will not be any easier to cut back on your standard of living. If you think it will be easy, then do it now and save and invest the difference.
If you have a $20,000 per year standard of living, you will still need to save enough in order to retire with that same standard of living. You are lucky because you won’t need to save as much as the person with a $200,000 a year standard of living. If you think that it is too difficult saving now, imagine trying to live off $10,000 per year from Social Security.
So, put your specific annual savings goals down on paper, one for your retirement accounts and a second for retirement savings which will go into a taxable account.
Now, prioritize the retirement vehicles that you can use for retirement accounts. We recommend investing just enough to get the entire match that your company’s 401(k) plan offers first, then funding your Roth IRA accounts. After these two, make certain you have enough non-retirement savings. Beginning January 1st, you may also have the option of investing in a Roth 401(k) through your employer-sponsored retirement plan.
The purpose of prioritizing your investment vehicles is to deliberately put your money into accounts that have the greatest number of asset allocation choices and the lowest fees. Many company 401(k) accounts have such high fees and poor choices they frustrate investors.
As an example, imagine that your AGI is $60,000 and you decide to save 10% in a retirement account and 5% in taxable savings. That translates to saving $6,000 in retirement accounts and $3,000 in taxable savings. Your company offers a dollar-for- dollar match on the first 2% of your salary, so you decide to save $1,200 in your 401(k) first in order to get a $1,200 match from your employer. After this, you decide to fund your Roth IRA before investing more in your company’s 401(k) or IRA. Since Roth IRA limits are $5,000 per individual, this finishes off the remaining $4,800 for savings in retirement accounts.
The remaining $3,000 earmarked for taxable savings we recommend saving in monthly installments of $250 each month. Since finding the money to fund your Roth IRA at the end of the year is sometimes difficult, we recommend saving toward funding your Roth IRA each month by adding that amount to your taxable savings. In our example, we would save $7,800 a year in $650 monthly installments and transfer $4,800 into our Roth IRA at the end of the year.
Our example assumes that you need to build up your taxable savings. It might be better for you to fully fund your Roth IRA and your Spouse’s Roth IRA instead. Also, depending on your specific needs, you may need to save more than $9,000 a year in order to catch up and meet your retirement needs.
Next, to help you save, automate your savings. Automating your contribution to an employer-defined contribution plan is easy. Automating a taxable savings plan is just as easy. Most brokers offer an automatic money link between your investment account and your checking account. They also offer a monthly automatic transfer between the two accounts.
If your paycheck is deposited on the first day of the month, ask your broker to transfer money (in this case, $650) from your checking account into your investment account on the second day of the month.
From there, automate your investing. If $650 is being deposited into your brokerage account each month, designate an asset allocation that purchases $100 or more of five or six funds. Again, most brokerage firms make this process easy to set up and easy to change.
Once a year rebalance your portfolio. I recommend doing this some time half way through the year after your June 30th statement.
You can get much more sophisticated than this, but set your sights on getting the benefit of saving and investing with a minimal amount of work. After all, the whole point is that you haven’t been saving and investing because it is too much work. New Year’s resolutions, if they are to be kept, should be simple and specific.
A fee-only financial planner can also help. They can act as a personal financial coach, offering suggestions, sharing ideas, and keeping you on track to reach your financial goals. Call the National Association of Personal Financial Advisors (NAPFA) at 1-888-FEE-ONLY (1-888-333-6659) to get a list of members in your area or visit their website at www.napfa.org