A Different Way To Save For Retirement
Many advisors (including us) believe that one of the best ways to save for retirement is to regularly set aside a certain amount of money every week or month, turning saving into a habit. Many retirement plans such as 401(k)s have been structured to encourage this behavior. However, when you have to make lifestyle changes in order to save, it becomes somewhat like dieting. It’s hard to keep it up when you feel like you’re restricting yourself from doing something you like. A recent CNN/Money Magazine article describes a different way of saving called burst saving. One of the benefits of this approach, according to research firm Hearts & Wallets, is that people who practice it are far more likely to sock away enough money for a comfortable retirement than those who don’t.
The concept is quite simple. Whenever your income ramps up, such as from a pay raise or from a bonus, put at least 50% of the increase into a retirement account or bank or brokerage account targeted for retirement. Whenever your expenses drop — for example after your children graduate from college or after you pay off a mortgage — take at least half the amount you would have spent and put it into the same accounts as above. This approach allows you to save more without feeling like you’re forcing yourself to cut back or to give up something. And if you can do this for several years, rather than just once, so much the better.
Hearts & Wallets says that burst savers are more likely than other types of savers to hit their savings goals no matter what age they start their savings regimen. That makes this approach particularly useful for those 40 and 50-year olds who have not been giving much thought to saving for retirement until now.
There are some other things that you can do to increase your savings without it becoming a burden. One is to set a target for savings. Studies show that people who calculate how much money they need for retirement end up saving much more than those who don’t.
A variation of the above strategy is to create an auto-escalation plan for your 401(k) or your budget. For example, you can raise your 401(k) contributions by one percentage point each year for five years, or increase your monthly savings in your budget by 1% each month. People who do that are much more likely to save enough for retirement than those who don’t.
Keep in mind, also, that those credit cards in your pocket may be the single biggest drag on your ability to save. Taking on debt for home ownership is one thing, since most of us (with the possible exception of the latest Google and Facebook millionaires) do not have a sufficient level of equity to be able to buy a home fully in cash. But incurring debt for most other purchases means you are living beyond your means, and that is practically as risky as borrowing money to invest.
We’re all living longer than our predecessors, and government support for our retirement is getting smaller. Anything you can do to save more now will be well worth it to your future self.