Saving for retirement is above all a mental game. After all, that’s what people like about good old-fashioned pension plans — no muss, no fuss, things just work.
It’s also why we tend to prefer direct deposit and online bill pay systems. Who really likes sitting down and writing 10 or 15 checks on a Saturday? Most bills do not vary month to month, so it’s usually better to let a computer write those checks and lick those virtual stamps.
Retirement saving is no different, except the pension plans of old are mostly gone or fading fast. The solution is to build your own, and doing so can be surprisingly cheap and easy.
There are a few simple rules, again mostly mental, but following them faithfully can put you on the road to building a real retirement. Here are three ways to kickstart your retirement plan:
Out of sight, out of mind. The first step is to set a weekly, biweekly or monthly number to save and remove it from your check before you deposit it. Your workplace 401(k) plan is already set up to do this, but the default option might be too low for your goals. Aim for double-digits here.
If you don’t have a 401(k), build your own. Contractors and small business owners can open a personal 401(k) plan at nearly any large brokerage, with the added benefit of access to more low-cost investment options and, usually, higher total contribution limits.
Similarly, a traditional IRA or Roth IRA is easy to set up online or at your bank. Then just direct the bank to withdraw funds periodically or pay yourself using online banking tools.
The next most important step is to avoid trying to game the system. Early on, you won’t have a large balance to invest and are likely to leave it in cash. Don’t do that. Open a target-date fund or a low-cost balanced fund and direct all incoming cash to that account.
Later, when your balances grow, it becomes tempting to try to play the market. That’s another huge mistake, one far too many people make. You will be better off managing your retirement using a tested, well-designed portfolio or by simply owning an appropriate target-date fund. You won’t “beat the market” (almost no one can) but you also won’t take a huge hit in a market downturn.
Let your investments compound by automatically reinvesting dividends and interest and by rebalancing periodically. This is where low-cost index funds or ETFs can help a lot. The more money you keep and reinvest, the faster your retirement plan will grow.