Retirement saving is hard work. There’s no two ways about it. You have to spend less and put away more, and that’s that.
But we fail to save sufficiently year in and year out, as the gloomy retirement statistics show us. Often, we fall behind with the best of intentions, putting off the pain of actually saving money for the next paycheck, the next month, the next year.
Breaking that cycle is important. Do you sabotage yourself unwittingly? Here are five ways that savers sabotage themselves.
1. Undershooting the big number
Do you know how much you need to retire on time? If you said “$1 million,” remember that $1 million in retirement at a 4% withdrawal rate equals $40,000 in income. You might need more or less, but that’s the rule of thumb.
So, get your number and ask: What’s a reasonable income to target? Money doubles every 10 years, if properly invested, so how long you have to save also matters. Fewer years, bigger monthly savings number. More years, lower monthly number.
2. Failing to automate
Remembering to put aside money each and every paycheck is a real chore. Either have it withdrawn automatically at work into your 401(k) plan or set up an automatic withdrawal from your checking into savings.
3. Keeping money too close
So here’s the problem with that last piece of advice. Keeping savings money in an account at your bank is like leaving a cookie jar on a counter in houseful of teenagers. You’ll find it empty within hours, no doubt. If you can, send money to a remote account, perhaps to another, unlinked account or directly to your brokerage account.
4. No emergency fund
Think you have the willpower to leave a few thousands dollars untouched? You will until you get into a car accident, or have a medical bill spring up, or some other unplanned expense appears out of nowhere. Go ahead and build up a few months of living expenses before you try to save long-term. Stash that elsewhere, too.
5. Ignoring free money
The reason companies offer matching on a 401(k) plan and the government allows you to save money tax-deferred in workplace plans and IRAs is simple: You will need money later in life, as does everyone. Not saving into an IRA or 401(k) is literally turning your back on free money. Foolish, to say the least.
Saving for retirement is really hard to do — at first. But once you get into the habit and definitely once it is automated, saving can be the easiest, most brainless part of your financial life.
Correctly invested, it will grow by compounding and, someday, your money will be back in your hands, taking care of you when you can no longer earn it or, in the best-case scenario, simply have chosen to relax and let the money do the work for you.