What does it take to retire on time? Money, of course. But that’s where most of us stumble. Having money on payday doesn’t translate on the spot into savings unless you do something about it.
We also tend to overthink saving and retirement. What’s the best stock to buy? When should you buy and sell a mutual fund? What about the economy, the markets, the world?
All of these things are well beyond your control and you know it. Yet the one thing we can control with great certainty — our own habits — gets lost in the shuffle.
Here are three key ways to save more for retirement by fooling yourself into better saving habits:
You can’t spend what you don’t have (credit cards notwithstanding). The simplest and best way to save is to set up an automatic deduction from your paycheck. If you have a 401(k) at work, use it.
If you don’t, open an IRA at your local bank or at an online brokerage. Figure out what your maximum contribution is for the year (currently $5,500 a year or $6,500 if you’re over 50) and set up automatic monthly or quarterly withdrawals from your checking account.
Consider a Roth IRA as well. You won’t get a tax break this year but withdrawals are tax-free in the future. However you do it, get yourself out of the decision process. Make it 100% automatic, even if you set the bar low at first and raise it later.
Once you have a few thousands bucks in an IRA, you’re likely to wonder how to invest it. Don’t fall into the trap of “playing the market” as a hobby. You’re far better off building a solid, risk-adjusted portfolio.
Why? Because a portfolio of diversified index funds will grow without a lot of mental effort on your part and reduces the risk of emotional moves that can cost you big money. Keep the costs low (use index funds) and just rebalance periodically.
What you want, in the end, is for your money to work for you, rather than you working for money. It won’t feel like a lot of money in the beginning, but once you hit a certain dollar level the incoming interest and appreciation will become real cash-flow.
Keep it automatic. Let those incoming dollars reinvest and redistribute them by rebalancing. That keeps your emotions in check and helps you compound your savings into a real retirement.
It’s just three steps, but it starts with automation. The problem with most retirement plans isn’t the design. It’s getting the plan off the ground with action and then keeping it going with regular saving and investing.
It can be done and it can be fun — once you take the first step.