How to save for retirement is a simple question that often begets a simple answer, save more and spend less. This is certainly a case of easier said than done. Just like loosing weight, all you have to do is just move more and eat less. I wish it was that simple. However, it’s always harder to do because it involves changing our behavior.
More specifically, I’m talking about habitual behavior that we all rely upon. All of us have our own patterns of behavior at work, home, with friends, family, and even in money management. These behaviors allow us to rely on prior adjustments to maintain a sense of control over our environment. Its human nature to want consistence, reliability, and even predictability in life. Otherwise, life seems chaotic and we feel out of control. This can lead to stress and anxiety.
We can all agree that habitual behaviors help make life easier, but what if some of these same behaviors are counter productive? A common example is someone who makes a good wage, but doesn’t save. We don’t want to alter the habitual behavior of earning a good wage, but we want to change our behavior to be a saver.
Our saving habits most likely started in childhood. Our parents were our role models, but our socioeconomic status matters too. Many of those from a lower income family are very cost conscious even as they move into the middle class. They often keep frugal habits despite earning more. These patterns from childhood can become deeply ingrained. Occasionally, the news reports a homeless man who has a million in the bank. He lives that way due to these deeply ingrained frugal habits from childhood.
If you were raised middle class or higher, you are likely to have less anxiety about money. But, you may end up saving less and spending more due to this complacency. I’m not saying you need to feel anxiety to save, but you do need a plan. It seems that the middle class, most of America, has fallen into this pattern of not saving enough for retirement.
By the time you are near retirement, your behavior patterns are well developed as a result of the many years of use. Changing these long term patterns is very difficult and often fails. It’s natural to return to behaviors we are comfortable with. So, if we involve automatic savings before we receive the money, we don’t have the nagging pressure of saving.
I like automatic savings because you often forget about it. There is no requirement to monitor or change your behavior as the amount to save is pre-arranged. The best automatic savings are the many retirement plans that invest your money pre-taxed, IRA, SEP-IRA, 401k, 403b, etc. You must maximize these plans weather there is matching or not. However, it’s a mistake to stop there since we are still not saving enough even with these plans.
Because saving does not come naturally, we must have an after-tax plan like a Roth IRA or an investment account as well. Since this is after tax, you’ll need to set up an automatic deposit yourself. The best method for all our savings is pre-arranged because we don’t have to consciously decide to save each payday, we don’t feel stressed or deprived, and are more likely to continue the saving program as a result. After all, Social Security is pre-arranged and its been successfully paying out benefits for a long time. We’re just extending this model.
How much to save for retirement? Of course, this answer is different for each person. Some say 10% or 15% is good, but they are not retired. I’m retired and I can certainly tell you the more you save, the better. I forget percentages and save as much as I can. I notice that people adjust their lifestyle to accommodate whatever their income tends to be. Getting used to living modestly is a good prelude to retirement sustainability.
Many writers claim you’ll need a huge nest egg of millions to last 30+ years in retirement. I see this as a scare tactic to get you to buy their product. The truth is that income streams are the foundation of retirement for most of us, not a huge savings. Social Security, annuities, dividends and interest, and any work income are distributed to us over time. So, it’s a continual income stream that provides us with security and sustainability in retirement. In other words, don’t panic if your savings are low, just work on maximizing the income streams.
A great method for reducing day to day spending is to use cash. When we pay with plastic cards, we become detached to the amount spent. Counting out the amount with cash heightens our awareness and reduces our spending (1). There are certain times when credit card protection is needed, but for day to day spending, cash can help balance your budget.
A realistic attitude is also needed to accept some economizing in retirement. We know we have to spend less, but we don’t want to feel deprived. So, our retirement identity is a successful person who creatively manages their money and lifestyle to adapt to the ever changing economic conditions of our time.
Recommendations to save for retirement:
1. Maximize your contributions to your pretax retirement plan
2. Set up additional automatic contribution to an after-tax retirement plan
3. Contribute as much as possible in the above plans
4. Use cash instead of plastic cards for daily purchases
5. Learn to economize and view yourself as someone who successfully adapts to the ever changing economic conditions
6. Read the chapters on Money Makes the World Go Around and Creative Income
1. Chatterjee, P., Rose, R.L.(Vol. 38;2012) “Do payment mechanisms change the way consumers perceive products”; ideas.repec.org; Retrieved on 2-5-2014 from: ideas.reped.org/a/ucp/jconrs/doi10.1086-661730.html
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