The New Year offers an opportunity for a fresh start – and if you’re behind on saving for retirement, it’s a good time to evaluate your financial priorities and resolve to do better.
It’s a stark fact that many Americans are under-prepared for retirement. According to the Employee Benefits Research Institute’s 2015 Retirement Confidence Survey, 28% of respondents report having less than $1,000 in personal retirement savings.
Yet the same survey suggests Americans realize they could do better: 69% admit they could put away at least $25 per week more than they currently save for retirement.
Do the math. If you put aside an extra $25 per week, you’d save $1,300 per year. Do that every year over the course of your working life, and with compounding and capital appreciation, you could save an additional $100,000 or more.
So how could you do that? Responses included cutting back on eating out, buying lottery tickets and streaming movies. You can also start by answering the following questions:
- Are you one of the millions of Americans who hasn’t saved enough for retirement, even though you know you should?
- Have you been meaning to begin saving or saving more, but find it hard to get started?
- Could you set aside even a small amount each week or month toward your long-term goals?
If you answered “yes” to one or all of those questions, then it’s time to make a plan to get your retirement house in order in 2016. Here are some suggestions on how to get started.
Making a Plan
The key is to make a plan-and then take steps to put that plan into action.
- First, take advantage of opportunities you have.
- If your employer offers a company-sponsored retirement plan, like a 401(k) program, and you’re not participating, now is the time to get enrolled. And in many 401(k) plans your employer will match a percentage of your contribution, further helping to build your nest egg.
- Are you self-employed or work for a company that doesn’t offer a 401(k) plan? If so, consider starting an Individual Retirement Account (IRA). You can set up an IRA online through your bank or broker dealer, or you can work with a financial professional if you’d like more hands-on guidance.
o If you’re already enrolled, take the first opportunity you have to boost your monthly contribution, even if it’s only by a small amount. When you get a raise, boost your contribution again. See if your plan offers an “auto-escalate” option that will automatically increase your contribution each year. With this feature, you’ll boost your retirement savings without ever really missing the money.
Once that’s done, you’ll have made a huge positive step toward providing for your long-term retirement needs.
How much should you save?
Now you need an actionable plan you can follow and that starts with deciding how much to save each month.
There’s no single right answer for how much you should be saving. But don’t let that become an excuse for doing nothing.
One common approach is “proportional budgeting.” With this approach, you look at your income and divide it into categories, designating a portion for regular savings. The benefit of this approach is that you can set the category percentages based upon your actual needs and priorities. You also have the ability to adjust the percentages based on actual events and changes in your economic situation. One important thing to remember is that you have to take a serious look at your expenses and separate the “needs” from “wants.” While food is necessary to survive, is eating out every day necessary?
After determining your needs, look at your wants and determine if any are things you could either do without or reduce in order to save more. The money you allocate towards savings should include items such as money for major purchases such as a home or car, an emergency fund to cover unexpected expenses and your retirement fund.
After determining your percentage allocations, periodically review your expenditures and savings to ensure that your personal finances are working for you.
There are a range of popular “proportional budgeting” alternatives:
- Save 10: One of the simplest approaches for boosting your savings is the “Save 10” plan-that is, simply set the goal to save 10% of your income each month.
- The 60% Solution: Richard Jenkins, the one-time editor of MSN Money, proposes “the 60% solution,” under which you live off 60% of your income while banking the rest in the form of savings and investment.
- 50/30/20: Looking for a middle ground? The 50/30/20 plan is another popular savings approach that relies on proportional budgeting. It breaks down as follows:
o Determine your monthly take-home pay.
o Apply no more than 50% of that figure to your monthly fixed costs, like housing, utilities, car payments, etc.
o Take at least 20% of your take-home pay and put it toward saving and investing goals.
o The final 30% is for your flexible spending-that is, spending over which you have some control, like food, entertainment, clothing and so forth.
Don’t put it off-it’s time to take action
Those are just three possibilities. Consider them as starting points for thinking about how to build a savings plan that works for YOU.
The one thing all these approaches have in common: they provide an actionable framework for setting up a savings system.
Keep in mind that if you’re a younger saver, you have more time to improve your situation, so actions you take today will have a big impact down the road. And even if you’re mid-career or older with a shorter time horizon, it’s not too late to make positive changes to boost your savings for retirement.
Then, with your account and savings plan in place, you can start thinking about how you want to invest your money in the capital markets, striving for a smartly diversified portfolio that reflects your risk preferences, time horizon and savings goals.
Still unsure of how to proceed? It may be a good idea to consult with a financial professional who can offer additional guidance to navigating the various financial products on the market.
So what are you waiting for? Get started now and make 2016 the year you changed your savings behavior for the better.