Saving for Retirement – Pay Yourself First

We all need to start doing a better job saving for retirement.

The investments do not really matter that much. One can do just great putting their savings in several mutual funds, going into one of the targeted retirement funds that do the asset allocation for you, or building up a portfolio of individual stocks and gradyually shifting more into cash and bonds as retirement looms. The key is to invest regularly.

Investing early is also absolutely critical, since the earlier you start, the easier it is.  The reason is that the amount of interest gained in the years at the end, when there is a large sum built up, greatly outweight the amounts received in all of the other years.  The more years you have at the end to let the money continue to accrue interest, the better. 

So what is the best way to actually save that money, despite all of the forces that make it difficult?  Just like with a diet, where there will always be an excuse to eat more than you should there will always be a reason to delay putting money away.  Just like with a diet, one must change one’s lifestyle to get good results.  One cannot go on and opff a diet and expect to keep the pounds off.  One can also not expect to start and stop retirement savings and expect to be successful.

Everyone will basically spend all that he/she makes. If one is bringing home more than the cost of his mortgage, food, and lights, he will buy a new car or add a cell phone, movie subscription, join the wine club, take vacations, or do something until he has spent the surplus.  Someone who is making $40,000 per year will spend about $40,000 per year, plus an additional $3000 or so on the years that the “emergencies” happen, such as an air conditioner breaking down or a new roof being needed.   Likewise, a person making $250,000 per year will spend $250,000, plus an additional $20,000 when emergencies happen.  Some of the individuals that you may think are rich are actually just one lost paycheck away from missing their mortgage payment.  They have large incomes, but spend every dime.  The people who are actually rish probably dress modestly and live in modest homes, with really nice interior features.

To retire comfortably, one must put away about 15% of one’s income (write off Social Security – it won’t be there).  This is the amount required to allow you to continue to live the same lifestyle through the rest of your life without another income.   The trick is to put money away just like another bill before you have the opportunity to increase your lifestyle to suck up the extra cash.  Just write a check each month to a mutual fund company or a brokerage account for 10-15% of your paycheck, just like you’re paying any other bill.  Also, take advantage of 401k’s, since again the money is taken out before you have a chance to spend it.  Typically the plan is to invest in the 401k up to the company match, then max out IRA accounts, then return to the 401K up to the maximum.  If one is still not at 15% of gross income, put more money away in a standard, taxable account. 

And once it is in there, don’t ever take it out unless you are retired or about to be on the streets.  The taxes are onerous, plus for every dollar you take out when you are young, you lose $32, $64, or even $128 dollars when you are ready to retire.  It just is not worth it for that vacation or new car.

Comments appreciated! What are your thoughts? Questions?

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