Why Delay Saving for Retirement?
Are retirement savings a priority for you? If not, why aren't they?
Perhaps you have other expenses to deal with, excess debt, or too little income. Maybe you don't know how much money you'll need to retire, or you know very little about investing for retirement. It's possible that you haven't given a thought to retirement savings at all.
How many of those things are likely to change over the next few years?
Years turn into decades – and before you know it, retirement is imminent, and you have insufficient funds. Now you're forced into bad options – delaying your retirement, scaling back your plans, or both.
A recent study by the Principal Financial Group digs into the reasons behind financial procrastination. As reported in USA Today, Principal teamed up with behavioral economist Dan Goldstein to look at the behavioral side of financial decision-making. The results suggest that the emotional and psychological can trump the rational when it comes to retirement savings plans.
It's Mostly In Your Head
Polls cite standard reasons for delaying important financial decisions like retirement funding – high debt loads, insufficient income/savings, busy schedules, and major life events that take precedence. Principal's research not only found similar responses, but also conflicts with other survey responses.
Consider this example – 60% of survey respondents cited current income as a reason to put off important financial decisions. However, high income did not correlate strongly to delaying decisions. Almost one in four (23%) of households with annual incomes greater than $150,000 put off financial decisions, and only 55% were comfortable planning for retirement.
Conversely, the Principal study found that many households with lower incomes (approximately $40,000 as reported in USA Today) are comfortable in making important, long-term financial decisions.
It's possible that people with higher incomes increase their discretionary spending instead of directing funds toward retirement savings. There will always be something more tempting to do with your money than placing it in a retirement fund. However, the Principal survey suggests that lack of knowledge – and a corresponding lack of confidence – play a significant role.
Less than 30% of survey respondents were comfortable with their monetary management knowledge, while only 35% were comfortable planning for retirement, and less than one-quarter felt they could start new investments or make sound changes in their existing ones. Plenty of resources exist to help people with financial planning, but they have to be motivated to seek those sources.
The best way to address retirement savings is to make it a priority and include it as a regular cost of living, just like groceries and rent/mortgage payments. That mindset will drive you to educate yourself on retirement strategies.
The Building Block Approach
Start by taking advantage of any employer-based retirement funds. Don't let indecision on the proper amount to deposit delay your plans. You can adjust the amount later if required.
If you have no employer-based plan, start setting money aside each month – in a separate savings account if necessary – and research options for IRAs or other retirement plans. You can open some IRAs with little money upfront.
Once you've decided where to invest, the next question is how much. That depends on how much you need to retire, which in turn depends on your retirement goals. Start there and work backwards. If you've never thought about what you plan to do in retirement, now's a perfect time.
Plan out your basic retirement goals and estimate how much those are likely to cost. Don't get hung up on accuracy yet – make some estimates based on your current lifestyle and how that's likely to change in retirement. Add another $250,000 to $300,000 over the course of your lifetime for medical expenses.
You now have a crude estimate of the size of your nest egg. Register for a My Social Security Account to find out your estimated Social Security benefits. Figure out how long you plan to work and include any other post-retirement income you can think of. The difference between income and expenses is the gap you must fill with retirement savings.
You can then set a retirement savings strategy with a concrete goal of saving a certain amount of money in a certain amount of time.
You may not be accurate in the beginning, but as you start to lay out your plans, you'll gain more confidence in your ability to predict, control, and adjust your retirement strategy. As the Principal study concluded, financial confidence will help you prevent inaction – the greatest danger to your retirement plans.
The Principal survey reinforces what we all know deep down – the keys to solid retirement savings are a savings priority mindset, a plan to achieve those savings, and the discipline to stick to that plan. It's certainly not as sexy as winning the lottery or finding gold deposits in your backyard, but it's far more reliable.
Too many of life's decisions are delayed by waiting for the perfect time or the perfect set of conditions. Retirement savings are no different.
Imagine your future self in your preferred retirement setting – a beach, a mountain stream, or an exotic foreign locale – raising a glass and making a toast to your current self. "Thanks for taking the right steps back then to make my life easier today."
Now take the steps to make that toast a reality.
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