Once you get your financial house in order with a budget and debt reduction, it’s time to get serious about saving. Get ready to ante up. According to the January/February 2013 issue of Money magazine, page 112, in order to have enough savings to retire and have that money last, “The amount you save is more crucial than how you invest.” It seems counterintuitive but I’m here to tell you this is what worked for me. This same article in Money recommends saving at least 15% of your gross income per year. That 15% doesn’t include any employer match. Now, in the past, I’ve talked with people about this strategy and they’ve claimed they can make up for a lower savings percentage with an aggressive investment strategy. Well, yes, you could take that risk with your future, but, how will you weather a severe economic downturn such as the recent one the nation is still trying to crawl out from under. Due to the strategy I’m telling you about here, we were still able to retire early despite the dive the stock market took in 2008. So, how do you reach the point where you can ante up 15% of your income per year?
Well, for starters, if you free yourself of non-mortgage debt, how much will you have in additional monies, which can then be redirected to your retirement savings? After all, that’s the entire reason for becoming debt-free. Look at the light at the end of your debt reduction tunnel. Maybe the thought of adding more to your retirement fund will be an incentive to stay on track to free yourself from the debt. Will your employer give you a raise this year? Most people who have taken control of their financial situation by accounting for every dime they earn can add at least 1% of their gross income per year to their contribution. Think about this. Look at the historical average annual inflation rate in the US, which, as of 2012, is a little more than 3%. We lived through years in the 1980’s when inflation was about 14% and then there are years, like 2012, when the rate is around 2%. Lower inflation rates are likely to be with us for a while. If you receive a raise in 2013 of 3%, decide right now, before you even see the dollars in your paycheck, to put 1% into your 401K. And then, do it! Will you get a promotion? Even in these slow economic times people get promoted. If someone retires, moves on to another company or is transferred to another city, there’s most likely an opening. Are you doing everything you can at work to put yourself in a position to reap the rewards of filling a vacancy? Promotions usually come with substantial raises. Look for ways to change your financial outlook so you can increase the amount you save toward retirement.
A savings strategy as opposed to an investment strategy also doesn’t mean you can now ignore where you put your money. If you work for an employer offering a 401K, they most likely have a money management company who administers their program. You may be offered options on how to invest your savings and they may automatically rebalance your portfolio to meet your retirement goals according to the mix you choose. Additionally, they most probably also offer investment counseling from the administrator’s financial planners. As a manager, I often found this to be an underused resource by employees. Take advantage of this opportunity to have an advisor help you plan your financial future. Even if you’re self-employed, before you decide where to put your money, decide who will administer your self-employed pension for you. I found, as a real estate broker, this became more personal as I wanted someone who was knowledgeable, trust worthy and willing to take the time to sit down with me to answer questions. Who I chose as a partner advisor was entirely up to me. I gave it a lot of thought.
Lastly, I learned to ignore the emotion attached to trading on the stock market. When the market has ups and downs and you hear the commentators on the news talking about the emotional swings, they are talking about YOU! The pros are not getting all worked up about this news or that news. It’s their job to remain clear headed. They look at it from a more pragmatic view. We know people who panicked during the downturn of October 2008 and moved their entire portfolios to money market accounts, thus locking in their losses. One individual told me this was the only way he could sleep at night and, besides, he’d time it so he came back in as things started to pick up. This same individual then missed the “timing” in March 2009 when the market took an upswing. As I mentioned, you lock in your losses and even the experts, who do this for a living, can’t predict the market. So, we chose to adopt a strategy of not moving money out of a mutual fund or selling a stock unless there was something wrong with the management or something wrong with the product. And, yes, that also means looking at who’s managing your fund or who’s at the helm of a company. It also means keeping an eye on the product to be sure it’s still desired by the general public. With the power of the internet this has become easier just be aware everything you read on the web is not always true.
As you can see, once you ante up, along with that comes even more personal responsibility. Taking control of your financial life is never easy but the reward of increasing your chances of having enough money to last your lifetime is more than worth the extra work. In order to retire comfortably, you don’t need a lot of money to begin with. You need a steady savings plan and time. After all, this is your money and your future. So, ante up!
We were just talking about our plans this morning. I jumped to paying off the house. Matt said he didn’t think we should focus on paying off the house when our interest rate is as low as it is and we could put money into savings earning a higher interest rate than that and have more time in investments. Then I read your blog and you are talking about saving 15% of your income. Then I drag out Dave Ramsey’s Baby Steps and sure enough, once you pay off the other debt, Dave has you start saving 15% of your income every month before he has you start paying extra on the mortgage. Looks like you and Matt are on track and I need to slow my roll!
Yes, even in today’s slow economy, depending upon your tax bracket, with a low interest mortgage and your mortgage interest tax deduction, you are most likely paying less in mortgage interest than what you can earn even with conservative investments. When it comes to building your retirement nest egg, time is your biggest friend!