A survey by TD Ameritrade found that about 28% of Americans in their sixties have less than $50,000 in savings. In the same study, they discovered that two-third of Americans 40 years and above have less than $100,000 in retirement savings. More surprisingly (at least to me), 20% of those between age seventy and seventy-nine have less than $50,000 in retirement savings.
These statistics show that many Americans (and people in other countries) find it challenging to save for retirement. It may be one of the reasons why many are working late into their 70s even though they would prefer to retire before then. For those who would want to retire earlier, this is a significant hurdle. Even for those who would want to retire late, they will still have to retire at the end.
All of these are happening at the same time that current reports are showing that the working population in the United States and other European countries is shrinking. Currently, the ratio of active workers to retirees in the United States is 5:1. However, USA Today projects that by 2050, this will be less than 3:1, which means there will be fewer people supporting the social security system.
The implication of all of these is that you need to jumpstart your retirement savings whatever time of life you are in at the moment. You can’t work forever. You can’t trust in the social security system forever. It’s time you begin to take more personal responsibility for your retirement savings.
Monthly Saving Goal
In a previous article, we went through the intricacies of deciding how much you should be saving for retirement. If you follow that process and practice it, you will have a percentage figure you should be targeting.
In the example from that post, Dave needs to save 5% of his annual income for retirement. The next thing is to break this figure to a monthly target. Since Dave earns $50,000 every year, that’s a yearly saving requirement of $2500 and a monthly saving requirement of $208 (you can check all the assumptions we made for Dave).
The purpose of this example is to give you an idea of how to calculate the amount you will be setting aside for retirement every month to achieve your retirement goals. Figuring out a monthly amount will make it easier to achieve your retirement savings goals.
The clearer your goals, the easier it is to accomplish.
Achieving the Monthly Saving Goal
Saving is one of those things that are easier said than done. It is easier to create a savings target but more challenging to stay true to them. However, creating those targets is always a good place to start. What are some steps you can take to achieve your monthly savings goal and jump start your retirement savings?
Creating a Budget
Setting up a budget is always the first step to achieve any financial goal. Last year, 33% of Americans didn’t have a budget. Budgeting is essential because ‘he who fails to plan, plans to fail.’ It is an excellent way to keep track of income and expenses. You can see very clearly where your money is going. Without a comprehensive and robust budget, it will be more difficult to save money. When you budget and stay with the budget, you can identify opportunities for savings.
Max out your savings by trimming down expenses
If you look at your expense items with critical eyes, you will always find opportunities to cut down on many unnecessary things. We all have those things we should not be spending money on at all or, at least, spend as much money on as we currently do.
This is one area where it is difficult to set aside hard and fast rules. What is essential to Mr. A may be unimportant to Mr.B. You can check this article by LifeHack for some guidelines. However, consider your life situation before adopting any suggestion. That said, try to be as ruthless as possible.
Setting up an emergency fund
The next thing to do is to set up an emergency fund. Many people find it difficult to save because of debt. However, we can avoid many of the debts we incur if we had an emergency fund. An emergency fund is money you set aside to cater for emergencies like job loss, slide in business income, and unexpected medical bills.
An emergency fund can be your monthly expenses for three to six months, depending on factors like job stability, among others. It should also be in an investment channel that is liquid (easy to convert to cash).
Setting up an emergency fund will prevent you from incurring additional interest payments on loans.
Setting aside money for expected large expenses.
Similarly, if you expect to incur a large expense in the next twelve to eighteen months, you will do well to set aside money for such expenses. If you don’t set aside money for those expenses, they will lead to more debt when it is time to incur them. By setting money aside for them, you can pay for them without incurring debt.
If you already have some debt, you need to pay them off. As long as the debt is lingering on your budget, it will be harder to achieve your retirement savings goals. To do this, you can use the debt snowballing process. Below is what I wrote about this process last year:
“Write out all your bad debts in a sheet with a column for amount owed, interest rate charged, and minimum payment. Start with the debt you can easily pay off to get some momentum.
To carry out this process, you need a surplus, and you need to ensure the amount you currently apply towards payoff will continue to serve that purpose until you have cleared the account. The surplus is an amount you can pay above the minimum payment of your debts. You can get the surplus by ensuring that it is only your necessary expenses you are incurring every month.
Start with the smallest debt, pay the minimum balance, and then use the surplus to pay the debt. It is good if the debt is paid off by the surplus. If the surplus remains after you pay off that particular debt, apply it to the next debt.
As you pay off one debt, you move to the next debt with that surplus amount, and then the next.
Revel in the success, then repeat it: As you clear off the lower amounts, use the momentum to go to the higher amounts until you pay off all the debts. Celebrate the little victories, but don’t over celebrate with something expensive. In a few months (depending on your debt size), you should be completely free from debt. Then go back to read the section on how to avoid bad debts in the first place.”
Spend what is remaining
George Clason’s The Richest Man In Babylon contains some of the best strategies to achieve your saving goals. One of the concepts he dwelt upon is “spend what is remaining.” Instead of saving what remains after spending, spend what remains after saving. The latter approach will help you to achieve your saving goals and develop the discipline you need to cut down unnecessary expenses.
Avoiding Impulse Purchase
If you are very prone to impulse purchases, you might need to stop going out with your credit card (if you need to have one). You may need to adopt the cash-only lifestyle to prevent you from incurring debt by buying things you can’t afford (and don’t need). Whatever discipline you need to adapt, stay faithful to your budgeting, and put an end to impulse purchases.
Arguably, mortgage constitutes the largest portion of expenses for the average person. One of the things you have to consider on the road to achieving your retirement savings target is your mortgage. Do you need to live in your current location? Do you need the type of house in which you are currently living? Is it possible to make do with a cheaper home or the same kind of house in a different location? Are you paying too much in mortgage than you should?
Considering these questions may lead to a process that can help you cut down on your mortgage obligations.
Maximize contribution to employer matching 401(k)
We’ll be looking at these different retirement accounts later on. However, at this point, it is important to consider maximizing contribution to your employer matching 401(k). If you have access to this account, make maximum use of it. An employer matching 401(k) allows your employer to match the contribution the employee is making into the retirement account. The typical payment to a 401(k) is 6% of the employee’s salary. Whatever you contribute, the employer will either match a portion of it (50%) or match the whole amount. (100%)
There is a maximum contribution value of $19,000 on a 401(k). This means you can’t contribute more than $19,000. If you have access to a 401(k) employer match, then, by all means, try and meet this maximum amount. The more you put in, the more your employer will match.
For example, if you earn $60,000 annual income and contribute 6% to 401(k), that will be $3,600 per year. Let’s assume your employer matches 100% of that amount. You will have $7,200 at the end of the year. Supposing you raise your contribution to $6000 instead of $3,600, you will have $12,000 at the end of the year.
If you are 50 and above, you can contribute up to $25,000 every year to your 401(k).
Whether you want to retire early or late, you will retire one day. To ensure you have the financial resources to retire well, you need to start setting and meeting your monthly retirement savings target. It may be a difficult process to begin with, but it is worth all the efforts. Wherever you are with your savings, you can jumpstart it and be on the road to the retirement of your dreams.