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Saving for retirement is one of the most important things we must do during our working years. After all, nobody can work forever and living expenses don’t stop after you stop earning a paycheck. And yet too many of us aren’t saving enough for retirement. Why is that? For workers that can afford to save, I think the number one reason is the inability to cut through the complexities of saving and investing. Today, workers must answer complicated questions to successfully participate in a 401(k) plan. I believe these questions scare a lot of workers away from giving their savings enough thoughtful consideration.
When people are faced with complicated questions, they tend to delay a response – while doing nothing in the meantime. Some call this behavior “analysis paralysis.” I believe the best approach for participants is to break the process down into simpler decisions that can be addressed independently. To overcome analysis paralysis, I suggest savers do just two things to keep their retirement savings on track - establish a retirement savings goal and monitor progress towards that goal at least annually. Focus on saving and not investing. Unless you’re an investing expert, leave the investment of your retirement account to professionals.
Establish a retirement savings goal
When saving for retirement, your goal should be an account balance likely to “buy” you a monthly income during a retirement that can last 30 or more years. Don’t simply target an account balance alone! It can be too easy to underestimate the amount you’ll need for retirement if you simply focus on account balance.
You can set a goal using two approaches – determine a percentage of preretirement income you want to replace or a dollar amount that will cover your monthly living expenses. Many experts say your income replacement target should be 70 to 80 percent of your preretirement income.
There are free online tools available that can help you set a savings goal. For example, the Vanguard website offers a Retirement Savings Calculator that estimates your account balance at retirement and the monthly income that balance is expected to buy you in retirement based on how much you’re saving.
Monitor your progress
Once you have determined a goal, estimate the amount you need to save, on a per paycheck or annual basis, to hit that goal. Generally, the same calculators that help you determine a retirement savings goal can also be used to determine a savings rate during your working years. It’s best to start saving as early as you can so investment earnings grow your account.
You should use a savings calculator at least once a year to be sure you’re on track for meeting your retirement savings goal. If you’re not estimated to reach your goal given your current savings rate, increase it.
Get professional help!
Are you an investment expert? Most of us aren’t. Studies have shown that professional portfolio management can help 401(k) participants increase investment returns. An Aon Hewitt study found that median investment returns for 401(k) participants using Target-Date Funds (TDFs), managed accounts and personal investment advice were 3.32% greater than returns earned by participants that picked an investment portfolio themselves.
If you are not an investment expert, you should STRONGLY consider utilizing a professionally-managed portfolio option provided by your plan.
The key to overcoming saver apathy is simplicity
The best time to save for retirement will always be today. The more time your savings can grow, the better your chances for a secure retirement given the power of compounding interest. Determine your savings goal ASAP and evaluate where you stand in meeting that goal - you may be surprised by the results. Maybe that new 80” flat screen TV today becomes a lower priority when you know that contributing that money to a 401k instead will make the path to a secure retirement easier.
Don’t let apathy impair your retirement savings – having a proper nest egg at retirement is too important. Keeping things simple will help keep your retirement savings are on track. When you delegate investment selection, saving becomes the key to retirement security and you can boil that down to two things - a goal and a savings rate necessary to reach that goal. When things are simple, you feel in control. When they are not, you feel can lost, and that feeling can lead to apathy.
