Pay Yourself First When Planning for Retirement
My father is the best man I know. He was the type of father who led by example. He was not the person to constantly tell me what to do or how to do things. He would show me how to do things by doing them. He was the epitome of “Do what I do.” One of his mottoes, and something he told me all the time, was “Pay yourself first.”
What did he mean by pay yourself first? He meant to save. He instructed me to pay myself first out of every paycheck, every time I got paid. It worked for him. My father paid for college with cash (admittedly, college was a lot less expensive back then), but he also he paid for all of his cars with cash, he paid the down payment on his house with cash, his wedding with cash, etc. etc. My mother jokes that he was not prepared for the 21st century, because he didn’t have a credit card until several years after his wedding!
My father is not alone is this approach. Several baby boomers grew up this way. You saved, and then you purchased things with cash. You didn’t charge everything to your credit card. What has happened to the subsequent generations? As you have undoubtedly heard before, savings rates are down, way down. In 2013, the median retirement savings for families with ANY retirement savings was only $60,000. The median savings of ALL families is only $5,000! In other words, Americans aren’t saving. According to the Economic Policy Institute, “nearly half of families have no retirement account savings at all.”
As a retirement planner, I get the question all the time of “Do I have enough to retire?” or “Have I saved enough?” While these are important questions to ask, one of the more important things to determine, even if you are already retired, is “How do I save more?” That is the real question.
Regardless of where you are in life the answer to “How to save more for retirement?” begins by paying yourself first. If you are working, then you need to check to see if you have a 401k or any IRA plans available to you. If your company offers a match on your contributions, then it is extremely important to participate in that plan up to at least the amount they match. If you can afford to contribute more to your employer plan, then contribute more. A new report from the International Longevity Centre – UK said that Americans should be contributing at least 11% to their 401k. They found the optimal amount is 20%!
3 Strategies for Saving More for Retirement
A few strategies you can employ to get maximum value out of your 401k is to set up automatic increases each year and bank any surplus money. Setting up automatic increases each year helps you take advantage of any raises you have received through promotions or cost of living adjustments that your company has provided. It allows you to incrementally increase your savings rate over time until you reach the optimal savings rate to help you reach your retirement savings goal. Most people are not going to be successful going from a 5% contribution to an 11% contribution overnight. You have to work up to that savings rate.
Another strategy is to bank any surplus money, which means you are saving any and all extra money you receive throughout the year whether it’s a birthday check or a company bonus. Instead of buying a new suit or a new dress with that windfall, you put it in your IRA or other savings account. This way you stay on budget and put that little extra away for retirement. It all adds up over time.
Living within your means is another way to “Pay yourself first.” If you are not consistently having to tap into your savings to pay for everyday expenses, then you can allow that money to grow. Einstein is credited with saying “the power of compound interest is the most powerful force in the universe.” To illustrate that, a recent Huffington Post article referenced June Greg, a woman celebrating her 98th birthday and told how her father invested $6.11 into her account when she was only two years old. At a 2% interest rate, that $6.11 is worth $42.55 today. At a 10% interest rate, that $6.11 is worth almost $70,000 today. Now let’s say that her father invested that money with Warren Buffett who has averaged a 21.5% annualized return, her $6.11 investment would be worth $351.4 million!! Living within your means and paying yourself first allows for all of this beautiful compound interest to take place!
Now that I am a father to my own children, I find myself constantly telling them what they should do or how they should do things. In fact, in my house we have a motto that we say “Hard work pays off.” My wife or I will be doing a chore, or asking our boys to do a chore, and we will always say “Hard work pays off” while working. My 7, 4 and almost 1 year old say it all the time. I love how the motto I grew up with of “Pay Yourself First” works hand in hand with our family motto of “Hard Work Pays Off, because if you Pay Yourself First out of every paycheck and every increase you receive, you will see how your Hard Work Pays Off…literally, it will pay off in the end. Back home, my father is smiling, because he’s known this all along.