Do you hear the pundits asking if are you saving enough for retirement? The other day I heard one preach, “Pretend you are in your seventies and yell at yourself for not saving!”, as if that type of advice can be practically applied and put into action. Everyone’s financial situation is unique and needs to be treated as such. A large financial burden, such as retirement, is a big concern for most people. Yet it gets pushed down the road because it is not an immediate need and can be overwhelming to think about. You can start to save for your retirement immediately; you just have to make it a priority — not only with your values, but also with your day-to-day decisions.
The younger baby boomers (those who are in their late forties or early fifties now) are the first generation that will, for the most part, not have a pension to help cover costs in retirement. When this generation retires, they are going to need 100 to 120 percent of our current cost of living. This is not because of inflation, but rather because we have become accustomed to a certain standard of living over the course of our lives.
For example, several years ago I had a conversation with a woman who had recently retired. I mentioned that 100 to 120 percent of cash flow was needed in retirement and she agreed. She told me she had been saving by doing small things every day, such as bringing lunch to work. However, now that she was retired, she was exceeding the budget that she had made while she was working. Instead of making her own lunch, she was doing things with her friends, such as eating out and meeting at coffee shops. She had actually planned on needing only 75 to 80 percent of her pre-retirement cash flow instead of 100 to 120 percent — not accounting for her behavioral changes in retirement.
Yes, when you retire your priorities change — but in most cases, the cash you need does not decrease. So what do you do in order to prepare for needing 100 to 120 percent of current cash flow? First, you need to understand what all of your current living expenses are. Be sure to include large purchases you can foresee needing over time during your retirement, such as home repairs, new appliances, cars, and vacations.
Once you establish your current budget and account for large future expenses, find out if your company has a retirement matching program. If they do and you are not yet contributing to get the match, you are walking away from part of your salary. If you do contribute the amount of the match, it is time to slowly start increasing your contributions. Begin adding $50 to $100 a month, depending on your salary, so you are less likely to miss it. As a result, less federal taxes will be removed from your paycheck so you will not see much of a difference. Once you get used to each contribution increase, start to increase it again.
If you are already contributing the maximum allowed, ask yourself if you are contributing in the beginning of the year so it can grow tax deferred. (In 2015, the maximum contribution allowed is $18,000 if you are under 50 years of age. If you are 50 years of age and over, $24,000 is the maximum allowed.) If your cash flow can handle it and it does not affect your company’s match, consider contributing the maximum in the beginning of the year. Then, start an outside investment account for extra savings. Currently the amounts we are able to save tax deferred are not actually enough to cover our needs in retirement, so outside savings are necessary.
Start slowly and work your way up toward your retirement savings goal. Once you see the growth over time, you will feel accomplished, reinforcing the positive financial habit you have created. In doing so, you will notice that the important things in your life are not suffering the way you might have imagined they would, and you will feel more in control of the present and future as a result.
Joan Sharp is a member of the DailyWorth Connect program. Read more about the program here.