Many clients ask me the best way to save for retirement. For our purposes we will focus on 401k savings. The old adage of “It does not matter how much you make, but how much you save” is very true. There are several important points to saving for retirement. The first key is to have a consistent strategy in place unique to your personal financial situation. An example of a consistent strategy would be to contribute 10% of your paycheck to your 401k. The second key is to keep your standard of living the same(or at least modest) as your pay goes up. By keeping your standard of living modest, you are allowing yourself the opportunity to redirect your pay raise into your retirement vehicle. Over time this will naturally increase your savings rate. Also, don’t forget to take advantage of the maximum your employer will match.
I will use the example of Jill making $50,000 in 2017 and getting a substantial raise to take her income to $60,000 in 2018. Human nature would be to spend the extra money. Jill should reward herself for a job well done, but it should be modest. The prudent financial strategy would be to increase Jill’s 401k savings rate to capture most if not all of the extra income earned. In this manner, Jill would redirect most of her new found income into her primary retirement savings vehicle. Over time this has a dramatic effect on the amount saved for retirement. If Jill has debt, another prudent strategy to compliment her savings strategy would be to systematically payoff debt as her income rises. When Jill’s debt is retired, it would be prudent to redirect this freed up cash flow back into her savings strategy. I have included a short and very easy to follow video that demonstrates the principal of increasing your savings consistently, saving more as your income rises and monitoring your progress. I want to be like Jill……….
Here are the details of the video:
How much should you be saving for retirement? Massi De Santis, PhD, explains that the answer should be customized for each individual, based on how their income grows prior to retirement.