Financially preparing for your retirement should be a multi-decade process that results in a large healthy nest egg. I talked about how it wasn’t a one year commitment in my previous post. It’s not a 2, 5, or 10 year commitment either. You must start now and consistently save and invest money to have a secure retirement. Maintaining that consistent investment month after month and year after year is very difficult. Life gets in the way with things like emergencies, job changes, vacations, and the newest gadget on the market. The more steps you take to remove the thought process from routinely investing your funds the better off you will be.
Automate Your Roth IRA Investments
Don’t rely on contributing funds through your Roth IRA provider’s website whenever you feel like it. At the end of the day you’ll never feel like sending $400 or $800 to some account that you aren’t supposed to touch until decades in the future. If you rely on feeling alone your account growth will be severely impacted over the long run. Instead set up automatic withdrawals from your checking account to be sent to your Roth account on a monthly basis. All major Roth IRA providers offer the option of automatic contributions. Granted, they offer it because the larger your account the more they can earn in investment fees. But even if you choose investments with very high costs the simple act of consistently investing is better for you in the long run. (Paying a high 2% expense ratio on any extra $5,000 is better than paying no expense ratio on zero investment!)
How to Automate Your Retirement Investments
If you are using one of the major retirement providers (Vanguard, T. Rowe Price, and many others) there should be an option to automatically withdraw funds from a checking account that you designate. All you need to provide them for most Roth IRA accounts is:
your checking account number
your routing number
the name of the bank or credit union
Since we live in a digital age this is usually a form you can find on the provider’s website. However, they may require you to print it off, fill it out, and endorse it with your signature for legal reasons. You can usually mail or scan and e-mail it back to the provider.
Understand the Agreement and Commitment
But be careful to make sure you understand what you are agreeing to. By sending in the form your account provider will automatically withdraw whatever amount you tell them to from your bank account on a specific day of every month. You are agreeing on:
the amount of money you think if appropriate to invest every month
that you have that amount ready in your checking account as part of your budget
The first part is critical. You might start off thinking you will set aside $100 per month. That sounds like a lot, but it’s only $1,200 per year. That’s just over 20% of the contribution limit on a single Roth IRA. If you are married and you only set aside that much, it’s only around 10% of the maximum of $11,000 that you could have set aside for that tax year. The higher of an amount you can commit to investing every month the better off your retirement will be. For singles you could max out a Roth IRA with monthly payments of $458.33; for married couples $916.66. The second part of this is having the money set aside in your budget and waiting on the automatic withdrawal into your Roth IRA. I’ll show you how to budget for a Roth IRA in my next post.