Saving money can be difficult, especially when it’s for a long term goal such as retirement. We do, after all, live in a consumer oriented culture where the motto often seems to be “buy or die”. The good folks in the media and marketing worlds do more than their fair share of bombarding us with messages designed to get us to sacrifice our hard earned money at the altar of the consumer gods. And can we be completely honest about something else? Buying feels good!
And how does saving money feel? Kind of like taking bitter medicine—we know it’s good for us in the long run, but it’s positively hideous going down. The more direct control we have over our paychecks the more vulnerable we are to the prevailing culture and to our own preferences. Is it any wonder that in the early 21st Century we have something very close to the lowest savings rate in U.S. history? The deck is most certainly stacked against us.
Mechanizing the retirement process
The solution to this problem is to remove the series of “small choices” we face every day on whether to spend or save our money. Anything we can do that takes away the need to consciously take money away from consumption, move money from one pile to another or be forced to accumulate a large amount to fund a retirement plan will make the process of saving for retirement dramatically easier. The best way to do this is to take the money out of our sight and our control.
We can do this with a series of automatic payments that move money from our paychecks and directly into retirement enhancing money transfers. It’s all handled by computers in assembly-line like fashion that takes both the decision and the stress of saving money off our shoulders. Once a year, you can quietly and rationally decide how much money you want to allocate and where, fill out a few forms at work, then get on with your life. No day-to-day decisions need to be made after that point, and one year later your retirement accounts will be larger than they are now. What could be easier?
Where automatic payments can simplify retirement savings
If you participate in an employer sponsored retirement plan, such as a 401K or 403B, you’re already making automatic payments toward your retirement. The money goes straight from your paycheck into your retirement plan without you being the wiser—until you see the additional accumulations in your quarterly statement. But there are other areas where you can use automatic payments to speed or enhance retirement planning.
Payments to Traditional or Roth IRA’s.
Most payroll companies will allow you to have money from your paycheck direct deposited into multiple accounts, including retirement accounts. This will be a way of funding your IRA in small increments, rather than forcing you to come up with $5,000 or more by April 15th of every year. Simply take the amount of money you intend to deposit into your IRA for the year, divide it by the number of pay periods in the year and have that amount direct deposited into your IRA from your paycheck. You’ll never have to write a check for an IRA contribution again.
Payments to non-retirement savings accounts.
Same principal as above, except that you’re allocating part of your paycheck into your non-retirement accounts. This can include mutual funds, brokerage accounts or even savings accounts. Many people don’t think about non-retirement accounts as part of retirement planning, but any large pool of money that you have or are accumulating are part of the mix.
Automatic debt payments.
For most people, the family homestead will play a significant role in retirement planning. A home that’s owned free and clear opens up a number of retirement options, including a cash windfall on sale or the ability to live in a mortgage free home. Either situation is worth preparing for. Paying your mortgage by automatic draft can make this effort easier than ever. You can not only authorize your mortgage lender to withdraw the payment from your account each month, but you can also increase the payment to make additional principal payments and accelerate the payoff of the loan. Silently, gradually, your mortgage will go away in time for retirement.
You can use IRS form 8888 to choose up to three accounts to have your tax refund deposited in. You can have money sent to a checking, savings or retirement account, or even to all three if you wish. With the average refund being in excess of $3,000 there is a real opportunity here to accumulate a significant amount of money by automatically directing your refund into a Traditional or Roth IRA, or some other type of retirement account. This can be especially valuable as a clean up tool in the event you haven’t been very successful at funding a plan during the rest of the year. Automatic payments are a real tool when it comes to retirement planning. They remove tough decisions, smooth the process and allow for quiet accumulation of retirement assets while we’re busy doing other things.
Photo by D’Arcy Norman via Flickr