Old Dogs Can Learn New Retirement Savings Tricks

We might be getting older, but there is till time for learning some new retirement savings tricks.  Do you have enough retirement savings? Are you feeling unprepared? Thanks to the following quick fixes, those worries end now.

retirement savings tricksOld (and not so old) dogs can learn new tricks…

Saving for retirement may seem daunting. You are probably already dealing with more immediate needs: mortgage, auto loans, credit cards, maybe you’re paying for your children’s college education. If you are feeling overwhelmed, you’re not alone. What’s more, your brain isn’t always helping.

A study by the National Bureau of Economic Research (NBER) discovered that our brains often work against us. Turns out, most of us have what they call “present bias,” the tendency to place greater emphasis on those events that occur closer to the present. If you’re 55, for example, and assume retirement is still 10 years away, you’re more likely to focus your financial efforts on saving up for a summer vacation, or putting money into a 529 plan for your child’s college. Retirement seems so far away.

Present bias is common.  To help overcome it, hack your brain.

Here are 6 tricks that will make retirement savings easier and enable you to have a better future:

1. Invoice Yourself for Retirement Savings

You have probably heard the phrase, “pay yourself first.”  But are you doing it?

Gone are the days of a reliable pension.  Your future financial security is in your own hands.

Saving for retirement should really be thought of as just another bill to pay. The trick is to convince yourself that saving for retirement is as important as paying your electricity or mortgage.  Put as much of your paycheck as you can (or at least something) into your company’s 401K plan or your own IRA.

If you have to, send yourself an invoice!   If you are already saving for retirement, give yourself a raise!

2. Take Advantage of Catch Up Savings

Catch up contributions are the IRS’s way of making it easier for savers age 50 and up to tuck away enough retirement savings.

You probably already know that there’s a limit to how much you’re allowed to save in tax-advantaged retirement account such as IRAs and 401(k)s. Well, once you reach age 50, you’re allowed to make additional “catch up” contributions over and above those annual contribution limits.

However, according to a Transamerica Center study, only 52% of workers know about catch up contributions.

Time to learn about catch up savings and start stashing away more money.

3. Make Retirement Savings Automatic

Saving for retirement takes willpower.  However, if you automate your savings, you’ll only need one burst of will power to start the automatic withdrawals, then you won’t have to think about it.

Commit – right now — to automating saving for retirement or for boosting the amount you are already saving. Don’t think about it, don’t consider how you might use that extra money for any non-retirement activities. Don’t let present bias have a chance to take root.

4. Imagine Yourself in 10, 20, 30 Years

Research suggests that our brains process our future selves as strangers. And, let’s face it – you are unlikely to save for the retirement expenses of a stranger.

To increase the likelihood that you save for your retirement, they suggest that you imagine yourself in the body of one of your own grandparents or great grandparents. Think about what this old version of yourself wants to do and where you are living. Consider this person paying the bills in retirement. By visualizing yourself in retirement – and writing down these thoughts to make them more real – you may be far more likely to adequately prepare for being this older person.

In fact, the study suggested that retirement savings increased when the saver could understand that they were saving for an actual person (themselves) with real needs in the future.

Here are 7 ways to imagine your future in order to achieve your personal and financial goals.

5. Find Out How Much Retirement Savings You Really Need

We all know that the better and more concrete a plan is, the better the outcomes will be.

It is highly recommended that you create a highly detailed retirement plan.  Imagine your retirement: When do you want to stop working? How will you generate retirement income? How much will you need throughout your retirement years?  Where will you live?

When you have thought about and documented these details, then you will have a really clear picture of how much you need and you are likely to be much more motivated to make sure you can save that much.

As easy way to create a thorough plan is to use a retirement calculator.  The NewRetirement retirement calculator is a highly detailed but easy to use tool that will help you imagine your future.  It will tell you exactly how much you will need for different phases of your retirement.  This tool was recently named a best retirement calculator by the American Association of Individual Investor’s (AAII).

6. Take a Real Look at Compounding Interest

We’re not only limited by our present bias. That same NBER study discovered that many of us also have what they term an “exponential-growth bias.” That is, we fail to appreciate how our retirement account balances can grow exponentially over time – our money benefits from compounding. In fact, the study discovered that less than 25% of us fully grasp the value of compounding. For many of us, we view putting away a dollar for retirement today as about the same as putting away a dollar for retirement a year from now, or five years from now. Avoid this trap!

Start putting money into your retirement account today. Each dollar adds up — and can grow exponentially over time. Not convinced? Try this compound interest calculator from the US Securities and Exchange Commission.

Just look how even a modest $100,000 grows a lot in a short five or ten year time period!   START Saving NOW!

The NBER study discovered that a whopping 70% of surveyed respondents under-estimated the increase in value from compounding based on the individual’s own circumstances, costing potentially tens of thousands of dollars in their retirement fund.

7. Get Retirement Savings Help You Can Trust

Trust in government and financial institutions is low.  Our current election shows how we are feeling about government and a 2012 Forgotton Investor study found that only 15 percent of clients trusted their financial advisors.  However, financial planning for retirement is really hard.  We need help.

Here are a few tips:

  • The Forgotten Investor study revealed that one of the key problem with financial advisors is that investors doubt that the fees they pay advisors are commensurate with their return on investment. Maybe you should try out a a low cost roboadvisor to help you.
  • Another issue revealed by the study is that we are suspicious about whether or not financial advisors are unbiased.  If you are concerned about bias, consider hiring a fee only advisor.  Or make sure that you understand exactly how and why your advisor is compensated.
  • Be assured that the financial services industry is trying to make improvements. The Obama administration recently enacted rules that protect families by imposing a “fiduciary standard” on retirement advisors. The fiduciary standard ensures  that advisors put the interest of average Americans ahead of their own profits.
  • Use tools that inform and help you make good decisions.  The NewRetirement retirement calculator was designed to enable you to learn about important financial planning issues.  As you make changes to your plan, you can immediately see the impact of these modifications.  You’ll feel more informed and confident after using this tool.
  • Keep reading stories like this one and take action.  Share your best retirement savings trick in the comments below!

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