Ah, New Year's Resolutions. Has there ever been, throughout all of human history, a more effective tool than this at making us feel bad about ourselves? Each year we stride confidently into January armed with a long list of goals and a gym membership, only to be discouraged with both by the time February rolls around.
How can we break this predictable cycle? Sorry, I can't help much with your fitness, but I do know a thing or two about finances. Specifically, I'd like to help those whose goal is to get serious about their retirement planning.
Be honest. That's you, right? We all know we should be saving more for retirement, but every year life seems to get in the way. That's probably why nearly 60 percent of the population reports having less than $25,000 in retirement assets. How can you do better?
Before I answer how you can do better at saving for retirement, let me ask you: If 1,000 people set a particular retirement planning goal and 950 of those people failed to meet it, do you think there would be 950 different reasons that they failed? Probably not. There would probably be four or five reasons that tripped people up again and again. So it makes sense then to identify those “failure points” and come up with a plan to overcome them.
Below are five retirement planning failure points that most people struggle with. Overcome them and your retirement resolutions will likely stay on track.
This may seem basic, but most people fail at retirement planning before they even start because they never make a conscious decision to begin. They think about it, talk about it and definitely plan on doing it “someday,” but they don't actually decide that today is the day. Most dreams die for lack of a decision.
Make no mistake, deciding is usually the hardest part. It's easy to hope and dream because those are vague and passive. They don't take any work. But deciding! That is specific and active. It takes doing. Yes, big goals can be challenging, scary, complicated and overwhelming, but they get less scary when you run at them instead of from them. Decide that today is the day that you're going to get serious about your retirement planning. Once you do that, the rest is just logistics.
There's no easy way around it. Saving for retirement takes discipline and that often trips people up. To help, there are two key things that you can do to drastically minimize the amount of discipline you need. First, rather than relying on willpower, make your saving automatic — money automatically deducted from your paycheck or checking account each month and deposited into your 401(k) or IRA. Once you do this, you no longer need to make a conscious decision to save every time payday rolls around.
The second way to minimize the discipline required is to figure out a way to replace discipline with motivation. Discipline is hard because it's doing something you don't necessarily want to do, but know you should. Motivation is easier because it compels you to do something that you already want to do. One is forced and the other is natural. The more motivation you have, the less discipline you need. So how can you make the switch? One way is to figure out your “Why?” Why are you saving and sacrificing? Why do you want to retire? If you don't have a good answer to that question, then you'll need a lot of discipline to choose saving over spending. But if you have specific plans for retirement that excite you, saving will be a cinch because that money represents the means to an end that you're highly motivated to reach. In short, the stronger your “Why,” the more successful you will be with “How.”
Our lifestyle tends to expand to fit our income. Because of that, if you haven't been serious about saving in the past, you probably don't have a great deal of disposable income that you can earmark for retirement. The best way to overcome this problem is to start incredibly small. Can you tweak your current budget to free up $25 per month? That's less than $1 a day. Maybe you can afford more. The initial amount isn't really important. The key is to get going, no matter how slowly. Then, once you get used to not having that extra income (which happens pretty quickly), call the bank or your employer and have them increase the amount. Do that and you'll quickly form a strong habit of saving and, because you started small, you'll be much more likely to stick with it.
Unfortunately, debt has become all too common for most people. This is a problem because debt acts as a drain on future cash flows. To see what I mean, look at your current budget. How much do you spend on debt payments (credit cards, car payments, etc.)? The more debt you have, the more your future income is already spoken for and the less ability you have to save. That is why deciding to save often coincides with deciding to get out of debt.
At the risk of stating the obvious, it's easier to get somewhere if you know where you're going. Much like traveling without knowing your destination, saving for retirement without knowing your end goal will likely leave you far from where you need to be. A trusted adviser can help you put together a detailed plan for your specific situation, but for now let me share a quick rule of thumb that will give you a target to shoot for.
Recent research by Aon Hewitt shows that the average person needs Social Security plus a nest egg worth about 11 times their annual income to maintain their standard of living in retirement. With that in mind, divide your assets by your income. What's the number? If your goal is to have an asset/income ratio somewhere around 11, how are you doing? Now that you have a general idea of how much you need, you can track your progress and celebrate milestones along the way. Knowing your destination gives your savings context and increases the likelihood that you will stick with your plan.
Ray Bradbury (the science fiction writer) once said: “I've learned that by doing things, things get done. We ensure the future by doing it.” With that thought fresh in your mind, look to the year ahead. What actions do you need to take to achieve the retirement outcomes that you want? If you can answer that question and then avoid the obstacles that derail so many, 2014 will be the year that you finally get yourself on track for a secure, rewarding retirement.
Note: If you'd like to give your finances a checkup as you enter the New Year, you can download a free Financial Checkup Checklist at intentionalretirement.com/checkup.
Joe Hearn is an Omaha financial planner. He can be reached at 402-331-8600 or by email at email@example.com.