Saving for retirement requires money — and you also might need to trick yourself into it.
Americans face so many financial responsibilities — housing, family, transportation, student debt and health care — but they are also on the hook for funding their own retirement, especially as many companies in the private workforce have moved away from providing pensions. Not everyone in their 20s and 30s, or even 40s, are thinking about retirement, or strategizing how best to amass enough money for when they get there.
It’s overwhelming. That’s where mental tricks can help, experts said. “It’s about spending your attention carefully,” said Daniel Egan, managing director of behavioral finance and investing at Betterment, an online investing and financial advisory platform.
Savers should create an environment that encourages proper preparation, one where they’re not comparing themselves to others who live more extravagant lives, and where they can spend time with friends in a frugal manner if necessary, Egan said. They should also consider the classic suggestions, such as opting into a 401(k) or workplace retirement plan when available, and gradually increasing contributions once a year or after receiving a raise.
Workers need all the help they can get. Many Americans are undersaved for retirement, by hundreds of thousands of dollars. Most companies, especially small businesses, do not provide employees with a retirement account, which has prompted states to step in and create their own programs. All workers are at risk of retiring without enough in assets, even high earners.
Behavioral finance experts shared a few mental tricks people can use to save more, and better, for retirement:
Understand where you ‘anchor’ your thoughts
Savers may have an “anchor bias,” which is when they rely too heavily on one piece of advice, said Helen Calvin, chief revenue officer at Jellyvision, a software company focused on health and wealth.
Take auto-enrollment for example. Companies are helping their employees when they automatically enroll them in a retirement plan, because it takes away the initiation and much of the back-and-forth paperwork of setting up an account. But auto-enrollment itself isn’t enough — companies set low contribution rates, somewhere between 1% and 5%, which is far below the 15% to 20% financial advisers say people should save.
“It is a push and pull,” Calvin said “There are positive aspects and pitfalls people can suffer with.” The standard rule of thumb is to contribute as much as the employer match, and then some if possible. They can also balance investing in a 401(k) with other savings vehicles, such as a health savings account or individual retirement account.
Know the value of a dollar now versus later
Some people would rather a smaller amount of money sooner rather than a larger benefit later in life. Winning the jackpot lottery is a prime example, as winners must decide between the upfront cash prize or annuitizing the winnings over a few decades. That won’t work when it comes to investing for retirement.
Workers may not be able to touch their savings, especially if they put them in accounts like a 401(k) with specific rules around withdrawing, but that money will be worth much more in retirement, after compound interest and investment returns. “They undervalue future dollars,” Calvin said.
Envisioning yourself in the future — having accomplished a successful career and achieving goals you saved for, perhaps with some gray hair — could make a huge difference in how you perceive the value of today’s dollar. Many young adults couldn’t picture themselves older, and likened saving for their future selves to giving money to strangers, a 2016 Prudential study found.
Other ways to get a better sense of yourself as an older person include spending time with elders, such as family and friends or by volunteering at a nursing home, and asking them about their lives, hopes, wishes and regrets, said Daniel Crosby, founder of Nocturne Capital and author of “The Behavioral Investor.”
Time your retirement, not your investments
One of financial advisers’ most popular pieces of advice is this: don’t try to time the stock market. Picking investments based on how well they’re expected to do, or trying to sell before prices drop, can cause a disaster.
Workers should consider when they’d like to retire, though, which will help them understand how much money they need to save, how much time they have left to save, and how they should invest those savings. Target-date funds are investments tied to a specific year in which investors may retire. For example, someone in his early 30s may invest in a 2050 target-date fund, assuming he will retire in his mid to late 60s. TDFs are easy to choose from the list of investment choices when setting up a 401(k) and they automatically rebalance every few years, so that as the worker ages, the investments become more conservative.
They’re not the right fit for everyone, as some investors would rather stay invested aggressively longer into their careers, but they’re a start for most.
Drink your lattes if you’d like
Millennials are shamed for buying expensive lattes instead of saving for retirement, but lattes don’t cost nearly as much as other expenses that can be reduced, Egan said. Much of a person’s income is spent on housing and transportation, and cutting costs in those areas will save hundreds of dollars more than forgoing the daily espresso-based beverage. Instead of thinking a latte will keep you from living comfortably in retirement, shift gears to where you can make your money work better for you.
Renters can ask their landlord to lower their rent, or homeowners may decide to downsize their home or move to a less expensive neighborhood. People can refrain from purchasing so many subscriptions to entertainment channels and meal prep kits.
The key is to spend on what you value, said Erin Lowry, author of “Broke Millennial Takes on Investing.” She has a line item in her budget for lattes, because she enjoys them and going out for one takes her out of her home (from where she works). “We won’t be perfect at it all of the time, but if you prioritize what you value and spend in alignment with that, it gives you more control,” she told MarketWatch.
Stick to your own trajectories, not others’
Financial firms and experts may give guidelines as to how much a person should save at different points in their lives, but that doesn’t mean someone who has less than the suggested amount is doomed, or someone who has more is safe from financial struggles in retirement. General rules of thumb may encourage some people to save more, but they also run the risk of discouraging others from saving at all.
Typically, guidelines include having one to two times your salary in your 30s and then suggest looking for additional sources of income, like a raise or new job, in the late 40s. Many experts also suggest holding off on claiming Social Security benefits for as long as possible, because they’ll see an additional 8% in benefit checks every year they do so (other experts argue not to wait so long, as life expectancy is not guaranteed and they could use the money).
“Any generic advice doesn’t take into account all the differences between us and all of the different levers we have to manage,” Egan said. “What are the biggest variables that are changeable?”
By: Alessandra Malito is a personal finance reporter based in New York. You can follow her on Twitter @malito_ali.