It's Easier to Save for Retirement Than You Think
by Bonnie Vengrow
Melissa Phipps knows a thing or two about retirement. She wrote the book on it — literally. But the Los Angeles-based financial writer and author of The Retirement Rescue Plan admits that even her own retirement planning hasn't been without its share of missteps. Early in her career, a co-worker advised her not to contribute to her 401(k) if she had debt. She listened to him and didn't start saving for retirement until she was in her late 20s, a move she continues to regret today.
Luckily for Phipps, her work taught her some basics about saving for retirement. “Once I started to learn more about money and the benefits of tax-deferred investing, I decided to put away 6% of my income. It didn't feel like I lost 6% of my paycheck, and suddenly I was building savings,” she explains. “I think of retirement savings like any other tax that has to be paid, and I have contributions taken out of every paycheck.”
Considering the glut of information available about retirement planning, is it any wonder so many of us are confused about the best approach? In fact, according to a 2015 study from the Employee Benefit Research Institute, workers and retirees spent more time planning holiday celebrations than they did considering their retirement savings options. Perhaps not surprisingly, a 2015 study from the National Institute on Retirement Security discovered that many Americans are woefully underprepared for life without a steady paycheck: The average working household has only $2,500 put away for retirement, while the average near-retirement household has saved $14,500.
“The reason [planning for retirement] feels so overwhelming is, we don't know how the 80/20 rule applies to investing,” says Manisha Thakor, Director of Wealth Strategies for Women at Buckingham & the BAM Alliance and author of Get Financially Naked. “When it comes to driving your financial future, 80% of the outcome will be driven by less than 20% of the possible actions you can take. But people are not aware of what those actions are.”
The good news? Creating your retirement savings plan doesn't have to be such a complex process, especially when the following common misconceptions are dispelled.
Misconception #1: It's okay if you don't pay attention, since it will all work out in the end.
Figuring out how much to save, where to invest your money, and when to rebalance your portfolio can feel like a herculean task. Overwhelmed, many of us think that somehow, some way, it will all work out. In reality, maintaining your standard of living after you've stopped earning money requires some thought and planning. “We are complicating retirement saving and planning by thinking of it as an option. It really isn't,” Phipps points out. “You should be saving at least 5% of your salary, and if your employer matches your contribution, you should take full advantage of that benefit. Anything less is equivalent to saying no to part of your salary.”
Misconception #2: There's plenty of time to plan for retirement.
Work-free days may seem like a dot on the horizon, but in reality, the longer you wait to plan for retirement, the more difficult it can be. “The steps are simple, but the earlier on in life you can address them, the less work you'll have to do,” Thakor says. “If you're in your 40s, you can sit down and think about this. The things you'll need to alter in your life at that point will be easier than if you wait until your 60s. The misconception is there's plenty of time to think about this down the road. The longer you wait, the harder the steps are.”
I think of retirement savings like any other tax that has to be paid.
Misconception #3: Saving for retirement is tedious.
Retirement may seem pretty great — sleep in every day! no commute to work! — but if you're just squirreling money into an account each month, saving up for those R&R-filled days can feel anything but exciting. It can help to reframe how you think about retirement savings, Thakor says. Forget the nebulous, faraway account, and instead imagine an experience or feeling you'd like to have during your retirement and build toward that, Thakor says. “The people who can most joyfully save for the future are the ones who intuitively have this sense that it's not about current denial, it's about building flexibility for future experiences.”
Misconception #4: I need a deep knowledge of investing.
There are a dizzying number of investing options available, many of which are described in complex terms. Compounding that is a dearth of education to help people figure out which is best for them, Thakor says. She hypothesizes that if there were fewer products explained more clearly, more people might understand the basics of investing. For Thakor, “that means having an appropriate mix of stocks and bonds in your portfolios, ideally owned in a diversified way, with the lowest costs associated with it,” she says.
Similarly, there may not always be a need for you to obsessively track the stock ticker or read up on industry forecasts to maximize your retirement savings. As Phipps points out, an annual analysis of investor behavior “consistently finds that individual investors underperform the market because we react to market events and move money at the wrong times.” If you're unsure where to begin, consider enlisting the help of a financial advisor, who can work with you to create a portfolio — and a strategy for rebalancing it — that makes sense for your goals.
Misconception #5: There's a perfect, right answer to saving for retirement.
If you were planning for a 30-year retirement a couple of decades ago, you may have been advised to follow the so-called “4% rule,” which involved saving enough to be able to draw 4% from your retirement funds each year. But thanks to longer life spans and lower interest rates, that rule of thumb doesn't always apply. In fact, there's no one-size-fits-all solution to retirement saving because there are inherently several key variables we can't know, Thakor says. These include how long you'll live, what kinds of returns your investments will generate, what inflation will be, and what unexpected expenses will materialize.
If the question marks overwhelm you, you might want to seek help from a financial advisor, who can work with you to create a personalized plan. But rest assured, you can always make changes to your plan down the line if needed. “You don't have to get it right,” Thakor says. “If you commit to a plan, and understand that each year, you'll review this and adjust accordingly, you'll eventually steer the ship in the right direction.”