Why aren’t people saving more for retirement?
There are many reasons.
“People like to live in the moment, and retirement is too far away for many to think about and plan for,” said Brian Snow, who invests and saves with his investment club BetterInvesting.
Many consumers must divert the money elsewhere, thanks to inflation, which “has outpaced the growth in average hourly earnings and squeezed household budgets, and a limited capacity to increase retirement savings is a byproduct of that,” said Greg McBride, Bankrate chief financial analyst.
Others lack the financial know-how or discipline.
Salary isn’t “the only factor in why folks don’t max out the 401(k),” said saver Byron Williams. “It’s not a matter of how much one makes but rather what one does with what they make.”
How do you start saving?
Start with a budget, advises Akari Muhisani, who credits a 2008 “Jesus moment” with jump-starting his savings plan.
“I had $25,000 in credit card debt and didn’t want to be broke and live paycheck to paycheck like my mother,” Muhisani said.
He started applying extra money to his debt, smallest balance first. In two years, Muhisani paid off his credit card balances.
After that, he began saving, setting aside 10% of his income for his future. He now has emergency savings of about three to six months of living expenses and retirement savings. If he has money left at the end of the month, he adds more to savings or to max out his 401(k).
Williams contributes a percentage of his annual raises to his 401(k).
“Some years, I took the entire raise and put it in the 401(k), forcing me to live off the same salary I lived off the year before,” he said. “It is not rocket science, but rather based on knowing the power of maxing out a 401(k) and having the discipline to do it.”
Some advisers suggest investing your tax refund, too.
How do you grow your savings?
Invest it – early.
“Too many people delay and do not invest early,” Snow said.
Early is key for compounding, which means earnings on your savings are reinvested to generate their own earnings, allowing for exponential growth.
If you can’t save the recommended 12% to 15% of your annual income, then “save at the level you can,” said Matt Fleming, wealth adviser at Vanguard Personal Advisor Services. “Later, step up contributions by 1%-3% per year to meet your target.”
And it’s better to automate savings so they’re deducted monthly from your paycheck or bank account into your 401(k) plan or other retirement fund.
“You’ll put your money to work as you earn it, buying you more time for compound growth.
But how do you invest it?
Investing can be daunting with so many numbers, options and tax consequences. Some people turn to financial advisers. Muhisani joined an investment club.
“Investment clubs are great for meeting everyday people, retirees who do this – man, they’re so smart, and they never studied this before,” he said, noting the Beardstown Ladies club inspired him. “They’re regular ladies that invest in the market and are always on the top of CNBC’s investment challenge.”
There, he says, he learned about company financial statements, valuations, funds, fees, retirement funds and more and has parlayed his savings into about $1 million in total retirement money.
Education would be the first step, Williams said. “Ensuring that folks really understand the 401(k), its benefits and how to leverage it is key.”