There's one weakness in retirement plans that stands head and shoulders above all the others: People face a variety of challenges in financial planning, and too many households fall short when trying to build enough savings to meet their retirement goals. Fortunately, there are several proven methods you can use to take greater advantage of laws designed to help you boost your retirement savings. Here's a simple four-step plan you can follow to get ready to retire.
We need to save more
We're bombarded with all sorts of retirement savings hacks and recommendations from the media, financial professionals, and people in our personal lives. A lot of these strategies are perfectly valid, but there's one issue that objectively kills retirement plans more than any other.
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Most people simply don't save enough. In recent decades, Americans' personal savings rate has averaged around 5%, and it rarely rises above 10%. For comparison, most financial planners suggest that households save at least 15% of their income -- some professionals even recommend that people retain 20% of earnings.
Regardless of the precise amount, it can be proven that the average American household is saving less than the consensus target among knowledgeable advisors. The gulf is wide, and the problem can't be solved without a significant change in behavior.
The rapid disappearance of defined benefit pensions triggered this issue. We never implemented the improvements to financial education and discipline required to effectively replace pensions with DIY retirement planning.
How to close the gap
Step 1: Set measurable goals
Quantifiable goals are often the most effective and achievable ones. It's really hard to diagnose and fix issues if they aren't measured. You probably won't achieve a 15% savings rate if you don't know how much you need to save -- or how much you're saving. That's exactly why most good financial plans start with a defined and monitored monthly savings goal.
Create a budget that's designed to retain 15% to 20% of your household income, then track your saving and spending data every month and quarter. There are a number of great tools offered by banks and other third parties that will help with budget creation and tracking. They'll analyze cash flow and create reports, so it should quickly reveal which parts of the plan are working well or falling short. Every month or quarter, assess your progress and course correct where necessary.
Step 2: Identify and implement some quick fixes
Some adjustments are fairly obvious and easy to fix, and they're a great place to start for day 1 improvements. The budget tracking exercise might reveal frivolous spending that you're happy to slash by changing consumption habits.
Managing your paychecks differently can also yield simple and immediate results. If your employer offers an employee contribution match in their 401k plan, take full advantage of that benefit. Other people have an opportunity to split their paycheck direct deposits into multiple accounts. If that's offered by your human resources department, it can be helpful to automatically send a defined portion to a dedicated savings account.
Checking accounts are designed to be spent, and it gets harder to save any dollars that go in there. Circumventing that issue can enforce discipline without any extra thought required. You'll have to check with a benefits manager or online benefits platform to implement these sorts of quick fixes.
Step 3: Assess and fix any bigger cash flow issues
Most people with credit card balances and other unhealthy consumer debt should prioritize paying down those lines of credit before focusing on investments. The interest rates on these products are so high that nobody should expect to replicate those long-term returns with any investment strategy. Carrying a balance inflicts more damage on the overall financial plan than asset growth can possibly overcome. Most people should pay off credit cards before funding retirement accounts beyond an employer match.
Step 4: Use different savings vehicles as they're advantageous
Once you've maximized the cash flowing to your savings, it's important to utilize whichever accounts and vehicles that are most advantageous. Many people are familiar with their 401k or other employer-sponsored plans, but a number of other accounts have features that can be advantageous in retirement planning. These include:
- Roth IRAs and Roth 401k accounts offer unique tax benefits on high growth assets, assuming that you fall within the eligibility requirements.
- Health savings accounts and 529 plans aren't designed specifically for retirement savings, and HSAs aren't available for everyone. But they can deliver value to an overall plan that results in superior outcomes in retirement.
- Brokerage accounts don't offer any meaningful tax benefits, but they provide flexibility and accessibility that aren't available in some other accounts.
Giving some consideration to the full array of products available allows you to make an informed decision about maximizing your retirement savings and growth.
