Save 1% More for Retirement in 2013

November 19, 2012

A wise Italian once said, “Perfect is the enemy of good,” meaning when we insist on perfection the results are often no improvement at all. When the goal is so high up on the pedestal and seems so unachievable, we simply give up.  I’ve certainly experienced this phenomenon personally and seen it manifest with the many individuals and families I have worked with over the years as a financial planner.  Building an emergency fund with six months of expenses, saving 10- 12 % of income for retirement, funding children’s college educations, and making extra payments on a mortgage are just a few of the financial goals people have.  Each of these goals needs to be funded while at the same time, other expenses are increasing such as health insurance and household bills. 

The solution isn’t necessarily to drastically increase our savings in every area but to make gradual progress in the most important ones.  Simply start by saving 1% more.  In the past couple of weeks, I’ve written about how to come out wealthier even if you started from behind (with high student loans) and gave an example of a friend of mine who retired at 55 even in today’s tough economy.  If your income is $50,000 and you saved an additional 1% in your retirement plan earning 6%, you’d have about $7,000 more in ten years and almost $20,000 more in twenty years.  Imagine the difference if you saved 1% more every year. Here are some ways to increase your savings.

  1. Save up to your employer match. This might sound like a broken record since this is said quite a bit but it’s always worth repeating because it’s the best way to maximize your savings.  If you invest 1% more and your employer bumps your savings up another half a percent, you can’t beat it.  Your employer match is “free money” and obviously a high return on investment. If you are married, make sure to maximize the savings for the spouse that has the best match.  If one of you has a dollar-for-dollar match up to 6% of salary, max that out first.
  2. Contribute raises to your retirement plan.  Just make it a plan to increase your retirement savings when you get a raise – save some and spend some!  Your savings will be seamless – you won’t feel it at all in your paycheck now but you’ll definitely feel it later in retirement when you have more money to spend.
  3. Set that increase on auto-pilot if your company has an auto-escalation feature. Just set it up to automatically increase by 1% each year.  This way you are only making one decision instead of having to make one every year.  Chances are better you’ll stick to it when it’s automatic.
  4. Invest substantially more. Another option is to go more extreme. Review your retirement contribution percentage at work and bump it up if you aren’t at the maximum (which is $17,500 a year in 2013 with an additional $5,500 catch up if you are over 50). Incremental changes don’t work for you or you want a greater challenge?  Go drastic.
  5. Don’t overlook the Saver’s Tax Credit. The IRS paying you to invest for retirement?  They actually do.  You can get a tax credit from 0% up to 50% of what you invest in an IRA or in your retirement plan at work subject to income limits. Click here to learn more.
  6. Fund your spouse’s IRA. If your spouse is not working, they are still eligible for an IRA if you do. You can fund your spouse’s IRA up to $5,000 in 2012 or $5,500 in 2013 with a $1,000 catch-up addition if your spouse is over 50.
  7. Convert your first home into a rental.  Then save for a down payment on the next house and keep the rental and do it again. You can build wealth by investing in real estate one house at a time.  Your starter home could be converted to a rental, which could provide retirement income once you pay off the mortgage (or your tenants pay it off for you).
  8. Turn your hobby into a business and invest your earnings. In his book, “The Other 8 Hours”, Robert Pagliarini encourages people to make the most of the hours that you aren’t working in your regular job and you aren’t sleeping.  Use that time creatively by inventing something, writing a book or turning your favorite hobby into a money-making business for you.

This month, financial bloggers across the country are encouraging their readers to save an additional 1% to boost the national savings rate.  While you are thinking about it, my suggestion is to do something about it.  Log into your 401(k) and bump up your contributions a bit or set up an auto-draft from your checking to your savings account to increase your emergency fund.  While some people may be analyzing their “perfect” retirement plan, you would have already taken action toward yours.  It won’t be perfect but it’ll be good.