Starting early and setting up automatic contributions are the keys to success.
Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…
The interesting study
These days everyone is trying to find the magic formula for when and how to save effectively to achieve retirement on time. The life insurance providers at New York Life polled over 900 pre-retirees between the ages of 50 and 62 with a household income of at least $80,000 to assess their confidence in their retirement strategy and glean tips for younger workers.
The big result
Two main findings came out of the study:
- Pre-retirees wish they’d started saving earlier
- Automatic contributions were the most effective engine for saving.
The fascinating details
The average age that pre-retirees really started to save for retirement was 34, but the majority wished they’d started 6 years earlier – i.e. they believe that starting a retirement saving strategy at 26 would have been the perfect time to set them up for success.
Pre-retirees also reported automatic contributions to things like 401(k) plans and IRA accounts, and automatic payments into things like a mortgage or life insurance were the most effective way to save. They also reported they were unable to save much outside of these automatic methods. This proved even truer for pre-retirees with children still living at home.
Men had more confidence in automatic savings than women, although the majority of both genders believe putting savings on auto-pilot is really the best option.
Respondents had overwhelming confidence in “automatic saving vehicles”:
- 93% were confident in direct deposit 401(k) or 403(b) plans
- 81% had confidence in college savings plans
- 79% reported confidence in their mortgage
- 78% are confident in permanent life insurance
What you can do
For those within the pre-retiree age group, the lesson to take away would be to set up more automatic saving vehicles. If you already have a mortgage and a 401(k) through your employer, consider setting up automatic contributions to a private retirement account like an IRA. You may also want to look into options for permanent life insurance.
For those who aren’t yet in the official pre-retiree age set, these findings confirm that you should start your retirement plan now if you haven’t already. Again, the more automatic contributions you can set up, the more likely you are to have the money necessary to retire the way you want. If you’re already contributing to a 401(k), then you may want to open a Roth IRA. Even if you have limited cash, if you can adjust your budget to set up a small automatic contribution, your monthly expenditures will generally equalize over time so the withdrawal isn’t as much of a burden as it initially might seem.
This is also a good lesson to incorporate into your daily money management strategy – the more payments you can put on auto-pilot, the less likely you are to find yourself facing financial distress because of things like overspending. Bill payments and even credit card payments can be set up to deduct directly out of your bank account. And these fixed monthly deductions tend to be easier to plan around because you know exactly how much money is going where out of each paycheck you earn.
While credit card payments are revolving – i.e. what you owe is based on how much you’ve borrowed – you can set up a fixed payment system fairly easily:
- First look at your current minimum required payment to ensure you set up a payment system that will cover at least that amount – so if your minimum payment is currently $120, then your fixed automatic payments need to be set at $120 or more.
- Review your budget to see if you can comfortably set the automatic payment higher – the higher the payment, the faster you pay off the debt to minimize interest charges.
- Once you determine what you can afford, set up an automatic transfer from your bank account OR an automatic payment through the credit card account.
- Keep an eye on your monthly statements – eventually you’ll zero out your balance, in which case you can eliminate that bill completely.
- Once eliminated, if you make new charges in a given month, pay them off in-full. This will maximize any credit card rewards while eliminating interest charges entirely if you pay off the accrued debt within the grace period listed on your bill.