The secret to saving for retirement!

 

If you joined this group to learn the secret to saving for retirement, I have two words for you: PAYROLL DEDUCTION.  Without utilizing this powerful saving technique, you’ll probably never be able to save enough for a comfortable retirement.  A payroll deduction does two things for you. First, it automatically invests money from your paycheck each month.  You probably wouldn’t have the discipline to do this yourself. And, if the money goes into your checking account, you’ll likely find something “better” to spend the money on, like a new car or kitchen remodel.  With a payroll deduction, you won’t even notice the money is missing and you’ll be able to avoid lifestyle creep too.  Second, by utilizing a payroll deduction, you are also delaying your tax bill—which allows you to save more for retirement!  For example, if you make $50k/yr and max your 401(k) each month, you’ll delay paying about $3,444 in taxes each year.  You could invest that savings into your Roth IRA each year and accumulate even more savings!

What does this look like in real life? I’ve already explained that my wife and I save over half of our income by maxing out all the tax advantaged space that we have available to us.  We haven’t always been able to afford this, but these are the general steps we followed:

1. Early in our careers, we contributed as much as we could afford to my 401(k) and her 403(b). This was above the amount that we contributed to my pension and her defined contribution plan.  In hindsight, we should have really increased our contributions as we received raises, but we were naive about saving at that point.
2. When our $600/month car payments were finished, we contributed another $600/month to our accounts.  In hindsight, we should have purchased used vehicles for half the price, and not taken on the car loans at all.
3. Once we were finished with daycare costs, we contributed another $15k/yr to our accounts.
4. Once we finished paying for half-day kindergarten, we contributed an extra $200/month to our retirement accounts.
5. Whenever monthly expenses ended (think cable TV and landline phone subscriptions) we contributed those savings to our tax advantaged accounts.
6. Over the past few years, we have contributed all our raises and extra income to our tax advantaged plans (Roth IRAs, 401(k), 457(b)s, 403(b), and HSA).  As you approach the end of the pay scale, this will be easier and easier to do.  At some point, you may be able to “max” out all your tax advantaged space!

Your savings rate is a very personal decision.  It really depends what your priorities are—there’s no correct rate.  We’ve decided to keep driving our ten-year-old vehicles.  Sure, it would be nice to have a shiny new vehicle, but that new car smell wears off fast and door dings seem to appear immediately.  Sometimes we think we would like to replace the Formica counter tops in our kitchen but at the end of the day, it still looks great and works just fine.  The opportunity costs of these seemingly modest purchases can really add up.  For example, the opportunity cost of buying a new $25k car, instead of a used $13k car, would amount to $258k after being invested for 30 years.  For me, the idea of my money, making enough money for us to live on, is a powerful concept, and that’s why we max out our tax advantaged space.  

What are you waiting for?  Go fill out a payroll deduction form and get your 401(k) and/or 457(b) started today!