Many advisers, including me, have become convinced that one of the best methods for retirement saving is to set aside a certain amount of money every week or month regularly, turning saving into a habit. Many retirement plans, such as a 401(k), are structured to encourage this behavior.
However, when you have to make lifestyle changes in order to save, it becomes somewhat like dieting. It’s hard to keep it up when you feel like you’re restricting yourself from doing something you like.
A recent CNN/Money Magazine article describes a different way of saving: burst saving. One of the benefits of this approach, according to research firm Hearts & Wallets LLC, is that people who practice it are far more likely to sock away enough money for a comfortable retirement than those who don’t.
The concept is quite simple. Whenever your income ramps up, such as from a pay raise or a bonus, put at least 50 percent of the increase into a retirement, bank or brokerage account targeted for retirement. Whenever your expenses drop – for example after your children graduate from college or after you pay off a car or mortgage – take at least half the amount you would have spent and put it into the same accounts as above.
This approach allows you to save more without feeling you’re forcing yourself to cut back or to give up something desirable. If you can do this for several years, rather than just once, so much the better.
Hearts & Wallets proposes that burst savers are more likely than other types of savers to hit their savings goal no matter at what age they start their savings regimen. That makes this approach particularly useful for those 40- and 50-year-olds who have not been giving much thought to saving for retirement until now.
There are additional approaches that can increase your savings without its becoming a burden on your lifestyle. One is to set a target for savings. Studies show that people who calculate how much money they need for retirement save much more than those who don’t.
A variation of the above strategy is to create an auto-escalation plan for your 401(k) or your budget. For example, raise your 401(k) contributions by 1 percent each year for five years, or increase the monthly savings in your budget by 1 percent each month. People who do that are much more likely to save enough for retirement than those who don’t.
Keep in mind that those credit cards in your wallet may be the single biggest drag on your ability to save. Taking on debt for homeownership is one thing, because most of us (with the possible exception of the latest Google and Facebook millionaires) do not have sufficient equity to be able to buy a home fully in cash. But incurring debt for most other purchases means you are living beyond your means, and that is practically as risky as borrowing money to invest.
We’re living longer than our predecessors, and government support for retirement is getting smaller. Anything you can do to save more now will be much appreciated by your future self.
Los Altos resident Artie Green is a Certified Financial Planner with Cognizant Wealth Advisors. For more information, call 209-4062.