The tendency when you feel like you are behind is to over-correct.
Like when you are driving and hit a slick spot on the road in winter. Our initial reflex may be to crank the wheel the opposite way.
Cranking your wheel can actually cause you to lose traction, making the situation worse. A safer way to react is to hold steady to the wheel and turn into the slide. This way, when you hit a spot that has a patch of snow, earth, or pavement, the tread on your tires will connect and you’ll regain control of the vehicle.
When you are behind in retirement savings, you don’t want to overcorrect. For example, if you double your 401(k) contribution and set up an automatic withdrawal from your checking account for retirement that is so high your take-home pay is suddenly gone, you won’t be able to keep it up.
I’ve seen this happen again and again. One of my former clients—I’ll call her Linda—was so upset that she was behind on retirement savings that she maxed out her 401(k), set up an employee stock purchase plan at her work, and started an automatic investment to a mutual fund all at once. She was going to try living on 50% of her salary (with no ramp-up period)!
Her thinking was right. She figured that if she couldn’t live on half her salary now, she wouldn’t be able to once she retired. However, her implementation was too drastic. Going from 6% savings to 50% savings in one month was unsustainable.
What did work was gradually building up her retirement savings rate. Sure, she’d be able to save more (at least on paper) if she started with a higher contribution right off the bat, but in real life, it doesn’t work that way.
The math works better when you start saving earlier, but we are human beings, not calculators! Also, saving more is just one piece of the puzzle.
Here’s what we did instead:
- Increased her 401(k) contribution by the amount of her raise (so she wouldn’t even notice it)
- Started her Employee Stock Purchase Plan at the minimum
- Added an automatic transfer from her checking to her brokerage account at an amount she knew wasn’t difficult for her to do, setting the date for the day after her paycheck hits each month
- Reduced expenses (food, entertainment, and personal care), as well as dropping services she didn’t need
- Earned more at her job by focusing on meeting her company’s goals to secure a bonus and a raise
Rather than making drastic moves, she made several small tweaks to her retirement saving strategy.
By starting small and getting a system in place, she was able to stick with it. When she tried to make a series of bold money moves at once, it was too much change and she failed.
Here are six things you can do if you are behind on retirement savings:
1. Increase your retirement contributions
Increase your 401(k) contribution if you are not at the maximum, but do it gradually—like by 1% per year or the amount of your annual raise. (Then set a recurring reminder to increase it.) If you set it too high at first, when you get your reduced paycheck, you can call HR and change it back.
The good news is, according to the Plan Sponsor Council of America, almost 85% of employees are investing in their 401(k)s (up from about 77% in 2010). The average deferral rate is about 7.1% of salary (which is up from the previous record of 6.2% in 2010).
The bad news is that amount may not be enough to fund a retirement income stream for the rest of your life, especially if you are starting late. Gradually increase your contributions when you can, with a target of the maximum contribution of $19,000 for 2019.
It’s good to note that if your employer offers a 401(k) and you are not utilizing it, you are leaving money on the table—especially if your employer matches your contributions.
2. Take advantage of other employer savings plans
One of the best features of the 401(k) is the fact that you contribute via payroll deduction. Since the funds never hit your checking account, you never see them. They are automatically invested.
If your company has an Employee Stock Purchase Plan, look into that. Some companies offer a discount on the stock investment.
Another way to hack your paycheck is to set up an automatic payment to your savings account. If your employer doesn’t have this feature, do it yourself and set up an auto-transfer from your checking to a savings account the day after your paycheck hits.
The key is to set up systems to invest that you don’t have to think about on a regular basis.
3. Earn more money
Work toward getting a promotion, raise, or bonus at work. Take on more responsibility in a major objective with your company. Volunteer for a challenging task that would increase revenue for your region. What can you do to make an impact that could earn you a raise?
A salary increase of even $10,000 per year is significant. Since raises are often based on your current salary, a 3% raise on $100,000 is $3,000 per year, but a raise on $110,000 is $3,300 a year. The benefits of a raise add up over time.
Consider your company profit sharing. If the profit share is 3% on $100,000, if you got a $10,000 raise, you’d earn an extra $300 from the profit share on top of your increased salary.
You’d earn $600 in additional compensation from that raise every year!
4. Get a side gig and put 75% of it toward your retirement savings
Start a side gig to bring in extra money. Rent out your basement, teach a class, start a consulting business, or sell things on eBay. A colleague of mine rents out his converted basement using Airbnb and brings in an extra $6,000 a year as a result.
It’s human nature to want to spend some of the extra funds on things you want right now, but carve out the majority of the funds to invest for the future in a Roth IRA (if you qualify) or another investment account.
5. Cut your major expenses
Review your budget and major expenses to find creative ways to cut your living costs.
For example, my husband and I reduced our housing costs by $500 per month by refinancing our mortgage last year. I take public transportation twice a week for my commute (which saves me $200 per month on fuel, parking, and wear and tear on my vehicle).
The commuter bus isn’t as convenient. I have to get up earlier since the bus takes longer and I am stuck with their schedule. The savings, though, are worth it.
As a side benefit, the walk to the bus can be brisk and helps you get your 10,000 steps in!
6. Get healthy and fit
We normally wouldn’t think of getting fit as a retirement plan. A study by Fidelity Investments estimates that the average couple who retired in 2018 will spend $280,000 on medical expenses in retirement. Reduce those expenses by getting fit, healthy, and strong now.
Use your employee benefits. Take advantage of any company-sponsored wellness plans and/or your medical insurance benefits. Get regular physicals. Use all of the preventative care options available with your medical insurance—they are often at no out-of-pocket cost.
Getting fit can help prevent disease, too. Exercise, according to Harvard Health, has been shown to reduce the chances of heart disease, stroke, and diabetes. Exercise that gets your heart pumping can also improve your cognitive function and reduce the “brain fog” that many people experience as they get older.
As a side benefit, you may feel better, look better, and have more energy to transition to retirement! You can rekindle some of your old hobbies or start new ones.
7. Protect your income and assets
Even with insurance, an unexpected expense can hurt your budget. A friend of mine, Lisa, was in a scary car accident that totaled her vehicle (but she wasn’t hurt, luckily). Her insurance paid to replace the car, so she only had to cover the $500 deductible.
Review your homeowners, auto, life, and disability insurance coverage, deductibles, and premiums to make sure you are covered in the event of accident or illness.
When you make incremental changes to savings and investing, it’s easier to stick with them. And sticking with it is very important if you want to be financially independent so you can retire.
There may come a day when you just know it’s time for you to retire. It will be nice if you are healthy and wealthy enough to step away from working and into your golden years.
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