How are you doing, financially? Are you satisfied with the state of your finances?
Think about your answer to that question and what drove it. If you are like most people, you were probably thinking about your day-to-day financial health — your ability to pay your bills and buy the occasional movie ticket or latte.
A recent study from the Center for Retirement Research at Boston College found that people’s subjective assessments of their own finances are based on those day-to-day measures. That’s true even for people who are financially literate. Having a little financial education makes you slightly more likely to worry about not having a retirement plan at all, but it makes you no more likely to worry about having an inactive retirement plan that you’re not currently contributing to. As long as you can pay your rent or mortgage, not putting money away for the future won’t trouble you.
In other words, you can’t count on yourself to worry enough about retirement to actually prepare for it. It’s just too far away to focus on. It is better to automate your savings, so you only have to think about it once. Here are three simple steps you can take to make investing automatic:
1. Max out your contribution to your 401(k).
Most savers don’t manage the maximum allowable 401(k) contribution of $18,000. In fact, average deferral rates have actually fallen in the past few years, partly because most plans that automatically enroll workers start them off saving just 3 percent of their paychecks. Check your own deferral rate, and max out if you possibly can.
2. Add an IRA.
If you are already maxing out your 401(k) and you have some more wiggle room in your budget, consider setting up an IRA or Roth IRA. You can save another $5,500 a year this way. Figure out how much you can contribute to this account, and look into setting up an automatic investment plan. Most funds will waive minimum initial contribution requirements if you use this option, so you don’t need a lot of cash on hand to start an account, and you won’t have to keep remembering to contribute in the future.
3. Automate your contributions to your regular brokerage account.
Don’t wait until the end of the quarter, or the end of the year, to decide how much you can afford to put away. Assuming you have already funded an emergency account and have all your monthly bills covered, why let money languish in an ordinary savings account, earning today’s meager interest rates, when you could invest it and put it to work for you? By setting up an automated contribution to your brokerage account every month, you won’t be tempted to spend the money, and you will take emotion out of your decision to invest. The money will automatically flow into whatever asset allocation you have decided is best for your long-term goals.
As long as you make sure to choose low-fee options in each of these accounts, set it and forget it is the best way to save. You can’t count on worry to motivate you, so you should instead take responsibility for your retirement saving out of your own fallible hands.
Sarah Morgan is a freelance writer and editor based in Brooklyn. Her work has appeared on SmartMoney.com and in the Wall Street Journal.