Saving for retirement is hard — and it’s not entirely our fault.
The human mind struggles with the whole idea of saving, let alone saving for such a big and faraway goal as retirement.
Our brains are wired to value the present over the future, something researchers have dubbed “temporal discounting.” We’re also prone to inertia and are effort-averse. Even the rather negligible hassle of filling forms is enough for many of us to delay signing up for our company retirement plan, studies show. Ditto for setting aside time to set up our own automatic contributions to a personal retirement account.
If you can’t save for retirement, you may need to help your brain along. Here are two ways to do just that.
Saving and investing now vs. later = more free money
One way to get yourself pumped up about starting to save is to take a look at the numbers. When it comes to retirement, even a few years of indecision can make a big difference.
For example, let’s say you start saving $500 a month at age 30 and stick to that until you retire at 65. Assuming a modest but reasonable average investment return of four per cent per year, you’d end up with a nest egg of around $450,000.
But what if you didn’t get around to saving until five years later?
If you started setting aside $500 at age 35, by 65 you’d have around $343,000 — more than $100,000 less.
The earlier you start saving for retirement, the longer your investments have to grow. In our example, a five-year start works out to just $30,000 more in actual savings. The rest is just the power of compound interest, or your investments earning interest on interest.
Those investment gains are free money. Therefore, delaying retirement savings is, essentially, passing up on free money. That’s something our brain understands and can get behind.
The case for starting to save now is even stronger when you have a workplace retirement plan with top-ups from your employer. Unlike investment returns, those corporate matching contributions are guaranteed.
Give yourself intermediate, age-based retirement goals
When Bridget Casey started to think about saving for retirement right after school, she didn’t aim for an overall, end-game retirement goal.
“When you look for traditional retirement savings and investment advice, usually what people tell you to do is calculate how much you’ll need in retirement to give you a certain lifestyle,” said Casey, a millennial money expert and founder of Money After Graduation.
But that kind of math can feel daunting when you’re in your 20s or 30s, Casey reckons. Who knows what your life will be like 40 years down the line?
So Casey decided to focus on a much closer target. By age 30, she wrote on her blog in 2013, she aimed to have the equivalent of her annual salary saved up.
“Setting on a fixed number that just seems reasonable and striving to meet that can keep you on track,” she said.
Six and a half years later, she said, she has more than surpassed her goal.
Even if you were able to come up with a grand estimate of how much you’ll need for retirement decades down the line, breaking down that massive savings goal into smaller goals will help, research suggests.
It’s easy to lose steam when you’re pursuing big goals that are very far off into the future because, on a day-to-day basis, it can feel like you’re not making any progress.
By slicing up those goals into shorter-term targets — and rewarding yourself along the way as you reach them — you can make the task psychologically easier.
Tying your intermediate retirement goals to your age also means having a closer deadline in the back of your head, another thing that can help your brain get a move-on.
Don’t get discouraged
Whether you’re contemplating the power of compound interest or wondering how much you should save up by 30, it’s easy to feel demoralized instead of energized.
That’s a familiar problem for financial planner Shannon Lee Simmons.
The first thing to keep in mind, she said, is that it’s never too late to start saving for retirement.
“I have lots of clients who started saving for retirement in their 50s.”
And for many of today’s 20- and 30-somethings, getting an early start on saving for retirement is just “not realistic,” Lee Simmons said.
But as Lee Simmons sees it, “anything that improves your net worth is a form of long-term retirement saving.”
Someone attacking their credit card bills may have no spare capacity to put money into a retirement account but is unquestionably improving their financial situation.
And the kind of discipline it takes to make more than the minimum payment on your credit card will help you stick to your retirement savings goals once you’ve tackled your high-interest debt.
Casey has a similar warning about overambitious, age-based retirement goals. A quick online search can yield some intimidating results. Fidelity Investments, for example, suggests you should aim to have set aside the equivalent of 300 per cent of your annual paycheque by 40.
Those rules of thumb can be counterproductive, Casey said.
“You have to be generous and forgiving of yourself based on your circumstances.”
Many young doctors and lawyers, for example, have huge student debt loads and very little saved up by age 30, she noted. If you started a family early or switched careers, you might be in the same boat, she said.
The key, she said, is to “modify the targets so they fit your life but make sure you’re still working towards them.”