Not saving enough for retirement? Try these creative options
Russ Wiles, Arizona Republic
6 min read
Saving money might become more of a challenge in the months ahead. Here are several tactics and strategies that might make it easier.
Saving money might become more of a challenge in the months ahead, with inflation a problem and tens of millions of Americans lacking even a modest emergency fund.
The tax season has wrapped up, meaning two in three Americans have received a refund recently, providing a nice cushion. But for many people, the hard work starts now.
Here are several tactics and strategies — some quite simple — that might make it easier to sock away money.
Reframing the issue
Workplace 401(k)-style plans can be a great way to accumulate money, combining tax benefits and employer matching funds with the convenience of diverting cash from each paycheck. But plenty of people still underuse these programs, possibly because they don't understand what's involved.
Participants in 401(k) programs must start by deciding what percentage of each paycheck they want to save, but percentages confuse many people, according to a study by researchers at Carnegie Mellon University, Cornell University and UCLA. Rather than talking about saving as a percentage, employers might encourage participation if they explained it by foregoing a penny or two from each dollar earned.
Financial adviser George Fraser helped to popularize this pennies approach. During meetings with prospective 401(k) participants, he often throws a few pennies on the floor to see if anyone picks them up. Few people do. “Pennies aren’t meaningful to most people,” said Fraser, managing director at the Fraser Group at RBG in Scottsdale. “But they can really add up.”
The academic study, conducted in association with the Voya Behavioral Finance Institute for Innovation, randomly assigned 401(k) participants into two groups. Workers in the first group were asked what percentage of their paycheck they could invest in their retirement programs. Those in the second group were asked how many pennies they could save from each dollar earned.
Workers who were instructed to set a percentage elected an average savings rate of 6.9%, while those thinking in terms of pennies went for a higher 8%. The impact was more dramatic among low-wage workers, the researchers said.
Employers that automatically enroll workers in 401(k)-style programs tend to report higher participation rates, as do those that gradually increase employee contributions over time (unless workers opt out). Explaining the saving choices in terms of pennies, rather than percentages, might boost participation more.
Other ways to boost savings
While the study focused on increasing participation in and contributions to retirement plans, there are other applications. The pennies approach similarly could be used to build up a rainy day fund or add money to health savings accounts, for example. Having a rainy day fund can mean the difference between meeting unexpected expenses or having to max out credit cards or resort to high-cost payday or auto-title loans.
Also, people could use the pennies framework to allocate their money to multiple accounts at once. For example, the academic study suggested people might want to divert, say, six pennies from every dollar earned to a retirement plan, plus two pennies to an emergency fund and perhaps another two cents to a health savings account.
This research, while simplistic, might help to illustrate basic concepts better than traditional approaches. “In this business, we tend to overeducate,” Fraser said.
Also, the terminology used in the financial field is often unnecessarily complicated or vague and possibly misleading, he contends.
Everyone deserves time for fun, hobbies and leisure, but a lot of people might be spending too much on nonessential pursuits if it puts their finances at risk. Often the sums seem trivial, but they can add up.
In 2021, for example, Americans spent $60.4 billion playing video games. The average gamer spends around $76 each month, $912 a year and more than $58,300 over a lifetime, according to All Home Connections, a gaming and technology research company that surveyed more than 1,000 gamers about their spending habits. Those figures include outlays for internet, games and equipment. The lifetime total assumes 64 years of gaming, from age 16 to 80.
It's a significant amount of spending that, instead, could be used to amass a sizable nest egg. The average gamer would generate more than $271,500 by retirement age if he or she invested the average monthly expenditure of $76 and was able to earn an average annual rate of 6% from age 16 to 65, according to All Home Connections.
The same analysis could be applied to other nonessential expenses, from travel to movie tickets. Obviously, people should be able to spend as they want, even on things that might seem nonessential to others. But the study illustrates the potential for cutting costs here and there and plowing the money into investments for long-term growth.
The analysis is similar to one done five years ago by Fran Kinniry, an investment principal at the Vanguard Group. He cited a daily cup of coffee at Starbucks to illustrate how spending decisions today can affect wealth accumulation in the long run.
Kinniry assumed you could save at least $1,260 a year, almost $3.50 a day, for each cup you brewed at home rather than bought at a restaurant. If you invested this $1,260 for 30 years, earning 6% annually on average, you would generate around $106,000.
To keep the tax impact simple, he assumed the money was invested in a low-cost, balanced mutual fund and held until age 59 1/2 in a Roth Individual Retirement Account. Balances in Roth IRAs grow tax-deferred and withdrawals come out tax-free.
Deciding between needs, wants
If money starts to get a little tighter ahead, more Americans will likely start paying closer attention to budgeting. It’s not always easy to stick to a budget, partly because tracking all of those expenses can be tedious. That’s where relatively simple approaches like the 50/30/20 rule can help.
This budgeting concept rests on the notion of splitting your expenses among needs, wants and savings/debt reduction on a 50/30/20 basis. Needs or necessities for living such as grocery bills, utility charges and rent or mortgage payments should be the priority in your budget, accounting for the 50%. Wants come next at 30%, followed by savings and/or debt reduction at 20%.
Some items aren’t easy to categorize. Most people would consider leisure travel a luxury and thus a want, but what about a gym membership? It might count as either a need or a want, depending on how you view your health and fitness.
The 50/30/20 approach thus requires some thinking, planning and analysis, like other types of budgeting. But it might represent a decent option for people seeking simple guidance along with a framework of discipline.
Reach the reporter at russ.wiles@arizonarepublic.com.
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