Here’s why you need to keep your retirement money growing even when you’re already using it (hint: inflation and longevity).
Most of us probably strived for better-than-average grades at school and better-than-average salaries at work. That being the case, it’s kind of surprising that so many investors seem to be comfortable having “average” retirement savings for their age.
Unfortunately, if your savings are just “average,” they probably aren’t going to account for inflation and cost of living increases both before and during retirement. The hard truth is that even after you retire, your assets will need to grow quicker just to keep up with higher prices.
Not being a top performer might be OK for some things, like golf or gardening. Increasingly, however, having an average amount of retirement savings can put you at risk. With people living longer, many of us might spend more years in retirement than in working life. And don’t put any bets on the cost of living going anywhere but up. Starting with above-average retirement savings and keeping that money growing even after you’re done working could put you on far better footing in case you end up enjoying a long stretch of golden years.
Building a better-than-average savings account that works harder on your behalf is especially important for women, partly because they tend to live longer, but also because women often (but not always) end up interrupting their careers to have kids or care for parents or a spouse and may neglect their own savings. No one is saying not to take care of your family. Lots of life events can stop people—both men and women—from steadily building retirement funds. It’s important, however, to get back in the savings game as soon as possible after a life event knocks you off track, and not to break the habit. Successful savers put their future needs first and don’t see saving as a chore or a duty. They see it as a gift to their future self.
Before considering some tools and techniques that might help blunt the blow of inflation biting your savings, here’s something else to consider: A simple mathematical principle called the Rule of 72 can help estimate how long it may take for prices to double. Just divide 72 by the rate of growth, and you get the number of years before inflation doubles. For example, at 3% inflation, it will take a mere 24 years for costs to double. For instance, the average new car price reached nearly $36,000 this year, according to Kelley Blue Book. That compares with around $19,000 in 1994, as reported by The New York Times.
Investment returns must first keep up with the rate of inflation—no matter how modest—in order to increase real purchasing power. For example, an investment that returns 2% before inflation when the Consumer Price Index (CPI) is rising at a 3% clip will actually produce a negative return (-1%) when adjusted for inflation.
Let’s look at how Americans are doing as far as their average retirement savings.
The natural tendency to avoid this topic doesn’t magically make it go away. It’s important to look at your savings, however hard that might be to contemplate, and figure out a way to build them up and make sure they continue to outpace inflation even after you retire. Think about spending one afternoon now. Then maybe check back in on your savings plan and your progress every six months or on a yearly basis from here on out. Try and develop some retirement goals, which could give you more motivation to save.
Maybe you were an average student and have a high golf handicap. But by using some of the ideas below, you might be able to chip your way out of the sand trap and into a better-than-average savings situation. None of these is a magic bullet, and it takes time to see an impact. Try taking things one at a time so the burden doesn’t seem too large.
There are other ways to build above-average savings. Take continuing education courses in your field when possible so you can add credentials that might get you that higher-paying job. If your company doesn’t have an adequate retirement plan and you have the flexibility, consider taking your skills down the road to a company that does. If you’ve been paying for some or all of your kids’ college bills and now they’ve graduated, see if you can earmark some of that money for your savings plan. Look at all of your hobbies and “fun” spending and see what truly makes you happier and what doesn’t. If there’s a way to save $100 a month by dropping that one class you’re sick of or the club membership you barely use, think of it as an extra $100 in the bank.
Your investment portfolio is another place you can try to fight inflation. One strategy that seeks to reduce the impact of rising inflation on bond holdings is to build a bond “ladder”—buying bonds that mature in two, four, six, eight, and 10 years, for example. As the shorter-term bonds mature, investors can reinvest the proceeds into longer-term bonds at higher rates. Typically, a bond ladder might fit best for an investor who doesn’t mind holding them for up to 10 years. Inflation-linked bonds seek to offer protection from inflation, but these instruments make up a smaller share of the overall bond market and are somewhat less liquid.
Do things one at a time. If you have to pay off high-interest credit card debt, just focus on that for now. Building better savings is a process, like anything else. There may be months when you can’t do it, but get back at it and don’t give up. Even putting a few dollars away every month or making the minimum 401(k) contribution could help multiply your savings through compounding over time, even as you work to pay off other debt such as that from college or credit cards. An automatic savings plan allows you to “set it and forget it,” so to speak. Put yourself and your future self first, and you might have a chance to rise above that “C average” in retirement savings and keep up with the drip-drip of inflation.
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