Sunday, April 13, 2014

Practical Pearl: If you begin saving at an early age you can enjoy a financially secure retirement.

Shortly after I began my professional career at Kodak in my mid-twenties, I shared an office with another scientist who was a few years older than me. He told me that the people he knew who were most financially comfortable in retirement had always saved the maximum amount they legally could in their retirement plans, such as 401(k) and IRA plans. This sounded like a good strategy to me, so I followed that advice for my entire career. It really works. However, you have to have the discipline (and of course, some extra pennies lying around) to save for retirement systematically. I recently passed the same advice along to my 31-year-old niece; I hope she heeds it.

Once upon a time in America, you would work for a company for forty or forty-five years and then retire with a reasonable pension. This is not common anymore. Individual employees must now take more responsibility for their own financial well-being during retirement. Don’t count on your future Social Security check to keep you comfortable, either. The most secure strategy is to set aside a small amount of each paycheck for retirement beginning as soon as you possibly can. This might mean that you postpone other ways you'd like to spend that money, such as on a vacation, a new car, or something shiny that catches your eye. Unless you die young, however, that delayed gratification will pay big dividends.

I’ve always been a systematic saver. Okay, I’m kind of a tightwad. Even when my parents gave me an allowance of ten cents a week when I was six years old, I would save a nickel each week (and buy a candy bar with the other nickel). Eventually I accumulated enough money to buy my first electric guitar for the grand sum of forty dollars when I was twelve. So accumulating money for retirement seemed natural to me. In contrast, I have a friend who never passed up a toy he wanted. Now at age 58, he faces the prospect of working forever. He has a lot of stuff, but he doesn’t have many bucks in the bank. Of course, everyone has the option to spend their money the way they wish. I just prefer to have a comfortable cushion, which allowed me to retire when I was 54.

In my view, the best strategy is to set aside a fixed percentage or dollar amount right off the top of each paycheck. Pretend you didn’t even get that money. Keep it separate from all your other funds, whether in a jar under your bed or in an IRA account, and promise yourself that you’ll dip into it only for a true emergency. Not for a vacation, a car, a boat, or a house. I realize this is hard to do if you’re living paycheck to paycheck, just trying to keep the family fed. Short-term survival certainly trumps long-term security. Any time you have a little extra dough, though, stash it away for retirement, provided that you’ve already established an emergency fund to live on for a few months if your job disappears or some other disaster happens.

Some employers will match a certain percentage of your salary that you elect to defer into a 401(k) retirement account. Hey, it’s free money! Take full advantage if you have that option. Funds you contribute to an official retirement account may be tax-deductible in the year you make the contribution, as well as growing tax-deferred over time. If you receive a bonus check or an income tax refund during the year, consider adding at least some of it to your retirement fund. This is a simple psychological trick to play on yourself. If you don’t need that money to live on now, you won’t miss it if it’s in a pile for future use.

I’m glad my officemate advised me long ago to start saving the maximum I could for retirement. Being an old dude now, it won’t be long before I need to tap into those funds. I’ll let you know in thirty years if I saved enough.

No comments:

Post a Comment