Why This Popular Retirement Advice Actually Makes It Harder to Save
It's always good to have goals. Without them, it's hard to prepare for the future -- especially when it comes to retirement. If you don't have retirement goals in mind, you'll wind up saving whatever you can muster, crossing your fingers it's enough to get you through. (Spoiler alert: It probably won't be.)
But setting lofty goals can actually hurt your chances of retirement success in some instances. It sounds backwards, but imagine you have nothing at all saved, and then you set a goal of saving $1 million by the time you retire. If you're already struggling to set any money aside for the future, that goal sounds impossible to achieve -- which makes it easier to justify throwing in the towel before you even start saving.
Science seems to back up this struggle. According to a report from Dominican University of California, only 35% of people who simply thought about their goals were able to achieve them. However, when study participants wrote their goals down and took actionable steps to achieve them, 70% reached their goals.
So what does this mean for you as you plan for retirement? Setting a goal is an important first step, but establishing a target amount for retirement isn't going to cut it on its own -- you must also create an action plan for manifesting it.
Setting your goal is just the beginning
Usually, the first thing you hear about retirement planning is that you need to figure out how much you'll need saved by the time you retire -- in other words, calculate your retirement number. That's all well and good, but it's only the first step.
Once you know your retirement number, the real work begins. Coming up with a retirement goal without a plan to achieve it is like saying you want to lose 50 pounds but you don't know what to change about your lifestyle to make it happen. Sure, you may visit the gym a few times or cut back on fast food, hoping for a difference -- and you may indeed lose a few pounds with this method. But at the end of the day, without actionable steps to get where you want to go, you can't be sure that you'll reach your goal.
It's no different with retirement planning. If you put whatever extra cash you have at the end of each month toward your retirement, you'll see your retirement account balance grow over time. But taking this haphazard approach without any serious thought behind the amount you're saving means you won't know whether you'll achieve your goal until you actually reach retirement age -- at which point it's too late to make upward adjustments if your savings are lacking.
Although setting a goal for how much you want to save by retirement is crucial, it can also be quite daunting. You'll need hundreds of thousands of dollars (if not a cool $1 million), which can be intimidating if you don't have much to put aside every month right away. But if you start saving early, and you break down your goal into more manageable pieces, it will be easier to accomplish.
Make saving more manageable
The more time you have between now and retirement to save, the easier it will be -- and the less you'll have to save each month to reach your total savings goal.
Plug your information into a retirement calculator to see how much you'll need to have saved by retirement, and how much to put aside each month. Use a compound interest calculator to play around with some numbers, seeing how saving a little more each month will spur your success toward your goal.
Here's an example: You currently have $10,000 saved, and you're saving $400 per month -- or $4,800 per year. If your investments earn a 7% annual rate of return, you'd have around $561,000 saved after 30 years. But by bumping your savings up to $600 per month ($7,200 per year), you'd have more than $800,000 saved in that same time period.
Keep in mind that all these numbers are just estimates. The stock market fluctuates daily, so there's no way to predict exactly what rate of return your investments will enjoy, or how much money you'll need to make ends meet in retirement. Further, since online retirement calculators use different inputs to determine your retirement number, it's a good idea to try several calculators to establish a range of results. When in doubt, set a higher goal than you think you'll need; it's always better to save more money than you need, and leave the remainder to your heirs or to charity, than to not save enough and find yourself struggling as a senior.
Keep yourself on track
Once you have a goal and a plan in mind, write it down so you're more likely to achieve it. Retirement saving is a mindset. Too many people think of retirement planning as an afterthought -- something they'll do once they earn more money, pay down bills, win the lottery, or experience some other surprise windfall. Unfortunately, when those times do come, it's easy to put off saving for retirement even longer if you haven't already made it a habit.
But if you approach your monthly retirement savings as any other expense you have to pay -- no different from your mortgage, electric bill, or car payment -- it's easier to make it a priority. Even better, set up regular automatic transfers from your bank account to your retirement fund. If you contribute to a 401(k) through work, the money is deducted straight from your paycheck before touching your hands, which is a good thing for saving.
Don't be shy about your goals. Trying to save for retirement is not some shameful secret, in fact it's something to celebrate and share. In the Dominican University of California study, the most successful group not only wrote down their goals and took actionable steps to achieve them, but they also sent a weekly progress report to a friend to hold themselves accountable. Many people shy away from talking about finances, but keeping your goals to yourself means it's easier to make excuses and fall behind on your savings. Enlist someone you trust to help keep you on track.
If you have a retirement goal in mind, pat yourself on the back -- you've already accomplished step one of the retirement planning process. But know that it's only the beginning. To actually achieve that goal and live out your retirement dreams, you'll need a structured and specific plan in place, and the will to follow it.
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