We are often reminded of the importance of saving for retirement, but why do so many people let the opportunity slip through the cracks? My experience is that, for many people, current lifestyles tend to soak up all the income. The desire is there, but the free cash flow is not.
There is a fresh approach that can get the job done while not making any sacrifices to your current cash flow. I call it the Pay Raise Earnings Savings Strategy or PRESS. It is an extraordinarily simple strategy.
After your next pay raise, commit to spending only one-half of it and invest the other half in a retirement plan. Simple, right? When you get a pay raise you get both a lifestyle bump and a savings bump.
Here is an example:
We will assume you are forty years old and have not begun saving for retirement. You know you are way behind and still spending every paycheck. We will further assume that, on average, you receive pay raises of 3% each year. Your next raise results in a very meager investment of 1.5%.The good news is that it did not come out of current cash flow, but rather future cash flow. By age 50 you are saving 15%, which is a respectable amount but still likely not enough to overcome your past under-savings. The real magic happens in the next ten years. By age 60, you are saving a whopping 30%! Assuming you work to age 65 or even age 70, you should have accumulated more than enough for your retirement.
Let’s talk money:
In our example above, if our forty-year-old was making $40,000 and had no savings, by age 50, she would have over $50,000; age 60, over $300,000; age 67 (full Social Security retirement age), over $800,000; and age 70, over $1 million…all by simply living on only one-half of future pay raises!
The Key to this strategy is to IMMEDIATELY defer one-half of your next pay raise to retirement savings BEFORE it becomes part of your take-home paycheck.
Invest the money in either your company’s (matching) 401k plan, a tax-deductible IRA, or Roth IRA using predominately stocks or stock mutual funds.
FOOTNOTE: If you are not receiving at least 3% per year pay raises, it may mean you are undervalued at work. You have three possible choices:
- Raise your hand for more responsibility in your current job. Volunteer for projects and seek more responsibility. The more responsibility you have at work, the higher you are valued. The higher you are valued, the more secure your job will become.
- Apply for classes and/or training courses to increase your education. Ask your supervisor what work-related education you could get that would benefit the company.
- Start looking elsewhere for a job. Sometimes you must change jobs to advance yourself and earn the salary you are worth.
In summary, it never hurts to save up and invest in your future. Be prepared to contribute to your company’s 401(k) now and reach out to a financial advisor to see how you can invest to better prepare for retirement. Also, don’t be afraid to ask your manager or supervisor for more information on your company retirement policies. Do your research, ask questions, and save for your future!
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Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including 50 Rules of Success; J.K. Lasser’s New Rules for Estate, Retirement, and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group. Consult your financial advisor before acting on comments in this article.
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