Are You Paying Your Retirement Fund First?
June 20, 2010
| MoneyRates.com Senior Financial Analyst, CFA
Financial experts who urge people to save more often talk of "paying yourself first." The idea is to sock away your target savings as soon as you get a paycheck, treating savings as if it were any other monthly expense like a mortgage payment or a utility bill. This school of thought says that if you only save after paying off everything else, you'll somehow find ways to spend that paycheck--leaving little or nothing to actually put away at the end.
A recent joint poll by MoneyRates.com and GetRichSlowly.org looked at the different methods people use to save for retirement. Based on the results, it is clear that automated payroll deductions and automated bank transfers play a crucial role. Many people are, it seems, taking "paying yourself first" to heart.
If you have not yet set up a means of automatically depositing money into a retirement plan or into a savings or money market account, consider joining the majority of savers who use this method.
How People Save for Retirement
The poll asked readers, "What is your primary method of saving for retirement?" Four answer choices were offered. Here's how the 1,436 respondents broke down:
- Automatically deduct from paycheck into retirement plan such as a 401(k), IRA, etc. (67%). This approach has several advantages. Retirement plans typically allow you to defer taxes on contributions, and company-sponsored plans may include a match for part or even all of your retirement contribution. These contributions do represent a commitment, however--in most instances, you would incur a tax penalty if you tried to withdraw money from these plans before you reached retirement age.
- Automatic transfers from bank account into savings or investment account (10%). Transferring money into a regular bank account or brokerage account doesn't offer any tax advantages you may have with retirement-specific investment plans, and you'd lose out on any employer matching. But this kind of automated transfer still imposes discipline on your budget. Also, putting retirement savings into deposit accounts may result in lower yields--after all, savings account rates and money market rates can seem anemic when compared to a good run in the investment markets--but these accounts are usually FDIC-backed and give you the flexibility to withdraw that money early should the need arise. Investment accounts are also an option, but these may be less suited to incremental deposits and withdrawals if you need cash flow flexibility.
- Transfer funds from bank account into savings or investment account when I can (9%). This savings method might be a practical necessity if you are on a tight budget--you might not always be able to afford an automatic deduction from your paycheck. This is particularly true for people who are self-employed, on commission, or otherwise don't draw a consistent income. The risk is that putting money into savings can get pushed farther and farther down on your list of priorities, so that too often those contributions to savings never happen.
- Currently not saving for retirement (14%). Unfortunately, a good chunk of the poll respondents reported that they are not currently saving for retirement. Certainly, saving money can be difficult--especially if you're already paying off high-interest consumer debt--but retiring without savings is even more difficult.
Observations on Results
These poll results do say some good things about savings rates. They indicate that 86% of respondents are at least saving something for retirement on a regular basis, which is a step in the right direction.
The 67% of respondents who indicate participating in a 401(k) or other retirement plan is higher than the national average, which was reported at just under 55% by the Employee Benefit Research Institute (EBRI). This higher rate might reflect the orientation of MoneyRates.com and GetRichSlowly.org readers toward financial fitness.
If you're taking a fresh look at your retirement planning, take note that a vast majority of people who are saving for retirement reported doing so by automated means. They're walking the talk when it comes to paying themselves first. If you aren't saving this way for retirement and have a steady income, stop delaying and set up a deduction into your retirement account or a money market account.
Given that the EBRI has reported that more than half of American workers have less than $25,000 in savings for retirement, MoneyRates.com would encourage more people to take this approach--the retirement savings system needs more of what's working.
