A Simple Mind Trick to Save More for Retirement

By Mitchell J. Smilowitz, CPA

You know it’s important to save more for retirement, but it can be hard finding the money.

After paying rent or a mortgage, making credit card payments, saving for a child’s education – or paying off your own student loans, there’s nothing left. This simple mind trick can get you started.

Think of Retirement as a Current Financial Responsibility

It’s easy to move retirement savings to the bottom of your financial priority list because the demands of retirement seem less immediate than paying your monthly bills. But there are several reasons it is important to consider retirement savings as a current financial responsibility.

• Retirement is the biggest purchase in your lifetime. You and/or your spouse may need to support yourself for 20-30 years in retirement. In addition, healthcare costs continue to increase faster than the general rate of inflation. Financial planners estimate you’ll likely need upwards of $1 million in assets to have a comfortable retirement.
• You can borrow to buy a house, to pay for your child’s education, to purchase a car. But you can’t borrow to pay for retirement.
• Most of us want to maintain financial independence as we age. If you don’t have enough saved when you retire, what happens? None of us wants to be a financial burden on our children.

Recognizing retirement as a current financial priority is the first step to meeting the retirement challenge successfully. The closer you get to retirement, the harder it is to catch up.

Prioritize Saving for Retirement Just as You Do Your Other Bills

Most financial planners recommend that you save 10% to 20% of your salary each year. This includes any contribution your employer may make on your behalf.

It may be difficult to dedicate 20% of your income to your retirement savings. That’s OK. Start with what you can. And set a goal of increasing your contribution by 1%-2% of your salary annually until you reach your target saving rate. Remember, contributing to your retirement account also lowers your taxable income. And, if you increase your contribution when you receive a salary increase, you won’t even notice the difference in your take-home pay.

For those whose employers match their retirement contributions, it’s particularly important to take full advantage of the match. Think of it as free money.

Early Saving Yields the Greatest Rewards

The main reason to increase your retirement savings is to take maximum advantage of compound interest. Here’s why.

• Rabbi Sarah begins saving 10% of her annual $50,000 salary – a $5,000 annual contribution to her JRB retirement account – as soon as she accepts her first position at age 30.  If we assume her salary increases 2% a year, she continues saving 10% of her salary for the next 40 years (until she retires) and earns an average of 5.5% annually on her investments, she will have amassed $1,014,208 by age 70.
• Cantor David begins saving 10% of his $100,000 salary – a $10,000 annual contribution to his JRB account – beginning at age 45. Assuming his salary also increases 2% a year, he continues saving 10% of his salary for the next 25 years and also earns an average of 5.5% annually on his investments, he will have accumulated only $708,270 by age 70 despite his larger annual contributions.

In other words, start saving for retirement early to get the most benefit out of compound interest.

Retirement Savings Reduce Your Taxes

Salary reduction contributions to the JRB Retirement Plan lower your taxable income. For example, if you are in a 25% tax bracket and contribute $1,000 to your JRB account, you reduce your taxes by $250; your $1,000 contribution only “costs” you $750!

None of this is meant to suggest that saving for retirement is easy. It requires discipline. The first step, however, is seeing retirement as a current financial responsibility. Once you’ve performed this simple mind trick, you are on the path to success.

For the nuts and bolts of developing a financial strategy, please contact us at 888-JRB-FREE (572-3733) or send an email to staff@jrbcj.org. We’ll work with you to develop a sustainable plan that meets your short- and long-term financial goals.

September 2020