Retirement planning is a lot like exercise. Before you start thinking I've gone batty, let me explain.
You know you should exercise, but the couch is so comfortable. And it's cozy under the blanket, especially this time of year. It's easy to fall into the habit of neglecting to exercise, even though we all know its far-reaching benefits: reversing some health conditions, improving your mood, boosting energy and even living a longer life.
Retirement planning is similar. You know you should do it, but it's easier to think about the here and now rather than worry about something so far off. You may prefer to spend your money on vacations, clothes or other items that provide instant gratification. Like not getting enough exercise, many of us aren't saving enough for retirement, and there are probably a few among us who aren't saving at all.
It's time to get off the metaphorical couch and start saving and planning for retirement. And how do you do that? By making it a habit.
Studies show it takes time to form a new habit. For example, exercising for five minutes daily for two months probably won't make a huge difference to your physique. But your brain might notice it more. By creating a routine that you stick to regularly, it will soon become second nature. Eventually you'll feel the need to exercise daily and you might even feel out of sorts on the days you're forced to skip.
Ramping up the amount of time you exercise is the next step, but it's far easier because the habit is already formed. Getting started is usually the hardest part of any new habit. What does that mean for retirement planning? You don't have to dive into the deep end right away. Here's what to do to gradually start moving toward retirement planning success:
Just start saving. If you went from contributing nothing to your 401(k) plan to putting in as much as the IRS and/or your plan would allow, you'd see a huge decrease in your take-home pay. Even if you could afford it, the difference would likely be shocking. Imagine if a couch potato suddenly attempted to run six miles on the treadmill.
But you can start small by saving just a small percentage of your income. You'll be happy to know that even 1 percent can grow to a meaningful amount of money over time, thanks to the power of compounding. Let's say you earn $50,000 annually. One percent of $50,000 is $500, which translates to saving around $41.67 per month in pre-tax income. You likely won't miss this money in your paycheck, but that $500 annual investment could grow to more than $66,200 in 30 years.
Ramp up your contributions. After a period of short daily workouts, you might find that you're ready to increase their duration and intensity. Likewise, after a few months or a year of making minimal contributions to your retirement plan, it's time to start increasing your contribution amount on an incremental basis.
It's OK to progress at a comfortable pace. But once the habit is formed, continue to challenge yourself and take additional steps to reach your goals by creating a schedule to increase your 401(k) contributions regularly. Try starting with 0.5 percent every six months until you reach the minimum recommended savings rate of 10 to 15 percent of your income - though, keep in mind that IRS regulations set the maximum annual contribution for 401(k)s at $17,500 in both 2013 and 2014. Workers over the age of 50 can contribute an additional $5,500 in catch-up contributions.
?Create a plan.
Getting in the habit of saving and building up your contribution level over time is only part of the battle. You've got to have a plan for your retirement. Much like someone who has become physically fit might decide to tackle a half-marathon or similar fitness event, you might be feeling more financially fit and ready to take the next step with your retirement training.
Your plan should include an estimate of your retirement income needs and how much you'll need to save to live comfortably in retirement, taking into account your expected rate of return on your investments and the number of years you expect to live in retirement. Use online calculators or talk to an investment advisor for help arriving at preliminary figures. As a general rule of thumb, you should plan to replace at least 70 percent of your preretirement income to live comfortably in retirement.
A good retirement plan should also take into consideration your risk tolerance, or how market volatility affects your peace of mind and achievement of your retirement goals, and asset allocation, or breakdown by percentage of which major investing classes you'll use in your portfolio. An investment advisor can help you sort through these complicated issues.
Once your plan's in place, you probably think you're all set. But like regular exercisers who plateau or stop seeing results after sticking to the same workout routine for a long period of time, your retirement plan needs a good dusting-off on occasion. Every six months, you'll want to look at your portfolio or talk with your investment advisor to see if there's a need to adjust your asset allocation and fund selections. This is also important to do if you experience changes in your personal or financial situation that may impact your overall retirement and investing goals.
Using a gradual approach to retirement planning such as this means your results won't be instantaneous. But that's OK. Embrace the idea that you're building healthy financial habits that will benefit you in the long run. After all, a gradual, measured start that succeeds is far better than a quick start that fails.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.