subject: How To Save For Retirement Automatically [print this page] How To Save For Retirement Automatically How To Save For Retirement Automatically
Most of us don't need a financial expert to tell us that saving money is quite difficult. The question we must ask ouselves is, what is our own problem with saving? There are four key psychological principles inherent to us that can provide answers to this question, according to behavioral economists.
The 4 Psychological Factors that stop most people from saving are: 1. Even with the hope to save a bit more, people often lack the will-power to do so.
2. Restrictions are easier to deal with if they take effect later in life. This is why most people put things off and plan on saving next year instead of just starting at this moment.
3. People are far more sensitive to losses rather than to gains. Extra money saved is an identified loss to a great deal of us because it can not bestow instant gratification to what we want at this point.
4. People think in nominal instead of real dollars. This is named the "money illusion". A pay raise even if it's well under the rate of inflation is identified as a gain. So people fail to notice that the cost of living is soaring faster than their money flow.
The "Save More Tomorrow" Strategy
With these psychological factors in consideration, Economists Richard H. Thaler and Shlomo Benartzi designed an inspiring retirement savings plan termed "Save More Tomorrow". It works by inviting employees to participate in a future savings plan that will start in their up coming scheduled pay raise. When they receive their raise, a part of it will immediately go to their 401(k) contributions. It's good because the people will not feel a reduction in their income but they're actually saving more.
Let us presume that you're in your mid thirties, planning to retire at sixty five with nothing in your 401(k). You've got a median household income of 49,777 USD with a 3% salary raise every year. If you put in just two thirds of your increase to your 401(k), when you retire you should have put aside a rough $1.5 Million.
The "Save More Tomorrow" Program can be applied to all of your unexpected cash flow. So why not stash a portion of your extra income from your tax refunds, bonuses, and other free-lance income into your nest egg? Anyway it definitely won't hurt to set aside money you've lived without in the first place. Each and every penny you stash away counts.
It doesn't matter how little it is, for the reason that it has the capability of building up. When you begin getting results, you will likely realize how addicting saving can become. You will become all enthusiastic and geared towards saving more agressively. And then, the journey towards your retirement bliss will start.
