Do you have adequate savings for your future and are you prioritizing your savings goals? Here are some tips to get you in tip top shape.
The current savings rate is running 4% of income, in the 70s Americans were savings double that amount. Compare this to the savings rates of Asian countries, like China and India, where savings rates are close to 30%.
Why are we such poor savers and how can we save more?
We tend to spend a large percentage of our income on housing and transportation when compared to these developing nations. The “Keeping up with the Jones” mentality enticed many into large McMansions and expanded the average square footage per home.
One way to counter this is to have a mentality that you will always spend well below your means. This is “The Millionaire Next Door” concept popularized by the book by Thomas J. Stanley and William Danko. Their research found that the people with significant wealth were often the ones you would least expect. They had smaller houses, practical cars, and were relatively inconspicuous with their wealth, suggesting that adopting this mentality can improve the health of your wealth.
Frugality is the new norm and people, especially retirees, are downsizing their lifestyle. The deleveraging cycle continues as consumers reduce the debt from their personal balance sheets. They want more for less and they are willing to go without to build savings for retirement.
It is sometimes hard to prioritize savings for the future. Is there a good rule of thumb for how to best save for future goals, for example, in IRAs or Roth IRAs?
The best method is to pay yourself first and sweep a portion of your paycheck to savings so that you won’t spend it. The majority of Americans will spend whatever they bring home. Here is a general guideline for prioritizing savings:
- Priority of saving vehicles:
– Save enough to get the match from your 401K.
– Save in a Roth IRA, if eligible.
– Boost your emergency reserves to at least 6 months of living expenses.
– Save additional amounts in your 401K.
– Invest the balance in taxable account for retirement or education savings (Future Scholar 529 account.)
If someone is behind with regard to their retirement savings, how can they catch up?
There is no easy fix but here are some suggestions to help you boost your retirement funds and maximize your chance of success.
- Maximize your 401K contributions.
- Go on a strict financial diet.
- Cut back on your expectations for retirement.
- Work longer.
- Take social security at a later date.
