How to Automate Your Retirement Savings

Because you want to enjoy your golden years, you already have a retirement savings plan. You put away a percentage of your earnings every month when you can. You are financially savvy enough that you are building savings elsewhere to make sure that you never need to touch your savings until you receive your proverbial gold watch. But are you doing everything you can to maximize your retirement savings?

There may be more that you can be doing to build toward your retirement, and it has to do with automating. What exactly can you do to automate your retirement savings? Let’s look at a few steps.

There may be more that you can be doing to build toward your retirement, and it has to do with automating. What exactly can you do to automate your retirement savings? Let’s look at a few steps.Go Automatic

Arguably the biggest key to automating your retirement is enrolling in an automatic retirement plan. Even if you are a stringent saver, you may not contribute to your retirement fund as consistently as you should if left to your own devices and facing the reality of current bills and financial obligations.

As the Financial Industry Regulatory Authority describes, an automatic retirement plan takes the decision of whether to contribute a certain amount out of your hand and automatically deducts a percentage of your pre-tax salary from each paycheck and deposits into your account. While you will have a degree of control over how much you contribute (you can choose to decrease or increase your contribution at any time), automatic retirement plans may also sweeten the pot over time with automatic escalation—an annual increase in the percentage of your contributions, which in some cases goes up by as much as one percentage point per year.

Go Above and Beyond

Mitch Tuchman, Managing Director at Rebalance IRA, writes in a June 2014 article for Forbes that one of the biggest mistakes that people tend to make when saving for retirement is saving too little. If you have a 401(k) or other retirement savings plan through your employer, chances are that they offer a match program where they will equal your contribution up to a certain percentage (usually around 6 percent) of your income.

If your employer does offer a 6 percent match, you should contribute 6 percent of your income at minimum—contributing anything less is tantamount to leaving money on the table. However, Tuchman notes that automating your retirement effectively may require increasing that investment even more as early as possible.

“If you start early enough, 10 percent is plenty to retire with a comfortably large nest egg. If you are starting late, however, you’ve already lost some of the advantage of compounding,” Tuchman writes. He notes that another method for determining your ideal contribution is to figure out how much you need in savings to be comfortable retiring and working backward “to calculate how much of your income, properly invested, it would take to achieve your goal by a given retirement age.”

Automate Your Accounts

If you do not have an employer-provided retirement plan, or if you want to make additional contributions when you receive a tax refund or cash gift, Business Insider contributor Kathleen Elkins notes the suggestion of “I Will Teach You to Be Rich” author Ramit Sethi to link all financial accounts together for easier, lateral movement of finances.

While this includes linking your paycheck to an employer-provided 401(k), it also entails linking your checking account to your investment account or IRA in order to move money into it more easily. By linking your checking accounts, savings accounts, credit cards, 401(k), IRA and regular monthly bills (e.g. mortgage payments, car payments, student loans and utilities), you can better manage your money on all fronts.

By linking your checking account to your investment accounts, you can schedule regular automatic transfers into your retirement fund. As a quick and dirty rule, Sethi recommends spending 10 percent of your income toward investments, leaving 5 percent for regular savings and the remaining 85 percent for fixed costs and spending.

By automating your retirement, you stand a good chance of being better off when the day comes for you to call it a career. Take whatever steps you can as early as possible and make your money work for your harder for longer.


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