1. Dollar cost average.
The Dollar Cost Average (or DCA) method of saving for retirement is a strategy designed to lower the volatility of the “value” of your purchase each time you invest, regardless of the price of the underlying security you are purchasing. This method of saving for retirement (in conjunction with “automatic contributions”—described below) is one of the easiest ways to help you avoid bad timing with your investments without having a crystal ball. By exercising this simple but very powerful strategy, the investor is purchasing more shares of a security when the cost is low, while purchasing/investing in fewer shares when the cost of the underlying investment is high.
The valuation of many securities fluctuates daily. And each day preceding the next, you don’t know whether the valuation is going to be up or down. This method (dollar cost averaging) helps to reduce the emotionally “price sensitive” aspect and lets you buy more when it’s cheaper, and less when it’s expensive.
**Dollar Cost Averaging does not assure a profit or protect against loss in declining markets. Such a plan involves continuous investments regardless of fluctuating price levels of such securities, and the investor should consider his/her financial ability to continue purchases through periods of low levels.
2. Automatic contributions.
For most workers earning a living, they know when their actual “payday” is. For homeowners and/or new automobile owners, they may also know when their monthly payments are due. So why is saving for retirement such a mystery on “when” to do it?
The convenience of an automatic contribution into your retirement account accomplishes several good things. For one, you don’t have to remember when to do it; it’s automatic. Two, it doesn’t take any of your precious time. And three, when combined with the DCA method discussed above, whether the market is up or down on any single day has less impact on your overall investment. You will automatically purchase more shares if the price is less and fewer shares if the price is more.
3. Pay yourself first.
I literally have completed hundreds of personal budgeting sheets with clients (and prospective clients) over the years. What I typically find is that people tend to list their expenses (i.e. car payment, mortgage, insurance, dog care, vacation, cell phone, utilities, etc.), but leave out their savings line items. Savings is an afterthought, or better yet, only available if there is any money left over after satisfying all other current wants and needs.
So ask yourself the following question: Is it more important that you eat a nice steak this Friday, and get your car washed on Saturday, and never be able to retire? Or could you forgo just a few indulgences, make saving in your retirement account just as much a priority as paying your cell phone bill, and then have some extra money in your retirement account for your non-working years?
Please have an honest moment with yourself when you answer these questions. They’re not meant to be funny. But for some reason this is actually how a lot of people treat their retirement savings—at a lower importance level than a Starbucks coffee or gym membership (that isn’t even used)!
4. Start small and increase each year.
This technique works very nicely. Assuming you grossed $5,000/mo of income and netted $3,500 (take home pay after state and federal taxes, and other miscellaneous deductions are taken), you could probably start with a contribution as small as $100/mo., and barely notice the take home difference at all. Once several months had passed, you could increase your contribution to $200/mo. This pattern could continue every 3-months or so, until you got up to $500/mo. The gradual increase would be subtle enough to allow you to adjust your spending habits slowly enough to make it work.
5. Use a raise to fund it.
This strategy is the easiest to physically do, but it mentally hurts! The reason it hurts emotionally, is because you probably already earmarked (or mentally accounted for) what to do with that raise (i.e. get a new car, buy a camera, get a bigger apartment, etc.). How hard would it be to continue living on what you are currently making? What if you acted like you didn’t get a raise?
Using a raise as an opportunity to put your retirement savings in high gear is an excellent idea. It could also potentially keep your taxable income the same (if contributing to a tax deductable savings vehicle and you qualify). See your tax professional for tax advice.