Saving for Retirement Takes Commitment. "Marry" Your 401(k).

As a company CFO, I routinely speak with our staff -- most of whom are in their 20s and 30s -- about the need to plan for their retirements and to get started with an aggressive savings plan NOW. I gave such a talk today, Valentine's Day, 2014. In keeping with the theme of love and commitment, I came up with the idea of treating your 401(k) like a life partner; i.e., whatever you make, think about sharing it 50/50 with your partner. Obviously, you can't share your entire salary with your 401(k). However, annual raises can be thought somewhat as being "found money," and if quickly shared on a 50/50 basis with the 401(k), the employee will simply moderate their lifestyle based on their remaining take-home pay, and they'll never miss what gets tucked away in the 401(k). Here's a scenario:

• Pat and Chris start their careers at the same time and at the same salary.
• They both get $5,000 raises following each of their first 5 years of work, followed by 4% annual raises thereafter.
• They both start their 401(k) contributions at 10% of their gross pay.
• Pat maintains his contributions throughout his career at 10% of his pay.
• Chris "marries" her 401(k) and splits all of her raises 50/50 with her 401(k) plan; i.e., whatever her raise, half of it goes to her 401(k).
• Chris hits the current annual contribution max of $17,500 in Year 6. She continues to contribute the max thereafter. [Take note: after 5 years of employment, both Chris and Pat have increased their salaries by $25,000. Stingy Pat has only given an extra $2,500 to his 401(k). Generous and loving Chris has shared her increase 50/50 to the tune of $12,500 with her 401(k).]
• We'll keep things simple and won't show Chris or Pat taking advantage of the additional catch-up contribution of $5,500/year when they reach 50.
• We'll assume the IRS authorizes 3% annual increases in the max during that time.
• We'll also assume a 7% investment return and a 40-year career. 

After 40 years of work, Chris ends up with roughly $4.3 million in her 401(k), almost double Pat's total. If she draws on that money at a rate of 4% of the ending investment balance, she'll be able to replace 61% of her ending pre-retirement salary, whereas Pat will only be able to replace 31% of his. Adding social security on top of Chris's draw, she'll probably be pretty comfortable in retirement. Pat, on the other hand, needs a part-time job in retirement.

Is this a gimmick? Maybe, but I'd rather think of it as being a rational method to enforce a savings discipline. Retirement doesn't fund itself, and few people have pensions any longer. So, if it takes a gimmick to help people reach financial security, I'm all for it. Here are the numbers (click to enlarge on a new page):

Helpful Behaviors for Building Wealth

There are some really good points in this article (link below), although the title is a little misleading. It's not so much about becoming super-rich, but rather, it's really about the behaviors that may help someone become more wealthy than they otherwise might, whatever their income level may be.

The author refers to these things as being traits, but they're really skills that can be developed by anyone. Not everyone has the ability or opportunity to become a financial expert or to even go to college, but that doesn't need to condemn them to a life of financial insecurity. It's never too late to develop these skills either, although they're certainly more beneficial if picked up at an early age. I agree that comfort and confidence with basic math is really important, as is developing a methodical approach to problem-solving. The article emphasizes planning skills as well. In my experience, I've found that many people have an aversion to planning simply because they are afraid of the unknown and what they might learn from the planning process. The simple truth, though, is that it's better to be prepared and to learn about potential problems as soon as possible in order to maximize the amount of time available to rectify them. Developing a willingness to encounter uncertainty and a fearlessness about tackling problems, therefore, can by extremely valuable behaviors. If parents could help their kids zero in on these skills, it would go a long way to improving their children's long-term prospects no matter what those kids end up doing in life.

What can someone do to develop these skills or to instill them in their kids? First, you get comfortable with planning simply by doing it. Start small in order to stay within your comfort zone. For example, if you find yourself running out of cash every month, then put together a simple monthly budget. If you're concerned about retirement, then play around with some of the retirement calculators that are available on the Internet. They'll help you determine how much you have to save every month prior to retiring in order to support your lifestyle in retirement. As far as the kids go, there's nothing wrong with getting them involved in household budgeting. Explain to them how much you make, how much comes off the top in taxes, and how you budget the remainder, which hopefully includes some savings. Demonstrate to them that it's important to not spend more than you make. Explain the concept of priorities. Help them understand that maybe spending $100 a month on a cell phone for them isn't a great idea when mom and dad are concerned about their retirement or making tuition payments. If kids don't know what the limitations are, then there will be no limit to their expectations. The main point, though, is you'll be getting them used to the planning process early, which they will hopefully carry forward into their adult lives.

Click here to read "Character Traits and Behaviors that Make You Rich," by Laura Rowley.