Are you feeling behind right now? You’re not alone. Personal Capital estimates¹ that the average 401(k) balance for Americans between 55-64 is $197K with a median balance of just $67K. As a quick reminder from your high school statistics class, when the median is way below the average – that means it’s being skewed by some really large balances at the upper end of the range. I won’t harp on this, but let’s start from a baseline that many Americans do not have large retirement account balances, and may feel under-prepared as they approach what should be their golden years.
When you are feeling behind in retirement, there are countless unproductive ways that you can deal with it. And there are a few that will be helpful. So let’s dig into some of the behaviors that you should avoid, and the ones that you should focus on to get yourself back on track or at least close the gap.
A More Aggressive Portfolio to Make Up Ground
We commonly hear investors express that they need to really ramp up the risk in their portfolio to make up some ground. Be very careful if you’ve had this thought.
It’s true that increasing your portfolio return can get you closer to a successful retirement. But adding risk adds volatility which can cut both ways. The same psychological stress you feel when you think about being behind in your savings will be exacerbated by wilder losses and downside from your investments.
While we don’t think of investing as gambling, you can see this kind of behavior at a blackjack table frequently. Losing a few hands makes you feel desperate to make up ground, so bets get bigger and bigger which simply drains the gambler of their chips even faster.
Putting Your Head in The Sand
We’re all familiar with the ostrich approach, right? If you don’t look at the problem, how can it bother you?
This one may be obvious, but ignoring the problem isn’t a good solution. It just means that by the time you actually start paying attention you’ll have even less time to course correct. If you’re the type of person that will ignore an issue until it’s right in front of you – retirement is a scary proposition.
Time is one of your most important tools when it comes to investing and getting control of your finances. When you no longer have time on your side, the list of options to “fix it” become much less appealing. The best time to plant a tree is 10 years ago, the second best time is right now.
Putting Your Kids First (Financially)
It’s incredibly common that we see investors trying to balance their own preparations for retirement while having young adult children either in school or perhaps after and still needing financial support. But if your own financial situation is not in order, diverting resources to help kids pay for school is a mistake.
An education is an investment in future earnings power. Your kids going to school should be to help them leapfrog into a productive career that will yield more as a result. And while in an ideal world you might want to support them by giving them a boost to avoid student loans, you could be risking your own stability and comfort later in life by doing so.
This is always a touchy subject and can be emotionally charged for many parents. But faced with the option of stretching to pay for school now versus having to rely on your kids for financial support late in life because you didn’t prepare well enough, the choice becomes much more clear.
Get Very Familiar With Your Budget
It’s shocking how often we work with someone who wants to get started with a financial plan and getting their arms around their finances, and they have no concept of how much they spend. Sometimes people will know their account balances to the penny, but the idea of a budget terrifies them.
Knowing your budget is not a restrictive measure. It doesn’t mean that we’re asking you to pinch pennies or cut back. It is the first critical input to knowing if you’re prepared to retire, because how could you know if you have enough saved when you don’t know what it will cost you to live?
I always recommend a backwards approach to budgeting. Start with the biggest number – your income, and then work backwards. Look at what you made in income, and then take away things that aren’t “consumption items.” You didn’t consume your tax dollars, so they shouldn’t be part of your burn rate. Any money you saved wasn’t consumed, so it’s not part of your burn rate. But at the end of the year, if you earned money and it didn’t get saved or go to taxes… you spent it. Know that number, either by month of year.
Of course your budget may change as you enter retirement, but if you don’t know what you spend today, it’s unlikely that you can accurately make those projections. And once you know how much you are spending you can then assess whether your current spending patterns completely align with what you value.
Save Your Raises
We have all experienced moments where we know we should be saving more, but just can’t seem to find things to cut from our spending. Maybe you’re even having trouble making ends meet now. If that’s your current spot, this is a critical strategy.
Anytime you get a bump in pay, commit to saving it not spending it. This is the best way to increase your savings rate while not feeling like you have to forego things in your life and cut back.
I recommend making a change to your direct deposit or 401(k) withholding BEFORE you get your first paycheck at a new rate. Don’t ever look at what that new paycheck could be. Lifestyle creep is very real, you can quickly and easily spend that new income. But if you make the adjustment to your savings you won’t even feel it.
If you are just a little behind in your savings you can try to commit 50% of your raise to savings and still let yourself enjoy the slightly higher income. But if you’re feeling very behind, capture the whole thing. This can be a powerful driver to really boost your savings and catch back up.
Talk With a Financial Planner
When you’re feeling behind saving, it might seem counterintuitive to spend some of your funds on a professional. But having a financial plan put together by a professional should give you assurance on where you really stand. You might not be as behind as you originally thought. Or perhaps there are big meaningful planning strategies that you simply haven’t considered yet.
Even if the hill you have to climb is steep, having a coach to encourage you and guide you along the way is important. We can’t do it for you, you’ll still have to be disciplined and put in the work. But what we can do is make sure the work you’re doing is on the most impactful pieces of your financial life.
Getting your finances in order is not the type of thing that happens overnight. Like fitness or diet it comes from repeatedly making small disciplined decisions with a long-term vision. Make a commitment to start taking the baby steps to get yourself back on track and you’ll be shocked at how some small behavior changes can add up in your favor.