Techniques For Retirement Saving

Technique matters a lot in tennis, golf, basketball and a host of other sports and activities. It also matters to investors. If middle income Americans approach investing--especially long term retirement saving--the right way, they can be hundreds of thousands of dollars, or even a million dollars, better off when receiving the retirement watch, compared to someone's whose technique is poor. Here are a few basic pointers that can take you a long way.  

Calculate your net worth regularly. Keeping score is essential. You have to know if you're making progress. You'll need to know when you're not making progress or losing ground, so you can take action to turn the tide. Knowledge can be painful in times of market downturns, but avoiding reality won't improve your retirement finances. You may or may not have a fixed saving goal. Having a goal is good, but not essential. It's essential to know where you stand. That knowledge alone will keep you focused on building wealth for the future. Calculate your net worth at least every three months.

Automate the saving process and use retirement accounts. Participate in any 401(k) or equivalent retirement plan your employer may offer. Maximize the amount you contribute. Some people think you might want to contribute only enough to get an employer match and then contribute to a Roth IRA; this isn't a bad idea but you have to be conscientious about the Roth contributions because they aren't necessarily automatic (read on for the solution to this problem). If you don't have access to an employer sponsored plan, open an IRA--or a Roth IRA if you think your future tax rates will be higher than today's--and arrange with your bank to have funds transferred every month (or every two weeks if you are paid on a biweekly basis) to the IRA. It's a good idea to use retirement accounts like 401(k)s and IRAs because they are separate from your regular bank and securities accounts, and the money in them is harder to spend before retirement.

Average returns take you to Lake Wobegon. Money managers (such as those at actively managed mutual funds) usually don't perform as well as market averages like the S&P 500. There are a number of reasons for this, including their higher trading costs and their compensation. But the bottom line is you are likely to end up with less. Focus on long term gains. Stick with index funds and other low cost investments. It's okay to invest in an actively managed fund with a good track record if the fund imposes low costs on you.  If you aim to get the market average for a return, you'll probably end up doing better than average.  

Keep it simple. Investing is, among other things, a sales transaction. A financial firm is the seller and you're the buyer. Complexity favors sellers and places you at a disadvantage. The seller will naturally know more about the product than you will. The law requires that sellers of financial products make a variety of disclosures to buyers. But even if those disclosures are made, the seller will probably still have a better understanding of the product than you will. So you may have trouble figuring out if the product is truly to your advantage. The complexity of some annuities and other insurance products, and some leveraged ETFs, is so great as to make them virtually opaque. Investing in opacity isn't a good idea. Complex products also tend to have higher costs for investors, which negatively impact investor returns. Stick to index funds and other low cost funds, and maybe some individual stocks and bonds. Plain old bank CDs aren't bad when the markets seem turbulent. If you don't understand a financial product, avoid it.  

The easiest budget of all--save a good percentage of your income (especially if you're self-employed). Budgeting sucks and it seems like every month something comes up that you didn't anticipate. Then, there are the "discussions" with your significant other about how much should be allocated to what expenses, and also last week's rampage off the budget. If you want a simple way to budget, don't focus on how much you spend, but instead on how much you save. Target a good-sized percentage of your monthly income (10% is good, 15% is much better, and 20% is a home run), and make sure that come hell or high water you save at least that much. If replacing your car's exhaust system one month prevents you from hitting your goal, then add enough more to savings the next month or two so that you backfill the deficit. The percentage-of-income-saved method allows you to avoid a lot of handwringing over lattes or not, and inter-spousal sniping, while meeting retirement goals. If you can consistently save 15% to 20% of your earnings over the course of a 30 to 40 year career, you could end up with enough to pretty much maintain your pre-retirement lifestyle during your golden years. If you're self-employed and have an uneven income, it's particularly important to save a good-sized percentage of your income because you can't easily automate the saving process.

Build your benefits. Even though private sector employers have abandoned pensions faster than New York high society abandoned the Trumps, just about everyone has the equivalent of a pension through the Social Security system. Although much maligned and stereotyped, Social Security is the port in the storm for tens of millions of Americans. The longer you work, the greater your benefits will be. Even though the level of Social Security benefits is subject to the whim and caprice of Congress, the tenure of members of Congress is subject to the whim and caprice of voters (including most of the tens of millions of Social Securities recipients). Whatever Congress may do in the future about Social Security benefits, it won't destroy the system and you'll be better off by working longer. If you're fortunate enough to have access to a pension, work as long as you can to boost your benefits. You'll sleep better, without having to buy a new mattress, if you can count on the automatic deposit of a monthly check.  

Attitude. Perhaps the most important factor, but the hardest one to control, is how you view money and saving. If you look at them the right way, you'll do fine. Understand that you have a finite stream of income during your life. If you spend your money, you can't save it. It's gone forever, and you're left with the now diminished remainder of your finite stream of lifetime income. Saving is a choice, not a sacrifice. Money saved now builds security for the future. Because your lifetime income is finite, you can economize now or economize later. Consider that eating dog food in your old age probably won't be a high point of your life. Remember that savings generate returns that can be compounded, so they may increase your finite lifetime income.  This isn't about being greedy in an unseemly way or living like a pauper during your working years. It's about common sense and living within your means. If you adopt the right attitude, you'll establish control over your finances and increase your equanimity.

How To Teach a Child To Manage Money and Save

The easiest way to build wealth is to start early and save often. A child who learns basic money management skills will spend sensibly and save as soon as they enter the adult work force. A person in their 20's who has the habit of saving and investing will benefit from a lifetime of good money habits. How do you teach a child to manage money? 

1. Give the child an allowance and a piggy bank. After the child has learned to count (at least up to 100), and is familiar with cash (coins and bills), give the child two things simultaneously. First is an allowance appropriate to the child's age. At age 7, 8 or thereabouts, something like $2 or $3 a week might be a good place to start. That's enough to buy a few little things, but not enough for the child to get into trouble. This allows the child to become familiar with money. Second is a piggy bank. It is important for the child to understand from the outset that money can be saved for future use and that saving some or all of the allowance will build up money for more expensive things. The child will learn very quickly to think about money as a resource that can be conserved and made to grow over time. It's important to give the child the allowance and the piggy bank at the same time. Receiving money and saving it should be associated in their mind from an early age. 

2. Hold the Line on the Allowance. If the child spends all of the allowance and then wants a supplement before next week's allowance, don't give in. Don't acclimate the child to borrowing against future income, or you'll create future debt problems for the child.  The child should learn that money is a limited resource and must be spent wisely. Increasing the allowance as the child grows older makes sense. But whatever the amount, don't supplement it. It's important for the young one to learn how to control the impulse to spend. 

3. Encourage Math Skills. All aspects of handling money--spending, saving and investing--require an understanding of math. Basic elementary school arithmetic--addition, subtraction, multiplication and division--is sufficient to handle most daily money problems. A middle school level understanding of decimals, exponents and how to read charts and graphs is helpful to understanding investments. Financial markets enthusiasts and Wall Street professionals often use more advanced math, such as statistics and differential equations. The more easily a child grasps mathematical concepts, the better prepared they will be to deal with money and investments. It helps if the child can do simple arithmetic in their head, without the need for a calculator. Make a game or contest of memorizing multiplication tables; your child will reap a lifetime of rewards from this bit of knowledge. 

 4. Have the Child Open a Savings Account During High School. Many parents give their kids credit cards (usually with a very small limit) at some point during high school. This isn't a bad idea, since it helps the child to learn about the modern financial system. But don't just give the young one the means to spend. Teach the child how to use the financial system to save and build wealth. Many banks offer special accounts for children that allow very small balances without any fees or charges. These accounts can sometimes be opened for as little as $25 or $50. Make sure your child has one, preferably during high school. Watching the balance grow and perhaps accrue a bit of interest will teach your child about the process of building wealth. This is something a young person should understand before going off into adulthood. 

5.  Show Your Child Their College Fund. It's a good idea to establish a college fund for your child.  A 529 account is an excellent choice, as it has tax advantages.  If you can open a college fund for your child, start as soon as possible.  The first year of the child's life is not too early.  The sooner you start, the more you take advantage of the compounding of earnings in the account (which can really boost the value of the account).  As the child approaches high school, or early in high school, show the account to your child.  By that age, the child will have a good idea of the importance of college and sufficient math skills to understand what happened in the account. You can use the account statements, or perhaps graph the contributions and value of the account using a program like Excel.  Explain how you opened the account and saved over the years, and how the account grew in value.  It's useful for the child to see periodic dips in the value of the account caused by stock market fluctuations, as that helps the child understand the vagaries of the stock market.  This is a valuable way to give your child an early lesson about saving and investing.

Tell your child how much college will cost (including tuition, fees, room and board, and whatever else), explaining the differences between in-state public universities, out of state public universities, and private colleges and universities.  Then discuss how much of the cost the college fund will likely cover and other sources of funding that may be needed.  If scholarships, grants and loans will probably be needed, be candid about discussing them.   If the child will need to work part-time in high school and/or college to pay for schooling, include that in the discussion. 

Showing the college fund to the child will likely be one of the first adult-level conversations the child has about money and finances.  The child will pay attention, because this very directly involves and affects them. Give your child this valuable learning experience.  Have this discussion at least once a year during the child's high school years, so the child can see how progress toward a big financial goal is achieved.  That will teach the child how to achieve big financial goals in their future, such as buying cars, homes, and college educations for your grandchildren.

6. Set a Good Example. Kids take after their parents.  Set a good example for your kids and be sensible about money yourself. You'll not only be rewarded with good finances, you'll have financially skillful children.  That's worth its weight in gold.