PAY-YOURSELF-FIRST PRIMERBill and Sue have a secret...one that has made them financially secure. As a result, they have every reason to believe that, when they retire at 65, they will have more than a million dollars waiting for them. It's not that they live on peanut butter and jelly. It's that they know a very simple principal for accumulating wealth: Becoming financially comfortable -- even affluent -- has nothing to do with earning big bucks. Most of all, it has nothing to do with luck. It has to do with a simple concept: Pay yourself first.
Today's workers, unlike our Bill and Sue, feel less confident about having enough money to live comfortably in retirement and fewer are trying to determine how much they will need to save for a comfortable retirement, according to the 2001 Retirement Confidence Survey conducted by the Employee Benefit Research Institute. The percentage of workers who do not feel confident about having enough money for a comfortable retirement increased from 10 percent in 2000 to 17 percent in 2001. The odds are indeed against them. Millions of men and women today are living in a fantasy world of "widespread denial" over preparing for retirement. Only a handful of men and women have actually saved for their retirement years, says the American Council of Life Insurance. Specifically, adds the Employee Benefit Research Institute, the median savings amount for all American workers is just $29,514. Among those age 50 to 59, the median amount saved is $71,250. That would provide perhaps $600 to $700 a month in income in retirement…not enough, apparently, to keep everyone in the lap of luxury, since 24% of retirees report having returned to work full time or part time in 2002, according to the Institute. Most people mean to save. They recognize the need to provide for a secure retirement, and they know that Social Security and a company pension may not do it all. The problem is that many people simply never get around to saving money. They are busy raising children, paying for a home, taking well-deserved vacations now and then. They may promise themselves that, after the bills are paid this month, they will "send ahead" for the future whatever is left. There is only one problem. There is almost never anything left at the end of the month. Something unexpected always seems to come up: The storm door broke, the carpets need cleaning, an anniversary or birthday needs to be celebrated. As a result, human nature being what it is, this method of saving what's left rarely works. So, how are Bill and Sue doing it? Bill and Sue expect to have more than a million dollars waiting for them when they retire at age 65. Their approach is simplicity itself. Every payday, they pay themselves first. Before they paid the mortgage, car loan or utility bills, they wrote a check for an amount equal to 5% of their gross income. That money went into an IRA, and, once they have reached their limit, they put began paying into an annuity. The money added up slowly at first. When they were first married, their household income was just $18,000 a year. Still, they set aside their 5%: $75 a month, $900 a year. It may not seem like much, but they kept at it month after month, year after year, for 30 years. Five years ago, when the last child finished college, Bill and Sue found that they had more discretionary income than they had ever imagined. So, they decided to increase their savings to 10%. Last year, they grossed $125,000; they put aside $1,040 a month...or nearly $12,500 for the year. The money grew and grew over time. Between steady payments into their retirement funds and good returns earning compound interest, they built a respectable fortune over three decades. How you can use the "pay-yourself-first" method to build up your retirement income: 1 .Practice consistency. Decide how much you can set aside each month...and do it. Investors call this dollar cost averaging*. Regardless of other circumstances and factors, the designated amount of money is put aside each and every month. It is a bill you must pay each month; the only difference is that it is a bill you pay to yourself. 2. Capitalize on compound interest. Money begets money, and it is the rate of return that determines how fast your money will grow. If you put aside $10,000 on January 1, 2000, and that money earns an average rate of return of 10% annually, it will become $20,000 in 2007. If the money earns only 5%, however, it will not double until 2014. So, look for financial vehicles that provide a maximum rate of return in line with the level of safety with which you are comfortable. 3. Remember that time is money. Few people become affluent overnight. It can take years of thrift and self-discipline. But the odds have always favored the tortoise over the hare. Example: If you are 25 years old and save just $50 a month, you can have $100,000 waiting for you at age 65 (based on an average return of just 6 %, compounded monthly). Most of that growth takes place in the later years, as earnings compound and compound again. Do it now. Whether you're young and just starting out or already looking at brochures for beachfront property in the Sun Belt, it's time to take action. Determine today the percentage of income or a specific dollar amount you can set aside. Then, each month -- month after month -- pay the most important invoice in your bill box first. Pay yourself. *Dollar Cost averaging does not assure a profit and does not protect against loss in declining markets. Because of fluctuating prices, investors should consider their ability to continue purchases through periods of both high and low price levels. |
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