Pay Yourself First When Planning For Retirement


My father is the best man I know. He was the type of father who led by example. He was not the person to constantly tell me what to do or how to do things. He would show me how to do things by doing them. He was the epitome of “do what I do.” One of his mottoes was “pay yourself first.”

What did he mean by “pay yourself first?” He meant to save. He instructed me to pay myself first out of every paycheck. It worked for him. My father paid for college with cash (admittedly, college was less expensive back then), but he also paid for all of his cars with cash, he paid the down payment on his house with cash, his wedding with cash, etc. My mother jokes that he was not prepared for the 21st century as he didn’t have a credit card until several years after his wedding!

My father is not alone is this approach. Several baby boomers grew up this way. What has happened to the subsequent generations? As you have undoubtedly heard before, savings rates are down. In 2013, the median retirement savings (for families with any retirement savings) was only $60,000. The median savings of all families is only $5,000! In other words, Americans aren’t saving. According to the Economic Policy Institute, nearly half of families have no retirement account savings at all.

As a retirement planner, I often get asked “Do I have enough to retire?” or “Have I saved enough?” While these are important questions to ask, one of the more important things to determine, even if you are already retired, is “How do I save more?”

Regardless of where you are in life, the answer to “How to save more for retirement?” begins by paying yourself first. If you are working, you need to see if you have a 401(K) or any IRA plans available to you. If your company offers a match on your contributions, it is important to participate in that plan up to at least the amount it matches. If you can afford to contribute more to your employer plan, contribute more. A new report from the International Longevity Centre – UK said that Americans should contribute at least 11 percent to their 401(K). The optimal amount is 20 percent!

Strategies For Saving More For Retirement

To get maximum value out of your 401(K), set up automatic increases each year and bank any surplus money. Setting up automatic increases each year helps you take advantage of any raises you have received through promotions or cost-of-living adjustments that your company has provided. It allows you to incrementally increase your savings rate over time until you reach the optimal savings rate to help you reach your retirement savings goal. Most people are not going to be successful going from a 5 percent contribution to an 11 percent contribution overnight. You have to work up to that savings rate.

Another strategy is to bank any surplus money, which means you are saving any extra money you receive throughout the year, whether it’s a birthday check or a company bonus. Instead of buying a new suit or a new dress with that windfall, put those funds in your IRA or other savings account.

Living within your means is another way to “pay yourself first.” If you are not consistently having to tap into your savings to pay for everyday expenses, you can allow that money to grow. Einstein is credited with saying “the power of compound interest is the most powerful force in the universe.” To illustrate that, a recent Huffington Post article referenced June Greg, a woman celebrating her 98th birthday. Greg explained how her father invested $6.11 into her account when she was only 2 years old. At a 2 percent interest rate, that $6.11 is worth $42.55 today. At a 10 percent interest rate, that $6.11 is worth almost $70,000 today. Let’s say that her father invested that money with Warren Buffett, who has averaged a 21.5 percent annualized return; her $6.11 investment would be worth $351.4 million! Living within your means and paying yourself first allows for all of this beautiful compound interest to take place.

Now that I am a father, I constantly tell my children what they should do or how they should do things. In my house, we have a motto: “Hard work pays off.” My wife or I will do a chore, or ask our boys to do a chore, and we will always say “Hard work pays off” while working. My children — ages 7, 4 and almost 1 — say it all the time. I love how the motto I grew up with of “pay yourself first” works hand in hand with our family motto of “hard work pays off,” because if you pay yourself first out of every paycheck and every increase you receive, you will see how your hard work pays off — literally. Back home, my father is smiling, because he’s known this all along.

Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.

Premier Planning Group is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC. The firm is located at 115 West Street, Suite 400, in Annapolis.


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