How We Are Saving for Retirement and Other Goals
If you’ve been over to read about our early retirement plan, you know that one of the major elements of our plan is saving more for retirement. Besides accumulating more money for important things, it will also help get us ready to transition from our full-time jobs. I’d like to talk a bit about our saving habits and the changes we’ve made to put more money away for the future.
Things we’re doing well
Jenny and I were already fairly good savers before our discussions about early retirement began. I say, “fairly”, because we likely had better saving discipline than most Americans at saving for retirement. We’ve had our tax-deferred 401(k) plan contributions firewalled for many years and have significant balances in those accounts.
Our success at funding our tax-deferred accounts was helped by the process of salary deduction. That pre-tax money goes straight from our paychecks into our retirement accounts and doesn’t pass through our bank accounts. (Note that I’m loosely grouping our 401(k), voluntary pension, and Health Saving Account into this category as well). So, except for the original decision of how much to save, the week in, week out act of saving for retirement is automated for us and not easily subjected to deferment due to the expense of the day. It has worked well for us and is an approach I would recommend to others to increase or sustain saving for retirement. Even if you can’t save the maximum allowed, you should at least save enough to take advantage of the matching funds your employer offers. That’s easy money folks, and darn near the best guaranteed return you can hope to get.
For saving for our children’s college funds, I’ve taken a somewhat similar approach to how we are saving for retirement. I have automatic deductions set up from our checking account to the respective 529 plan accounts on a monthly basis. As above, this makes the saving automatic and makes the act of not saving to require actively overruling the deduction from our checking account.
Another type of saving we have done over the years I will call short-term goal saving. Some examples are a vacation, a modest home improvement, or new tires for the car. We have been relatively successful at maintaining the discipline necessary to do this. The dollar amounts we’re talking about have been relatively small. Most of the time, it only took a few months to get to the saving goal. Because the goals are small and the need or want is nearly immediate, we’ve been successful at this kind of saving, too.
But, improvement was needed
Where the train has gotten off the tracks is in the area of longer term cash savings. I consider this to be for things like a cash reserve for emergencies, the purchase of a home or car, or for a larger scale home project or furnishings.
I did have a regular monthly deduction for this kind of saving coming out of our checking account each month and going into a money market account, but the amount was very modest and we regularly (a few times a year) raided the account to cover short term expenses for which we hadn’t bothered to save separately. While we were definitely saving, we weren’t leaving that money be for its intended purpose and we weren’t saving enough.
Intervention by automatic deduction
In the last few months, I’ve increased the automatic deduction from our checking account and we’re leaving that pot of money be until we’ve accumulated three months of essential expenses. After that, I will evaluate whether to continue or to redirect the future savings dollars to another need. Will we be successful? We’re certainly determined and motivated, so only time will tell. I’ll keep you updated.
After the longer term saving goal is reached above, I plan to divert at least a portion of the monthly saving to paying off a small auto loan. Following that, I’ll put more into paying down our mortgage, which is the lowest priority as a saving vehicle.
While this is not an article on managing expenses, you might be wondering where the extra funds are coming from to enable us to save more. The simple answer is we are spending less. The areas we’ve cut way back on are dining out, clothing, and hotel expenses. We’ll address expenses, budgeting, etc. in a separate article. Suffice it to say, the additional savings is coming at the expense of expenses – and we’re totally okay with that. It also helps us transition to living on a lot less, which will be required for early retirement.
Where do we put it all?
I’ve touched a bit on the methods of saving we’re using (salary and checking account automatic deductions), but what about the accounts we’re using to sequester funds after we have saved them? The tax-deferred retirement accounts are mostly a no-brainer. Those accounts are held with the custodian our employers choose to administer their 401(k) plans and HSAs, and the IRAs we have from earlier rollovers are at Vanguard. As already mentioned, our college savings funds are in a state-sponsored 529 plan.
The humble savings account
For the other savings, there are many possible methods of organizing your various saving buckets. You could use individual bank or investment accounts. I even know someone who used envelopes filled with cash that were kept under a mattress. Please don’t do that. We keep very little of our savings in actual cash. At any time, we probably have less than $50 cash between us. What I’m doing is using a bank savings account and the aforementioned money market account to keep our funds separate from our checking account. The checking account is purely used for cash flow. Any excess cash left over at the end of the month in the checking account gets moved into the short term savings account. If the short term savings account is ahead of its savings goal plan, I move that excess into the money market account.
But, do I have a separate account for every saving purpose? No, I do not. Instead I choose to track the individual “buckets” of savings that are commingled in an account. For example, I keep all of our short term cash goal savings in our bank saving account. Then I track the individual buckets via a simple spreadsheet I update monthly. I could, if I chose, have several savings accounts at our bank. But that seems like more accounts than I want to manage. What about our long term savings? For that I’m using the money market account.
And what about you? How do you manage your saving for retirement and other goals?
Posted by Jeff