In this blog post, I’m going to continue our discussions of how to automate your life — with the goal of reducing mental complexity and making your life more free. In this post, I’d like to share how we automate our retirements.
As I said before, you make the decision to save for retirement once, so why relive that decision month after month when you carry out your plan?
Make the decision once and take action once. Pure and simple.
For the purposes of this discussion, I’m going to separate our taxable investment accounts and IRA and purely talk about our tax-advantaged accounts through our employers.
Most people have some form of a tax-advantaged account available to them through their employer. To add to the fun and excitement of retirement planning, these plans are generally named using very exciting names, like “401k” and “403b” or “TSP” and so forth.
Regardless of their names, all of them are automatically primed for automation. Because once you opt-in and get them set up, the payroll department at your employer will automatically deposit the funds into your accounts for you. All you have to do is sign up for the accounts, determine the contribution amounts, determine the funds to invest in, and that’s it!
Briefly, here’s the steps:
Step 1: Find every tax-advantaged plan you (and your spouse) can contribute to.
Step 2: Contribute as much as possible.
Step 3: Set up the investment plans
Step 4: Relax! Your retirement plan is in motion!
Pretty simple, right?
Step 1: Find your plans
Make the decision once and take action once.
For us, the tax-advantaged plans at our disposal include: 401k, 403b, and 457, all through our employers.
We’re going to use all three accounts to maximize our tax-savings.
Step 2: Contribute as much as possible
Here’s where you need to sit down and determine your budget for contributions. I personally believe that one should be as aggressive as possible in their retirement savings, so for us, that means maxing out these accounts.
However, I would aim at least 10-15% of your gross income. If you’re really going for FIRE (Financial Independent/Retire Early) then you will probably need to increase your savings rate to 20-30%, maybe more depending on how aggressively you are planning to retire.
Nevertheless, select the amount (or percentage) and punch it in.
If you’re going to max out your contributions anyway, you can consider putting the contribution amount to 100% — this will use all of your first paychecks in the year to contribute to your retirement, ensuring that (1) your accounts are funded and (2) that they are funded as soon as possible. The greater time you’re in the market, the greater chance your money can grow!
Step 3: Set up the investment plans
This is where it gets a little more difficult, and frankly, overwhelming. I know for myself, this is the stage that gets me bogged down a bit. It’s where the simple process of automation reaches a stand still as you review the myriad of options available to you.
I think there is a few things to consider.
First: Choosing something is going to better than nothing.
If you have to run off to clinic or to a meeting or whatever, just choose something and move on. Investing in something is better than nothing. There may be advantages in one fund over another, but over the long term, any fund will far outperform putting that money in the bank.
If you take this path, then put a calendar reminder to review this information in a month or two to ensure that this is the fund you want to stay with.
Second: If available, go for an index fund. An S&P 500 Index Fund is a great choice. They often have low fees and will be a fund that is diversified — something is a key.
We can talk about funds until we’re blue in the face, but for now, let’s work with this!
Step 4: Relax! Your retirement plan is in motion!
That’s it! You’ve taken action. It’s still worth setting a calendar reminder to review your settings at least annually, if not more often. You can consider increasing the savings rate or maybe shifting around the funds. Particularly, if you employer changes the fund offerings, you should take a look at what’s leaving and what’s new on the menu — there might be a fund worth investing in.
Hope this helps!
Next steps
We’ll keep continuing our series on automating your life. For now though, have you set up your retirement funds at work? Was it easy? Hard? What other automation topics would you like to see?