How To Begin Saving For Your Retirement

We don't need financial gurus to tell us that saving for retirement is pretty hard. The question is, what is the trouble with saving? There are four primary psychological underlying factors inherent to us that could actually address this question, according to behavioral economists.



The 4 saving inhibitory Psychological Concepts are:

1. Even with the wish to save a whole lot more, we do not have the will-power to do so.

2. Restrictions are a lot easier to handle if they take effect in a future time. This is why most people waste time and intend on saving next year instead of starting at this very moment.

3. People are a lot more receptive to losses compared to gains. Cash saved is an identified loss to a lot of us because it can’t provide instant gratification to what we want today.

4. Most people think in nominal and not in real dollars. This is referred to as the "money illusion". A pay raise though it’s less than the rate of inflation is recognised as a gain. So we fail to fully grasp that the cost of living is escalating faster than our net income.



"Save More Tomorrow" Method



With these psychological factors in mind, Economists Thaler and Benartzi put together an innovative retirement savings plan known as the "Save More Tomorrow" method. It functions by inviting employees to participate in a future savings plan that will start off in their next salary increase. When they receive their salary raise, a part of it will instantly go to their 401(k) contributions. It is good because the employees will not feel a reduction in their paycheck but they will be able to start saving.



Let us presume you are in your mid 30s and you plan to retire at the age of sixty-five but you have 0 dollars in your 401(k). Let's also say that you just have a median household income of 49,777 USD with a 3% salary raise annually. If you contribute just 66% of your raise to your 401(k), by the time you retire you will have saved roughly $1.5 Million.



The "Save More Tomorrow" System can very well be applied to all of your unexpected cash flow. Why not save a portion of your extra money from your other incomes such as bonuses and tax refunds into your retirement savings? Anyway it isn't going to hurt to set aside money you have lived of not having in the first place.



Every dollar you save will count in the end. It doesn't matter how small the amount you save for it has the potential to accumulate in the long run. When you start getting results, you'll be addicted to saving. You will get to see yourself saving more and more and the journey toward your retirement bliss will finally start.