Don't Plan Your Retirement Saving, Automate It

Don't Plan Your Retirement Saving, Automate It

The best day in my financial life was the day I started automating my retirement contributions. I recall a lot of stress in past years centered around market conditions, getting the ‘best deal’, and second guessing the whole process of contributing to my retirement vs buying a rental or doing something even more risky.

I started automating my retirement contributions in 2006. After it was all setup I immediately started sleeping better. There is a certain peace of mind in the idea that I’m buying at today’s levels, but I had also bought at last year’s levels, and I’ll be buying at next year’s levels.

I prefer automating my contributions because it is less stress, I don’t have to re-think each purchase, and it puts me in a big picture mindset vs a single bet mindset.

Over the years the money has really started to pile up. This is mainly thanks to diversification in the funds I selected, low maintenance fees, and the historic bull market we are currently in. When there is another downturn I look forward to continuing the automatic contributions by reducing my emergency fund a little and trimming back in other areas.

Contributing wasn’t easy during the financial downturn of 2009. My wife and I were lucky because our jobs were stable and we could keep contributing even when things were so uncertain. I realize not everyone was as fortunate. However we have ran into the odd crisis or three (medical, house maintenance, new child etc) where our emergency fund was cleaned out and we had to hit pause on the contributions.

How often we contribute:

  • From my wife’s paycheck we contribute $750. She gets paid twice monthly. The $750 allows us to max out her 401(k), limited to $18,000 per year. That is our top priority because our tax bracket is roughly 35% (counting state and federal income tax). For us, deferring $18k is equivalent to earning $24,3000 pre-tax! All it took to set up was filling out a form with her HR department and selecting a fund to contribute to.
  • I’m self employed, so every quarter I contribute to my SEP-IRA. Again this turns into a large boost in terms of net savings because we avoid paying tax on the contribution. Unfortunately due to the nature of the SEP-IRA, it isn’t as easy to automate. First I have to estimate the amount of profit my business made. Then I take about 16% of the ‘profit’ and mail my brokerage a check for that amount. At the end of the year when my taxes are ready I make a final payment to max out the benefit to the last dollar, which is usually about 18%. The money then flows into a diversified fund and grows tax free.
  • My wife and I both automate our contributions to our Roth IRAs. We are allowed to put in $5500 per year each. On a per month basis our respective contributions are $458.33. We’ve had to pause this one several times over the years, but it doesn’t cost as much since there is no direct tax benefit. However the money in the Roth IRA does grow tax free. The more in there the better in our opinion.

We staggered the automatic contributions across each month like so:

  • My wife’s paycheck on the 1st - $750
  • My Roth IRA on the 8th - $458.33
  • My wife’s paycheck on the 15th - $750
  • My wife’s Roth IRA on the 22nd - $458.33

That way, if everything went in on the 1st and on the 2nd there was a huge crash I wouldn’t feel like so much of an idiot. Sometimes we get lucky and buy on a dip, other times we’ll buy at ‘the top’.  Because our contributions are so consistent it averages out in the end. The shotgun approach makes record keeping a little more complex with all the dates floating around. The actual dates of the contributions vary month to month because the market has to be open for it to go through.

Automate your retirement contributions, our strategy

I’ve discovered what I’m actually betting on with this automatic approach to retirement is:

  • Steady growth of the world economy.
  • Stability and peace in the USA and developed countries.
  • Continued population growth in the USA and developed countries to allow the tax base to grow so government debts and future promises like social security will stay funded.

Hope this example helps and let me know if you have questions by leaving a comment below.

This entry was posted in Family and Finances, Personal Finance
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