Retirement Savings: The Power Of Thinking Small

When it comes to retirement savings most people would benefit from bit of  Chinese philosophy. It was Lao Tzu who said, “The journey of a thousand miles begins with a single step.”

You often hear this aphorism other ways: Today is the first day of the rest of your life. Put one foot in front of the other. Just do it.

All of which are variations on the theme of time and effort. You might see some long-term goals as too large to contemplate, too audacious to consider — even a goal as important as building up retirement savings.

Yet any long-term goal can be broken down into smaller, incremental goals that are much less scary. You can lose 20 pounds, if you make a pound a month your goal.  You can drink eight glasses of water a day, if you start your day with at least one and then drink water instead of coffee or soda at meals.

And you can retire on time with plenty of money in your retirement plan if you take that first, crucial step. Here are some ways to ditch the inertia:

1. Join your company 401k

Nearly half of working Americans (45%) have no 401k and no IRA retirement account savings. They simply don’t participate. Employers increasingly push workers into 401k plans automatically, which is a help. While the fees on smaller 401k plans are onerous, putting money in does reduce taxes today. And anyone can open a self-directed IRA.

Make a point of joining your plan, even if it’s only at the minimum level to get any free company matching funds. You can increase it later.

2. Set a short-term cushion goal

Sound financial management revolves around controlling surprises. You do that by controlling cash flow. Aim for a cushion of at least a month’s pay in a savings (not checking) account. Once you make it, increase the number to three months by setting up automatic deductions from your paycheck.

3. Always bank windfalls

Never, ever spend pennies from heaven. Open a Roth IRA account and bank any tax refunds, tax-free inheritance distributions and bonuses from work. Money you don’t expect should always be added to long-term retirement savings.

4. Don’t count on windfalls

Windfalls should not substitute for regular saving.  Think of your 401k, IRA and other automated savings as the solid engine of your plan and any unexpected checks as a lottery ticket that paid off — and brought your retirement date that many days or weeks closer.

5. Invest early and compound

Time is money — literally. Every dollar you save today is worth $2 in a decade, then $4 a decade later, then $8 after 10 years more. Regular saving and compounding is how retirements are built, not through tricky stock trading or  blind luck.