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Enforced discipline is key to ensuring you’re saving enough to meet your needs, says Morningstar director of personal finance Christine Benz
By Jason Stipp and Christine Benz
Jason Stipp: I’m Jason Stipp for Morningstar. If one of your New Year’s resolutions was to save more for retirement, we have some tips to help you with that. I’m here with Morningstar’s Christine Benz, our director of personal finance.
Christine, thanks for joining me.
Christine Benz: Jason, great to be here.
Stipp: Investors often obsess about this fund or that fund? A Roth IRA or traditional IRA? But really the thing they should be obsessing about is how much they are saving every month.
Benz: That’s right. We maybe feed the obsession with all of our work on investment selection and tax management and so forth. But when you look at the most impactful things you can do for your portfolio plan and to help yourself reach your goals, the main thing you can do is try to bump up your savings rate. That’s going to be by far the most impactful thing when it comes to your bottom-line return.
Stipp: You often hear, every little bit counts when you’re saving for retirement. You brought an example of how saving just a little bit more can actually have a big impact if you have a long time before you retire.
Benz: If you have compounding on your side, you really can make those small sums work for you very, very hard.
If you are a 21-year-old, for example, and you’re able to save $100 a month, and you earn just 5% on your money, which I think is a reasonable rate of return to assume, and you save all the way until retirement, until you’re 65, you’d have about $200,000 when you turn 65.
If you are someone who is able to kick in maybe $50 more per month–just save $150 a month up until age 65 assuming that same rate of return, you’d have $300,000. So those small amounts, if you can find them in your budget, can really be quite impactful, especially when stretched out over a long time horizon.
Stipp: Small amounts can help, and getting started as soon as you can also sounds like a big help.
Benz: Absolutely.
Stipp: You have a few ways that you might be able to bump up your savings rate–a few ideas for people who are looking for some money to invest. The first one is a chunk of money that most folks get between now and April, which is their tax refund.
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