Most of us are not saving enough for retirement. Income is increasing at a pace that is slower than the rise in price levels. Besides, households are now spending more on discretionary expenses such as vacation and fine dining. The risk of accumulating wealth for retirement is entirely on you. What should you do to save enough for your retirement? In this article, we discuss some measures you can take to motivate yourself into saving more.
Positive emotions
You derive the benefit of your consumption now, whereas saving for the future does not offer visible benefits today. Nevertheless, saving is important to sustain your living expenses after your retirement. How else will you meet your expenses when your active income stops? We discuss two broad strategies towards self-motivated savings — positive and fear-inducing.
Consider the positive strategies. First, break your retirement goal into meaningful short-term goals. Suppose you plan to retire in 30 years with a wealth of Rs 25 crore. You can break your retirement objective into smaller goals that you can achieve every five years. Remember, the last 10 years of your working life are important. That is also the period when your retirement is within sight. So, you will have a stronger motivation to save; maximise your contribution to your retirement account during this period.
Second, visualise yourself having a lifetime experience during your retirement. You can make wish-boards, sticking pictures of the things that you want to do during your retired life. Looking at the pictures may not get you what you want, but it will prompt you to save today for your retirement. And third, pre-commit to increasing your saving by 3-5 per cent every year. This increase in savings should come from your yearly salary increase; you do not have to cut into your current consumption to increase savings. And if positive motivation is not enough, consider the fear-inducing strategies.
Negative emotions
If you are typical individual, you do not like to lose. In fact, psychologists have shown that we prefer to even give up gains to avoid losses! So, if you are averse to losing, remember this: Not saving enough for your retirement will mean that you may lose your existing standard of living when you retire.
For one, your active income will stop and you will have to primarily depend on investment income to pay for your living expenses. For another, you need much more money when you retire to even sustain your current standard of living because of inflation.
If you do not save enough for your retirement, you may become a burden on your children during your old age. To be physically dependent on your children because of medical condition is one thing. But it is quite another to be financially dependent on them for living. And your living expenses during retirement could be high, especially if you suffer from poor health.
And if the above two reasons do not motivate you to save for retirement, try this: Live on two-thirds of your current income for the next 6 months. Why? You will experience the pain from cutting consumption, a situation you will face in your retired years if you do not save enough today. This experience should drive you to contribute enough to your retirement account!
Saving for your retirement is an important step that you should take to secure your lifestyle when your active income stops. We suggest that you talk with individuals who have retired in the recent past to gather their new experience as retirees. Motivate yourself to save. And view this process not as retirement planning, but as your plan to achieve financial freedom — a state where your passive income pays for your lifestyle expenses.
(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor-learning solutions. Feedback may be sent to knowledge@thehindu.co.in )