The past year has been unlike any in our lifetimes, but summer is coming, and with Covid cases well below their peak and vaccination rates increasing, many in our region are rightfully growing optimistic and excited–myself included!
Some of that excitement for many people will involve an annual spring cleaning and updating of their homes, but it’s a great time as well to make sure that your savings and retirement goals are also updated. Here are a few things you can do to help increase your savings for retirement, gleaned from my years as a professor of economics working with young adults working to build their financial futures:
- Save all or some of your tax refund. You’ll hear constant advertisements on the radio to go spend your tax refund on shiny products, but if you are getting a refund, save your money instead! The impact of saving your tax refund could be enormous. For example, if you are 35 and put $2,000 into a low-fee mutual fund that earns 10% annually, that $2,000 will grow to almost $35,000 by the time you are 65 years old—even if you never do anything else.
If at age 35 you save $2,000 from a refund every year, with that same annual return, you will have an extra $360,000 at age 65–and you’ll have a lot more buying power then!
Saving part or all of a refund can go a long way toward meeting your retirement goals, something adults of all ages should be thinking about. Many retirees will wish they had saved more money once they reach retirement. Almost none lament that they saved too much.
- Consider the latest stimulus payment as a loan from the government. The U.S. government has run deficits for many years now, under both political parties. But the 2021 stimulus – which comes on top of two other Covid-related stimulus bills in 2020 – seems different for two reasons. The first was how little this one was needed, as the unemployment rate dropped dramatically over the past eight months (when the bill passed it was lower than at any time during Obama’s first term). Second, of course, and relatedly, it added significantly to our country’s debt burden. This is all borrowed money; therefore, there will be one or more economic consequences down the road.
One such consequence is the U.S. government will have to pay more in interest every year, meaning it will either have to cut spending elsewhere or impose higher taxes. A second consequence is that the government may choose to chip away at this massive debt in the future, meaning we all will be paying it back. Hopefully, we don’t experience a third consequence — which would have severe consequences — such as a government default or printing more money, which will lead to massive inflation.
That is out of our control as individuals, but using the stimulus payments as a loan from the federal government, and saving some or all of it, is not.
- Use behavioral economics to “save more tomorrow.” Economists Shlomo Benartzi and Richard Thaler (who won a Nobel Prize for his research) show how you can use a behavioral economics mindset to increase your personal savings. They find that the key is not to increase your savings immediately but to commit that any salary raises go automatically into your work-based retirement accounts. Or, if you don’t have a work-based retirement account, simply set up automatic contributions to your IRA or Roth IRA.
The idea is straightforward and brilliant. Taking money from your check now can be tough. So if this is too difficult, why not commit to using it to increase your retirement contributions rather than raising your level of consumption? That should be easier, as you won’t ever “feel the pinch” of the increased contributions because you will continue at the same standard of living. Different workplaces have different timelines for when raises are given — but you (and perhaps your spouse, partner or family members) could discuss this now and commit to putting your next raise(s) into retirement savings.
- Take a look at your bills and prune expenses where necessary. Just like pruning the hedges, it’s time to take a close look at your monthly bills and see where cuts can and should be made. No, it’s not fun, but it is something you should do at least once a year. Whether it is a phone line you don’t need, a magazine you’re no longer reading, a streaming service you don’t watch anymore, there are probably expenses you can cut that could save you money every month, and those small savings can add up.
As the days get longer and the temperature rises, people take to their closets, backyard and cupboards for spring cleaning. It takes effort, but we know it’s better for us in the long run. The same is true of saving for retirement and tending to our personal finances. Now’s the time to take the time to make sure your savings and budgeting are in good shape.
Matthew Rousu is Dean and Professor of Economics in the Sigmund Weis School of Business at Susquehanna University. He is author of the book Broadway and Economics: Economic Lessons from Show Tunes. Views do not necessarily represent those of his employer.