5 Points to Consider When Automating Your Retirement Savings

5 Points to Consider When Automating Your Retirement Savings

When it comes to saving for retirement, sometimes a passive strategy can be as effective as an active one. Many people today rely on automation to meet their financial goals. Automation is a great strategy for boosting savings and seeing your nest egg grow with relatively little direct action. Best of all, since the money is saved automatically, you likely will not miss it from your monthly paycheck.

There are many different ways to automate savings, but the best strategy will be different for each person. Sometimes it can be helpful to plan an automation strategy with a financial expert. Read on for some automation strategies you may want to discuss with a professional.

1. Paycheck deductions

Perhaps the easiest way to save automatically is through payroll deductions. Many large companies offer retirement plans that allow employees to divert a portion of their paycheck into a retirement account. Also, many companies match employee contributions (up to a certain amount), which amounts to free money for your retirement. As much as possible, you should maximize the match you get from your employer.

If your company does not offer a retirement plan, you can still automate deductions from your paycheck by opening up an individual retirement account (IRA). You can ask even your employer to withhold a portion of your paycheck, tax free, for this type of outside retirement account.

The great thing about paycheck deductions is that your investment portfolio grows without any sort of active intervention on your part.


2. Automatic transfers

You may be wondering what you can do once you have maximized your employer match and contributed the maximum to your IRA. At this point, you can set up different investment and savings accounts and use automatic transfers to create a system you can largely set and forget.

You can set up automatic transfers with IRAs, taxable investment accounts, and health savings accounts (HSAs). You should think about your financial goals when determining where to put your money. In many ways, automatic transfers work like paycheck withholdings except that you set them up through savings accounts. You can set these transfers to occur with each pay period so that you never miss the money in your checking account.

3. Regular increases

One thing that you should think about as you automate your retirement savings is how to increase the amount you save each year. While initially setting your deductions is important, you mustn’t forget to increase savings periodically, as its critical for meeting financial goals. Some companies let their employees configure an automatic increase to their 401(k) contributions each year. Even a 1 percent increase in savings annually can make a big difference over time.

If your company does not offer this option, revisit your finances at least annually and increase your savings appropriately. Doing so lets you ensure you are on the right track toward your goals and motivates you to increase contributions when appropriate. You should also revisit your finances when you receive a raise or pay off a large debt.

4. Windfalls


Financial windfalls needed to be handled with care. Too often, it can be tempting to spend these windfalls rather than putting them into a retirement account.

Instead, think about how you would like to handle a windfall. For example, perhaps you could put half in a retirement account and then use the other half for different purposes. Later, when you revisit your financial situation, you may want to change this percentage. Ideally, early on in life you will get in the habit of putting large chunks of your windfalls toward long-term goals like retirement. A lot of people kick themselves down the line for not saving more of their windfalls.

5. Finance software

Automation makes it a bit more difficult to keep a strong handle on personal finances, but there several software solutions that can keep you organized and ensure you stay on track toward your goals. Many programs let people configure their automatic savings into projections so they can see exactly where they stand. Plus, various apps will remind users of upcoming automatic transfers so that they never get into the situation of spending money earmarked for another account. With automation, overdrafts become a real concern, so software like this can be invaluable for keeping on track of account numbers, especially if you have other additional monthly deductions, such as mortgage payments. In addition, these solutions make it easier to track cash flow and determine exactly where you might be able to cut back if you need to rethink your monthly budget.