Habits help us do things more easily, with less effort.  They cause us to automatically slam on the brakes of our car when we see a ball and small child run out into the street just ahead.  Habits have helped us become right- or left-handed and do things efficiently because of better coordination.

But at the same time, habits can also hurt us. They keep us doing the same thing in the same manner we have always done, sometimes to our great detriment.  Hard to change bad habits such as smoking cigarettes, or constantly complaining about everything, or driving over the speed limit, or not eating healthy can really cause problems. And what about all the bad habits we form when it comes to the way we handle money?

Let’s apply this habit-forming-process to money management.  What is your habit of saving money?  How much and how often do you save?  If you are like 91% of all workers, you save very little and this is why 91% of all retirees are totally dependent upon the Social Security check they receive each month to provide basic living expenses.  This 91% number has been steady for over eight decades.  Anything lasting this long would be classified as a habit, right?  

If you want to change a bad habit, experts say you must consistently do something different for at least 21 days in a row. I think with money habits, it takes at least six months or longer.

Here are some suggestions getting started with better money-saving habits:

• Start by putting all you loose change in a jar at the end of the day.  With wide-spread use of credit cards, you may not have any loose change.  But try it and see.
• Each month  add to savings at least 1% of your income.  Anyone, and I mean anyone, can find extra money to do that through tracking every soda you buy and other small expenses. And if you commit to saving 1% for two months, then make it 2% for the next two months after that. Keep this going until you are able to save 10% of your income and then see how different you feel. A habit of saving 10% of your income will add to your retirement income, and give you more options at retirement than what Social Security will provide.

You can do this!  Start today. For more help contact me: peter@moneymastery.com, or visit www.moneymastery.com.

As people apply a systematic, principled-approach to their finances, such as the one I teach my clients in the Money Mastery program, their thinking begins to change, fundamentally. They no longer feel out of control financially and begin to see each financial decision as it relates to a spending plan, savings plan, debt elimination plan, and tax reduction plan. Because they have an overall Master Plan with a big picture view of how each area of their finances must work together, they are personally and intimately connected to the details that make following those plans possible. They can avoid costly financial mistakes and begin to see highly lucrative opportunities for wealth expansion in the future. With time, they move from being simply a “saver” — someone who gives his or her money over to others to handle in hopes of making more — and instead begins to manipulate and handle that money personally as a dynamic investor.

What’s the difference between a “saver” and an “investor?” A saver lets someone else handle their money, thus eliminating opportunities to learn for themselves what will and will not make them more money. Examples of these types of savers are 401(k) participants, individuals invested in mutual funds and thus forced to use managers who control what happens to their money, and so forth. Often these types of people are referred to as “investors” because they are turning a portion of their money over to be “invested” in mutual funds and stock equities in hopes of gaining a nice return. But even though they may be referred to as “investors” that doesn’t make them such.

Unfortunately this group of people cannot be considered true investors because they are not personally controlling what happens to their money, nor learning how to put that money in motion to generate even more money. The whole idea behind using an integrated system of principles to manager your money, such as the Money Mastery system, is to learn to think like an investor. Doing so helps prevent you from getting into a “herd” mentality. Savers have their heads down, following the person in front of them, hoping for the best. If the rest of the herd is on a good path, then all is well. But unfortunately, as we have seen time and again with the stock market, what goes up must also come down. If the herd is following someone who is headed over the cliff, everyone else is going over with them.

I use this chart on the left to help people understand how little control the average “investor” has over their money when they turn it over to other people to manage in the market.

By contrast, a true investor has his head up, seeking to take action, observing his surroundings, expanding his perceptions, and making a plan by which he will put his money in motion to create more. Investing goes far beyond simply dumping money into a particular investment vehicle, such as a 401(k), or participating in a certain type of investment procedure. Remember, investing should be seen as a plan, not a product or procedure.

The 401(k) was started in the early 70’s as a test, against the long-standing insurance industry’s pension funds management system. With pension plans getting harder and harder to pay out, employees were being advised that they would need to start funding their own retirement accounts — of course Wall Street wanted a piece of the action and thus the 401(k) was born.  Allow me to make some observations based on my 45 years of retirement planning experience about how well that 401(k) test has done.

Observation #1: Human resources counted on to help employees with retirement planning using new programs but this never happened. In the 1970s as pensions became harder and harder to fund, employers were forced to cut costs and hoped HR people would council with employees about their retirement options. Unfortunately this guidance has never really happened.

Observation #2: Employees are only taking advantage of the employer’s match 24 percent of the time.  Statistics show that $24 billion in matching funds for 401(k)s is going unclaimed every year.  This is a huge amount of money that could help the average worker have a better retirement but the opportunities of the 401(k) program have obviously not caught on in the workplace as much as had been hoped with the program was put in place.

Observation #3: Only 10 percent of all employees have stayed on top of any portion of investment choices in the last eight years.  During this time the run-up in the market should have given people a reason to re-balance their funds. When 2008 hit hard, uneducated employees chased the market all the way down selling at the bottom.  Many got so discouraged as to never again be a part of a 401(k) plan again.

Observation #4: Mutual fund companies enjoyed large fees with no accountability.  Plan administrators rebated costs back to fund managers in terms of “soft dollars” (or in other words, paying for travel and entertainment expenses supposedly related to placing investments). These were never reported to anyone for any reason.  If a mutual fund employer can get travel expenses paid for travel needs of his staff members, they are delighted.

Observation #5: The value of the 401(k) approach is in question.  Results speak volumes! Years later, few employees have adequate retirement accounts, and they are living longer that ever before.  Our recent 2010 census report shows the average person reaching retirement age has less that $60,000 of total assets and this is after a lifetime of work and making an average of $52,000 a year.  So $2 million goes through our hands and we have kept only $60,000 to use for the next 20+ years of retirement?  To me this says the 401(k) experiment has failed.

Contrast all this to what workers experienced prior to 1970.  No market risk ever,  because insurance companies guaranteed all the funds.  Of course this meant employees received a boring rate of return, but they also received a retirement income they could not outlive based on a formula, like the number of years worked and a percent of salary.  The employee never had to study investment options and funds were guaranteed so the pension administrator didn’t need to be an investment professional.

Balancing Statistics

Here are some balancing statistics to compare.

• The average worker pre-1970 did not have a college education.  They worked for one company their entire working life, receiving a gold watch after 40 years of service. Those were the good old days.
• The average worker today will have six careers during their working life…six careers, not six employers. The number of people who employ them may be double that! As a result, the 401(k)  experiment came along and each and every employee now had to become their own investment adviser (even though they didn’t know that’s what they would have to do).
• Workers have never have realized, even up to and including today, that they must be totally in charge of their retirement income.  But as I have mentioned in previous posts, even though they are expected to handle all this playing of the stock market, they don’t actually get to do this. It is done by a fund manager, who will often mismanage funds and tack on hidden fees.
• The knowledge that they were supposed to be playing the market and managing their money all these years has come as a big shock to many Baby Boomers as they have begun to reach retirement age and as they realize they haven’t made much in the 401(k)/IRA game. The Census report for 2015 proves this point as an average 65-year-old has less than $60,000 of total assets to show after a lifetime of work.

In future posts I will discuss HOW to change this dreadful situation by learning alternative methods for building retirement.

It can be challenging for people who are planning their retirement to balance the life they want to live right now with the life they eventually want to live once they’re retired. The retirement planning process itself can be the source of a lot of anxiety, particularly for that reason.

With the right information, you can avoid some of these common retirement planning mistakes and take a lot of the stress out of the process:

Living too large too soon. Exactly how much monthly income do you need to maintain your current lifestyle once you are retired? A high estimate might make your retirement seem like an unattainable goal, while a low estimate could lead to some significant financial problems later in life. Most experts say you should plan on 80 percent of your current annual income once you are retired, but it’s always better to overestimate how much you need.

Not taking future health care into account. People often fail to consider how much their health care needs will increase as they get older. You also can’t assume you’ll be covered by Medicare for your health expenses, as the costs for Medicare for retirees continue to go up every single year.

Not making plans for long-term care. According to information released by the United States Department of Health, approximately 70 percent of people over 65 will eventually require care. It’s important to plan for this in your retirement savings so you are prepared should you eventually count yourself among that 70 percent.

Not updating your plans regularly. You should revise your retirement plan every few years to take into account major life events, such as a marriage or the birth of a new child, as well as the state of the markets and your income level.

Waiting too long. The sooner you get started with your retirement planning, the better return on your investment you’ll get. Why wait?

You can avoid some of these mistakes by getting in touch with the team at Money Mastery today to begin talking about your retirement planning strategy. We look forward to working with you!