Procrastination in saving for retirement is so pervasive that it can be considered the norm. Retirement is a long way off and how much will be needed is unclear. The question is complicated by possible allocation to estate bequests and (for homeowners) the possible use of home equity in the process. Procrastination is further encouraged by expectations that future income growth will enhance the capacity to save in the future, further rationalizing the failure to save now.
Overcoming Procrastination With Foresight
The key to overcoming procrastination is the ability to project how savings now will affect lifetime retirement income. My colleague Allan Redstone and I have developed a tool that does this, we call it the Retirement Saver (RS). With RS, a consumer can see how their retirement finances will be affected by different start dates, retirement ages, and savings plan amounts, frequency and duration. And as time passes, retirees-to-be can monitor their progress.
RS also breaks down retirement funds by source: the amount attributable to financial assets at the start, the amount resulting from the savings plan during the period until retirement. and the amount drawn from home equity at retirement. (Home equity is released by using a HECM reverse mortgage credit line). These components are illustrated below for a 40-year- old male whose initial plan is to save $500 a month to supplement his $100,000 of financial assets and his current home equity of $150,000.
Note: The 40-year-old male aims to retire at 65 and plans to save $500 a month starting immediately and terminating at retirement. He has elected a plan in which monthly spendable funds increase by 2% a year. His status now consists of financial assets of $100,000 earning 6%, a home worth $500,000 appreciating at 4% a year with a mortgage balance of $350,000 at 4% and a payment of $2000. His equity in the house will be used to draw a credit line on a HECM reverse mortgage. A portion of financial assets are used to purchase an annuity on which payments are deferred for 10 years without a cash refund option. The remaining assets plus the HECM credit line provide spendable funds during the annuity deferment period.
Quantifying the Cost of Procrastination
In addition to its many other applications, RS can be used to quantify the costs of procrastination. I assume the same 40-year-old male illustrated in the chart adopts a plan to save $500 per month until he retires at 65, but he is not sure when to start it. The table below shows the initial spendable funds he will have if he begins saving $500 a month beginning immediately, in 5 years and in 10 years. The decline in spendable funds over these periods is entirely due to the delay in implementing his savings plan.
The Retirement Saver Calculator (RS) used to construct this table and countless others not shown here is now available on my website. The calculator allows anyone to develop a retirement plan that is based on the features and assumptions that are applicable to them. Depository institutions that see RS as a tool for encouraging the growth in deposits that comprise some or all of the financial assets earmarked for retirement can offer RS on their own sites. Financial and retirement web sites can also provide RS as a service for their customers. There is no charge for installation or for periodic updates.
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