Targeted Saving for Retirement
Targeted saving is a saving plan directed toward a future benefit that is otherwise beyond the means of the saver. An example is the consumer who places $X every month in an earmarked account that is targeted on the purchase of a mink coat or a motorcycle at a future date. It can also be described as “self-forced saving” in that consumers have elected to force themselves to adopt savings plans that will achieve their objectives.
While targeted savings plans are available for mink coats, motorcycles and many other costly tangibles, they are not available where the need for them is the greatest and where their absence impacts the largest segment of the population: retirement. Targeted savings plans for retirement have not materialized because of the vagueness of the objective, the lack of clarity on the savings needed to achieve any objective, and uncertainty as to how long the savings period had to be to get there. These are formidable barriers.
My first crack at this problem focused on one potential segment of retirement where these barriers appeared manageable: the paydown of mortgage debt. Homeowners with mortgages can (and many do) adopt savings plans that will eliminate their loan balance over some targeted period, which might be the estimated period to retirement. I help them by providing a calculator that shows the extra savings plan needed to eliminate their loan balance over that period.
This calculator is the most frequently visited page on my web site, at Mortgage Payoff Calculator: Extra Monthly Payments to Pay Off in Specified Period. Its popularity suggests that there is a strong appetite for a targeted retirement savings programs when both the objective and the means for achieving it are well defined. The plan I have developed with Allan Redstone, which we call Retirement Saver (RS), meets that objective:
- The vagueness of benefits is dealt with by defining the benefit as increased monthly spendable funds during retirement, for life. While this may not have the motivational force of a mink coat or a motorcycle, most consumers will recognize the value of being able to purchase anything they might want when the time comes.
- The lack of clarity on the amount of savings required is dealt with by showing the relationship between the savings plan and the increment of spendable funds resulting from it. Plans can be adjusted for both the amount and the payment frequency.
- The uncertainty regarding the length of the savings period is dealt with by allowing the consumer to try out different periods until retirement. I would expect that consumers using RS will try out different combinations of savings programs and savings periods.
RS is now available to consumers on the Retirement Saver page of my website.
While targeted saving is initiated by the consumer, financial institutions will play a critical role in offering and promoting it. Their response will be based on their views regarding plan profitability. My mortgage repayment calculator is not offered by any mortgage sites other than mine because mortgage lenders suffer income declines when borrowers prepay their loans.
We expect a favorable response to RS, however, because offering it to clients can only increase their bottom line. Depository institutions in particular can benefit from growth in deposits by customers using the firms to implement savings programs. There is no charge for installation, or for periodic updates, for any firm that would like to offer the RS option on their own web sites.
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