Lots of Good Little Retirement Planning Ideas

I have reluctantly concluded that there are no great ideas when it comes to retirement planning. There’s only two categories of ideas: (i) bad ideas to be avoided, and (ii) modestly good ideas. But good ideas, as modest as they may be, add up. Accumulate enough of them and you’ve got something.

One modest idea to be added to your planning comes from a commenter named Anonymous—“An Actuary”. (Why are so many commenters named Anonymous?) He or she points out that when you add to savings from your paycheck every pay period, you can expect that your effective rate of return will go up a tad compared to adding a lump at the end of every year. And that the formula included in Wednesday’s post implied a once-a-year contribution at the end of every year. Anonymous the Actuary astutely points out that it’s reasonable to expect retirement savings to be added in little dribs and drabs throughout the year.

That’s a good idea! To be treasured! Assume that you add to your savings every pay period. (i) That’s a closer fit to most people’s reality. (Although you might take your savings from an annual bonus, in which case Ernie’s approach may be a closer fit.) (ii) You get your money working for you sooner; that means more work being done by the financial markets and less by you. (iii) You can justify a modest increase in your spending. Nothing wrong with that.

How much of an increase? Anonymous the Actuary figures $317 per year, which is 2.8% less saving and more spending. You can add HBO to your cable package! Thank you, Anonymous. Not a huge increase in lifestyle, but definitely worth taking advantage of, especially when added to other modest retirement planning ideas. A little less investment expense here, a smidgen more investment return there, a dash of tax saving perhaps. It eventually adds up to something really meaningful.

A slight digression on Anonymous the Actuary’s arithmetic. In calculating the savings, Anonymous assumed that the total return for the year would still aggregate 6%, even after taking into account semi-monthly compounding of returns. A different way to look at it is to assume that a reasonable projection for investment returns is 0.25% per semi-annual pay period. Then Ernie’s required savings for the year drop by $597, or 5.2%. So which is more reasonable? That depends on how Ernie came up with his 6% assumption to begin with. But that’s a subject for another post.

Two other commenters—also named Anonymous—raised issues about taking into account inflation and income taxes. Both good points, which I need to address in other posts. But I can only absorb one good idea per day.