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Convincing Americans to save more for retirement ranks right up there in difficulty with getting them to stop eating fast food. We aren't big on self denial.
But what if you didn't have to sign up for the sacrifice immediately? What if you could choose to increase your payroll deduction for savings next year or the next time you got a raise. Would you go for it?
Administrators of some 401(k) retirement savings plans think you just might. Vanguard Group has been testing what it calls the "Save More Tomorrow" automatic savings plan, designed by experts in the field of behavioral finance. Participants agree to automatically increase their retirement savings by a set percentage each year. They can change their minds, but if they do nothing, the increase goes into effect. That's the opposite of the current situation in which doing nothing leaves most participants with low savings rates.
After a successful test run, Vanguard made automatic savings increases a component of its "One Step" retirement savings plan being rolled out this month. Participants also will get automatic asset allocation, with their investments becoming more conservative as they age.
Rival Fidelity Investments is working on a plan for automatic savings increases and other plan administrators soon could follow suit.
You don't have to be a behavioral finance expert to know that many workers are confused about retirement plan choices and in denial about how much money they will need to retire. Plans like Vanguard's Save More Tomorrow won't solve those problems. However, they could go a long way to overcoming another big obstacle to retirement savings - plain old inertia
Q. I plan to retire from the federal government seven years from now at age 55. I contributed to a tax-deferred savings plan that I could use to supplement my government annuity. Instead of doing that, I have been thinking about withdrawing enough to pay off my $80,000 mortgage when I retire, eliminating that monthly bill. What is your advice?
Congratulations on planning ahead.
Whether it's a smart move to pay off a mortgage depends on individual circumstances. Here are some questions for you and other readers to ask as you decide what's right for you:
1. Is the interest rate on your mortgage higher than the return on your investments?
2. Are you getting much tax benefit from your mortgage interest deduction? Compare your itemized deductions to the standard deduction you could claim if you did not itemize. It's only the excess that's actually a benefit.
3. Would you have sufficient cash reserves after paying off the mortgage? Everybody needs an emergency fund, although setting up a home equity credit line could give you a margin of safety.
4. What are the tax consequences of withdrawing the money for the payoff? If you take $80,000 out of your savings plan in one year, you will put yourself in a higher tax bracket. Withdrawals over two or more years might make more sense. Do the tax calculations before you withdraw any money.
5. Would having your house paid for make you feel more secure in retirement? Sleeping well at night counts for a lot.
If paying off the mortgage makes sense, why wait to start working toward that goal? You could make extra payments toward principal while you are still employed. Then when you retire, you would not need to withdraw as much from your savings plan.
Note to readers: If you are an investor who has paid Florida intangibles tax in the past, you are due some relief this year. The tax applies to the value of stocks, bonds and mutual funds held outside tax-deferred accounts. In the past, only the first $20,000 in assets was exempt from the tax ($40,000 for couples). This year, the first $250,000 is exempt ($500,000 for couples). And you don't have to pay at all unless you owe at least $60.
About 600,000 individuals and businesses will no longer have to pay the tax as a result of the larger exemptions. For more information, contact the Florida Department of Revenue toll-free at 1-800-352-3671.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.