In this article, you’ll find lots of ways you can add dollars to your retirement savings. But Paul Merriman also shows that if you want to be among the relatively few people who are truly affluent, you’ll probably have to adopt some new attitudes and habits. 

It takes more than just money to be affluent. Affluence depends on your state of mind as much as the state of your bank balance. In this article I'll show you numerous ways you can add dollars to your bank account and your retirement account. But all our tips and suggestions won't make you affluent by themselves. You'll most likely have to adopt some new attitudes if you want to be among the 3.2 percent of the population that holds 46 percent of the wealth in the U.S.

 

That statistic comes from Thomas J. Stanley, chairman of the Affluent Market Institute in Atlanta (404-257-0561). His primary business is helping other businesses and professionals market themselves to affluent people. But along the way, over the past quarter of a century, Stanley has studied affluent people thoroughly, learning what makes them tick, how they think, save, invest and spend. I heard him speak recently at a conference I attended and was struck by a few things he said.

People who aspire to affluence are often surprised by some of the traits that separate this segment of the population. They aren't likely to drive the newest and most expensive cars by BMW, Lexus and Mercedes. You're more likely to find them driving late-model Chevrolets. Affluence doesn't have much correlation with their jobs or professions. You'll find firefighters among their ranks and far fewer physicians than you might expect (Stanley says doctors are notorious for overspending their income).

And what credit card do you think they are most likely to be seen using? Think it's a supposedly prestigious American Express Platinum card? Wrong! It will either be a plain (non-gold) Visa or MasterCard or a Sears charge card. That's right, Sears. That store just appeals to their sense of solid frugality.

And frugality is what we are talking about if you want to be affluent. Wealthy people are those who inherit money. It's called "old money" and it's likely to be displayed modestly, if at all. Affluent folks, on the other hand, are those who earn more money and (this is the crucial point) manage to hang onto it by spending less than they make. Frugality is one major thing that separates the affluent from the rest of us. Another is courage. Affluent people tend to be business owners, people with the courage, skills and determination to work long hours and put their assets on the line for something they believe in.

ADD $100,000 TO YOUR RETIREMENT NEST EGG

I can't make you affluent but I can share with you some ways you can adopt the mind set of affluent people. They seem like inconsequential things, especially one by one. Pack your lunch instead of buy it. Use two-for-one coupons. Pump your own gas. How can you get $100,000 from stuff like that? If that sounds impossible, read on. And remember it's the attitude that counts. If you make a game out of saving every dollar you can, you will be amazed at how many opportunities you'll find, with relatively little pain, to feather your nest.

We could call this topic something like "Think Your Way to Retirement," but a lot of readers might dismiss that as being flaky. We don't consider ourselves flaky in the least, but we believe in the power of the mind. Here are some ways that many typical 40-year-olds could add $100,000 or more to a retirement stash without a lot of work or sacrifice. But these suggestions only work for those who implement them. (Funny how that works!) And 99 percent of the trick of taking these suggestions is a matter of mental attitude.

Of course you can use these ideas regardless of your age. To show their cumulative power over time, we have assumed they are being put into effect by a 40-year-old who has 25 years until retirement. If you are past that stage in life, your savings may be less. But the ideas are just as valid. And if you would like an extra copy of this Fund Exchange issue to pass along to somebody younger, call our office.

I have done well in life financially, but I regard myself as a frugal person. I just hate to waste any money. And I have noticed a similar attitude in many people who have accumulated substantial assets. For example in an airport or a hotel, my frugal instinct tells me there's no reason to pay somebody to carry my bags when I can carry them myself.

SPEND IT OR SAVE IT

For every $1 you have, you can only part with it once. You can spend it. Or you can save it. I suggest you remind yourself of this often. Create a mental attitude that favors saving-and ultimately investing-over spending. How many people do you know who really want you to save? Perhaps your parents. Your spouse. Your children (who hope something will be left when you are gone). And of course the professionals (including me!) who stand to make money when you invest.

But everybody else in the world, it seems, wants you to spend. Billions of dollars are spent every year on advertising designed to separate you from your money. More billions are spent to separate you from money you don't even have yet. It's called credit and interest. And it's expensive.

My son, Jeff, and I often have lunch together in one of two very fine restaurants. But we almost never do so without using a two-for-one coupon. Recently we took two clients to lunch for free using those coupons. We'd save even more if we brought lunches from home periodically-perhaps we'll work on that this year.

Here are our suggestions for everyday savings you can make, that taken together over the years, can add substantially to your retirement.

1. Pump your own gasoline. You probably already do this, but I'm willing to bet a full tank of premium unleaded that you don't know how much money you can save over a quarter of a century by doing so. If you are in the 33 percent tax bracket, you have to earn 30 cents in order to pay an attendant 20 cents to pump a gallon of gas for you. If you can save 20 cents a gallon on 20 gallons a week over 25 years, that's $5,200 you save. Invest that money at a compound rate of return of 8 percent and you'll add $15,200 to your retirement nest egg.

2. Buy used cars instead of new. When I'm ready for new wheels, I buy a used car instead of a new one. (Jeff still prefers new cars, but I think he'll eventually come around to my point of view!) The last car I bought was a two-year-old Cadillac in 1992. It had 19,000 miles on it and was in near perfect condition. I paid $17,000. I could afford to spend more for a car. But I don't need the anxiety of knowing that the moment I drive off the dealer's lot I have lost $4,000 to $6,000 in depreciation. If you replace your car every six years and save $6,000 each time by buying used instead of new, that puts $100,100 into your retirement pot.

3. Take your lunch to work. One day a week, save $5 by bringing a lunch from home. That savings of $260 a year works out to $19,000 extra in retirement-enough to buy a lot of meals with the senior discount you will of course take advantage of.

4. Be smart about when you invest. Put $2,000 into your Individual Retirement Account at the first of January each year instead of waiting until 15 months later, the last day you are eligible. At an 8 percent compound rate of return, that adds $1,000 to the return on your first $2,000 contribution by letting it grow for 25 years instead of 24. Add one year to the returns of every other IRA contribution, and you add more than $13,700 to the value of your IRA after 25 years. (Of course the calculation is more complex when you consider the effect of taxes and the interest you could earn on your $2,000 each year if you left it in the bank waiting to make your IRA contribution.)

If you are eligible to contribute to a profit sharing plan, estimate your annual end-of-year contribution and invest the estimated amount in January instead of December. Adjust your contribution up or down once you have final numbers. Your gain could be much more significant than those on a $2,000 IRA contribution.

5. Maximize your 401(k) plan at work. Many workers fail to take full advantage of this tax-deferred retirement plan and they miss out on big tax-deferred gains. Many of you only contribute to the level that your contribution is matched by your employer. Adding $1,000 a year to your contribution will cost you $720 (if you are in the 28 percent tax bracket). Over 25 years, that's an extra $18,000 out of your pocket. At the end of 25 years, assuming a compound rate of return of 8 percent, you'll retire with an extra $52,600.

6. Be smart about how you invest. Add to your returns by investing for growth instead of income returns. A mere 1 percentage point added to your returns (8 percent vs. 7 percent) over 25 years, assuming you start with $25,000 and add $5,000 a year, puts $23,277 extra into your account-all at no additional cash cost to you.

7. Be smart about your banking. In our privately managed accounts, I talk to many of our clients at least once a quarter and I am constantly surprised how many of them have $10,000 or more in checking accounts, savings accounts or money market deposit accounts. Banks, of course, want your money in the lowest-yielding account you'll tolerate. But why should you tolerate getting a pittance for your money? A money market deposit account through a bank may pay 2 percentage points less than a money market fund through a mutual fund family. What do you get in return for giving up that 2 percent? Federal deposit insurance and convenience. The former is a dubious benefit. The latter is something you can get another way. Switch to a bank that is affiliated with a brokerage and will let you transfer money by telephone between your brokerage account and your checking account.

Put your money in the broker's money market mutual fund and earn an extra 2 percent. When you need some of that money to pay bills, simply make the telephone transfer. On $10,000 of savings, this will earn an extra $200 a year, or $5,000 plus accumulated interest at retirement ($14,600). All for about an hour of work per year, at the most, to make the initial switch from one bank to another and to make subsequent transfers.

And let me say something here about spouses. Very often one partner is a saver and the other a spender. If your spouse resists making some simple change like this, attach the extra $14,600 you will get to some tangible future reward. Tell your spouse you're earmarking the $14,600 for a trip to Tahiti when you retire.

8. Move your emergency money from a bank or money fund into a bond fund. If you have $10,000, a short-term or intermediate-term bond fund should add at least 2 percentage points, or $200 a year, to your return. Over 25 years, that's another $14,600 for the Tahiti trip. Tell your spouse that will pay for your hotel and meals in the year 2020!

9. Be smart about your credit cards. It seems silly that we should have to give this advice, but millions of people-probably even some readers of the Fund Exchange-carry average balances of $2,500 or more every month on credit cards. At an interest rate of 14 percent, that costs you $350 a year, for which you receive absolutely nothing. Over 25 years, that could add $25,600 to your retirement fund. Just think what you could do with that in the gift shops of Tahiti!

10. Give away what you don't need. Once a year, go through all your belongings and collect all the things you have outgrown or don't need any more. Donate them to a charity, keep a list and deduct their value on your tax return. If you donate $500 a year worth of goods, that would save you $140 a year if you're in the 28 percent bracket, and grow to a total of $10,200 over 25 years.

11. Explore other creative ideas. You can surely look at your own lifestyle and come up with ideas for saving money. Use your library instead of a bookstore. Share the cost of magazine subscriptions with someone else. Vacation at home once in a while instead of flying across the country or to Europe. Review all of your insurance policies and then shop carefully to make sure you are getting your money's worth. If overspending is an issue for you, establish a buddy system. Agree not to spend more than $100 on anything (except in an emergency) without talking to your buddy about it first. Don't give your buddy veto power. But give him or her the opportunity to suggest alternatives and ask some questions to see if you really need to spend that money. This should save you at least $200 a year, or be worth $14,600 over a quarter of a century.

 

 

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