How Do You Start Saving? Your Tax Refund May Be The Answer

Nov 13, 2015
Originally published on November 13, 2015 10:26 pm

Many Americans feel they can't save any money for the future. Yet if an employer automatically enrolls workers in a 401(k) plan and matches some of their contributions, 90 percent of people stick with it and save and invest for retirement.

Now, what if your employer doesn't do that for you? What can you do? People in NPR's new Your Money and Your Life Facebook group wanted to know.

Alex Browning, 26, works at Green Meadows Farm in Hamilton, Mass. "There isn't a savings benefit plan and there isn't a lot of room to breathe financially," she says.

Both she and her co-worker Erin Feeney said they joined the Facebook group because they know they have to figure this out for themselves. "I've always had short-term, nonprofit work since I finished college and none of those jobs offer any kind of savings benefits at all," Feeney says. "That's kinda scary. I know I have to start a Roth IRA but what do I have to do to do that? I don't know."

On Your Own

We decided to answer this question: What's the best way to set up a retirement account on your own — and in a way that you're likely to keep contributing money to it?

"The most important thing is to get started," says Brigitte Madrian, a behavioral economist and professor at Harvard University. "The biggest mistake that people make is procrastination."

But the most important thing is also the hardest thing. This is why it's such a huge advantage if an employer enrolls you automatically. Left to our own devices, we humans have a bunch of what are called "behavioral biases" that get in the way.

'We're Focused On The Present'

"The term that I think applies best is 'present biased,' " Madrian says. "We're focused on the present and less focused on things that will make us better off in the future." That's a big reason that we tend to be so bad at saving. More than half of U.S. households have precariously low savings.

Another problem is there's no deadline to give us a kick in the pants to set up a retirement account, like there is with paying our taxes, for example. We'd never get around to doing that if we didn't have the federal government forcing us to do it by April 15.

But, Madrian says there are good ways to nudge yourself into starting a good retirement account.

"There's a lot of research that plan-making can help people follow through on their good intentions," she says. "And the research suggests that the more concrete is your plan, the more likely you are to be successful."

Make A Plan

Madrian says people should make a plan about when they're going to open, for example, an IRA or a Roth IRA and exactly how they are going to do that. Telling friends about it, too, creates some social pressure. Research shows that helps your chances of following through.

She suggests taking all or half of your tax refund when it comes to open your first retirement account — or for that matter your first 529 college savings plan. That's a great way to make a plan with a deadline, Madrian says.

Another issue is how much money you need to have saved up in order to open a retirement account. What's the minimum investment?

"The good news is things have modernized tremendously," says Stephany Kirkpatrick, a vice president at LearnVest, a low-cost online financial advice company.

Set It To Automatic

Kirkpatrick says some companies require a minimum of $1,000 or $3,000 to get started. But, she says, others have much lower minimum investments. She says that's "more on the roboadviser side of things to enable you to put in a very minimum amount — sometimes $10 a week, $25 a month — on an automated basis."

Kirkpatrick and Madrian both say that whatever account you set up, making the savings automatic is key. That makes your do-it-yourself IRA feel a lot more like a 401(k), Kirkpatrick says. "That's why we like it. It's automated. We don't have to think about it."

And she says that makes it much more likely we'll keep squirreling away money each week or month. "The behavioral economics here are really key," Kirkpatrick says.

All of the investing experts and economists we interviewed for this series also stressed the importance of finding investments with low fees. Many said you should try to keep total annual fees below 0.5 percent in any investment account (401(k), IRA, 529, etc.). There's more information about that in our profile of investment guru Jack Bogle and our sample portfolios page.

If you want more help with all of this, you can join the NPR Your Money and Your Life Facebook group. Madrian says she'll help nudge people to follow through on a pledge to set up smart, successful investment accounts.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.

AUDIE CORNISH, HOST:

Many Americans feel they can't save money for the future, but if an employer automatically enrolls workers in a 401(k) plan and matches some of their contributions, 90 percent of people stick with it and save and invest for retirement. But what if your employer doesn't do that? NPR's Chris Arnold reports for our series Your Money and Your Life.

CHRIS ARNOLD, BYLINE: OK, at one of the spectrum are Americans whose employers set them up to succeed with really great 401(k) plans. They don't have to do anything at all and they're just automatically on track to have a nice nest egg 30 years from now. But for many other people, the only eggs that they've got going for them are the ones they eat for breakfast. At Green Meadows Farm in Hamilton, Mass., two friends who work here are at the other end of that savings spectrum.

ALEX BROWNING: There isn't a savings benefit plan and there isn't a lot of room to breathe, financially.

ARNOLD: Alex Browning and Erin Feeney both signed up for the NPR Your Money and Your Life Facebook group. Feeney saw that we'd done some stories about 401(k) plans, and she posted in the group saying, hey, what about people like her and her friend, Alex?

ERIN FEENEY: You know, we're 26. I've always had short-term, nonprofit work since I finished college, and none of those jobs offer any kind of savings benefits at all. I know I have to start, like, a Roth IRA, but what do I have to do to do that? I don't know.

ARNOLD: So we decided to answer this question. What is the best way to set up a retirement account on your own and in a way that you're actually likely to keep contributing money to it?

BRIGITTE MADRIAN: The most important thing is to get started. The biggest mistake that people make is procrastination.

ARNOLD: That's Brigitte Madrian, a behavioral economist at Harvard. But she says the most important thing is also the hardest thing. That's why it's such a huge advantage if an employer enrolls somebody automatically. Left to our own devices, we humans have a whole bunch of what are called behavioral biases that get in the way.

MADRIAN: The term that I think applies best is present biased. We're focused on the present and less focused on things that will make us better off in the future.

ARNOLD: Another problem is there's is no deadline to give us a kick in the pants to start a retirement account. But Madrian says there are good ways you can nudge yourself.

MADRIAN: There's a lot of research that plan-making can help people follow through on their good intentions, and the research suggests that the more concrete your plan, the more likely you are to be successful.

ARNOLD: So Madrian says people should make a plan about when they're going to open, say, an IRA - an individual retirement account - and exactly how. Telling friends about it too creates some social pressure, and that helps. And she suggests this - plan to take all or half of your tax refund when you get it and use that to open your first retirement account. It's a great way, she says, to make a plan that has a deadline. Now, a lot of people ask how much money they need to have open a retirement account.

Stephany Kirkpatrick is with LearnVest. It's a low-cost online financial advice company.

STEPHANY KIRKPATRICK: Some companies do require a minimum thousand dollars to make your first purchase into a mutual fund whereas other companies are set up to enable you to put in a very minimum amount - sometimes $10 a week, $25 a month - on an automated basis, which feels a lot like a 401(k).

ARNOLD: Back at the farm, out by the chicken coop, that sounds like it might be the best approach for Alex Browning and Erin Feeney. Browning says, unlike some of her friends, she knows that she has to figure this out all by herself.

BROWNING: You know, I have a lot of friends that have the kind of job you're describing, where their savings are set up for them. And I think when you are working in a field where that's not set up for you, it is little bit more on your mind.

ARNOLD: So to help people turn those thoughts into action, we've got an unusual public radio pledge. No, we're not asking for money. It's a pledge to yourself to start saving for retirement. You can take the pledge at npr.org/moneyandlife. And the Harvard economist, Brigitte Madrian, says she'll help everybody to follow through and set up smart investment accounts. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.