Short-Term Savings Essential for a Successful Retirement Plan

Recent survey results that show a continued high rate of loans against 401k retirement accounts and account closures due to change or loss of employment underscore the critical role short-term savings play in a successful retirement savings plan.

401k plans:  easy and automatic

401k retirement plans are popular because they are easy and effective.  Just sign up and forget it.  Many 401k programs today are automatic opt in, so an employee doesn’t even need to sign up to participate.  No discipline is required; plan participants never see the money.  Retirement contributions are withdrawn automatically from each paycheck and deposited in the retirement account.  In most cases, employers match all or a portion of the employee’s contribution up to a certain percentage of annual earnings.

Slush funds instead of retirement accounts

Because they are easy to implement and require no discipline to maintain, retirement accounts are the only savings many Americans have.  When that is the case, retirement accounts become slush funds that are tapped whenever there is need for extra cash.

Retirement accounts are intended to be long term.  Retirement investment fund strategies are structured for a period of 20, 30, or 40 years or more.  Borrowing from retirement accounts or closing them when there is a change or loss of employment compromises the effectiveness of long-term investment strategies as well as reduces the amount of money invested.  Interest paid on program loans may not replace gains that could have been realized had the money remained invested.  This has been particularly true over the last few years as the stock market averages have soared.  A decision to close an account due to a change or loss of employment subjects the plan participant unduly to market swings.  Many who lost their jobs during the Great Recession closed retirement accounts when the stock market was at or near its low point, suffering huge losses unnecessarily.  In addition, money from retirement accounts that are closed gets spent and is no longer available for retirement funding.

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Short-term savings protects integrity of retirement account

Short-term savings eliminates the need to borrow from retirement accounts or close them when there is a change or loss of employment.  Money for down payments, medical deductibles and co-pays, living expenses during a period of unemployment or reduced hours, relocation, and such comes from short-term savings rather than the retirement account.  Short-term savings allows a retirement account to remain a retirement account invested for the long term rather than a slush fund that is tapped when ever extra cash is needed.

Save for the short term as aggressively as you would save for retirement.  It takes a lot of short-term saving to keep from accessing a retirement account.  You will need an emergency fund equivalent to 6 months of living expenses for use in the event of an interruption in income due to a layoff, accident, illness, or reduction in hours.  You will need to save for unpredictable expenses such as medical co-pays and deductibles, house and automobile repair and maintenance, and appliance repair and replacement.  You will need targeted savings for a replacement vehicle, vacation travel and expenses, Christmas gifts, room addition, swimming pool, big screen television, a down payment on a house, and so forth.

Short-term saving produces increased retirement saving

Unlike an employer sponsored 401k retirement plan, short-term savings requires discipline.  Money must be set aside every month to fund the various short-term saving accounts.  To do this consistently requires the use of a budget to plan spending in order live on less than you earn so money is available each month to save.  The discipline to save for the short term will make you a better saver for retirement, as well.  The control you exercise over your spending to save for the short term will allow you to increase the percentage of income you set aside for retirement savings.

Short-term savings make successful retirement saving possible.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

Big Lots’ Clearance Deals Offer Big Savings on Snack Foods

Rosa and I have become fans of the Big Lots chain of discount stores ever since we discovered how much we save on snack foods purchased from them.

We first started purchasing snack foods at Big Lots because of the discounted everyday prices.  Later, we noticed the clearance items piled into grocery carts parked inconspicuously to one side of the entrance doors.  The products sold at clearance prices are often snack foods that are very near the “Sell By” dates.  The prices of these items have been reduced for quick sale and typically range from $1.00 to as low as 50 cents per box or package.  Imagine, a 12.4 oz box of Sunshine Cheez-It crackers for 75 cents or a box of Nabisco Triscuit crackers (13 oz) for just 50 cents.

Freezing extends useful life

Does purchasing a snack food item that is near or at the “Sell By” date make you squeamish?  Rosa has found that freezing these snacks in their original packaging for 24 hours keeps them edible for a long time.  Just because a product has a “Sell By” date doesn’t mean it turns bad immediately upon exceeding that date.  Of course, we check the “Sell By” or “Use By” dates and avoid purchasing anything that is more than a few days past the date.  Most of the items we purchase from the clearance carts have not exceeded the “Sell By” date.

Damaged packaging doesn’t always mean damaged goods

Some items may have damaged packaging:  tears in a box or crushed corners.  We search for those items with the best packaging, but we have purchased items that have damaged outer boxes after determining that the inside packaging (bag) is intact and the product has not been compromised.

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Beyond snack foods

Big Lots clearance carts include other items in addition to snack foods.  We recently bought several boxes of breakfast blend tea for 75 cents a box (25 tea bags per box).  In the past we’ve purchased other food items such as an au grautin potato mix from the clearance cart.

Product selection is limited

When dealing with clearance items, we work with what is offered.  Our favorite snack food may never be marked down for quick sale, but there are usually plenty of interesting products from which to choose.  The prices are so low they tempt Rosa and me to be adventurous and try items for which we would have never been willing to pay full price on the off chance we might like them.  We have often been pleasantly surprised.  And if we don’t like a particular snack, we can toss it and only be out 50 cents or so.  Sometimes there is nothing in the clearance carts that appeals to us, and we walk away empty-handed.  But we always take the time to rummage through the contents of the carts just in case there is a good deal waiting for us there.

Big Lots isn’t alone in discounting clearance items for quick sale.  Rosa and I often purchase marked-down baked goods at Walmart and Albertson’s.  Keep an eye out for those shopping carts or bins loaded with clearance items.  They may look disorganized and unappealing, but many a good deal can be found in them if you have an open mind and take the time to pick through the merchandise to search them out.  It’s just one way we live well on less.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

Credit Isn’t the Only Thing That Creates an Illusion of Prosperity

I have discussed elsewhere in this blog how the use of credit to finance purchases produces an illusion of prosperity.  But credit is not alone in its ability to create an illusion of prosperity.  In their own way, defined benefit pension plans and retirement health care benefits, government entitlements (Social Security and Medicare), and asset bubbles (the housing and stock markets, to name a couple) can create an illusion of prosperity.

Defined benefit pension plans and retirement health care benefits

Defined benefit pension plans and retirement health care benefits provided by an employer constitute a form of deferred compensation to help fund our retirement.  Their existence makes us feel more prosperous.  We may save less and spend more as a result.  But the perception may be an illusion.  We don’t own or control the pension fund, our employer does.  All we have is a promise.  The promise is only as good as the financial strength of the employer.  Bankruptcy may result in a reduced pension and the elimination of all or part of the retirement health care benefit.  Too late we realize the additional prosperity was only an illusion.

Social Security and Medicare

Government entitlements, specifically Social Security and Medicare, make us feel prosperous in much the same way.  We take the benefits we expect to derive from these programs into account when we plan our retirement funding.  Consequently, we save less and spend more than we would have if those programs did not exist.  But we do not control the benefits we are entitled to receive from Social Security or Medicare, the government does.  The government can change the amount of our benefits or the terms under which we receive them at any time, for better or for worse.  A reduction in benefits, even in the form of a reduced cost of living allowance, leaves us with less than we had planned to receive.  The prosperity we thought we had proves to be an illusion.

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Asset market bubbles

The Federal Reserve manipulates interest rates with the express purpose of inflating asset markets, most recently the housing and stock markets.  Unrealized capital gains achieved in asset markets make us feel more prosperous.  We may save less and spend more as a result.  This is the “wealth effect” the Fed desires to produce.  But those gains aren’t realized until we sell the assets.  If the markets take a dive before the assets are sold, part or all of the gains may be lost, as well as part or all of the original capital.  Our perception of increased prosperity turns out to be an illusion.

Don’t adjust your spending and saving prematurely based on perceptions of increased wealth.  And that applies to anticipated salary increases, bonuses, and inheritance, as well.  Wealth isn’t real until you possess it, until it is in your bank account.  Continue to spend and save as if those prospects for increased prosperity don’t exist, because they might not.  Even if you are in your early forties, you have another 20 to 25 years until you can tap your private and government retirement benefits.  A lot can happen to undermine the value of those benefits over that much time.  If they do materialize fully and you find you have saved too much, you can always spend the excess.  That’s far better than discovering you have insufficient savings.  After all, you can’t save money you have already spent.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages