April 2, 2013 -- You've doubtless heard of the government budget "sequester" — a fancy word for making budget cuts and keeping them separate from other fiscal considerations. Just as a sequestered trial jury is kept separate, so, too, are Congress' austere spending cuts.
Perhaps this action by the broke federal government can set an example for those of us who are also broke. People who do their own sequesters will spend less and will be able to contribute more to their 401(k) plans.
This is important because, although it seems quite obvious, many people don't seem to get the point that it's not enough to just have a 401(k) plan; you also must put money in it by having it deducted from each paycheck. The less you spend on unnecessary items now, the more money you'll have for necessary ones come retirement.
Unless you're Warren Buffett, you'll need to be on a budget during retirement.
But how can you budget then if you're not budgeting now? Budgeting now encourages you to tone down your lifestyle so you 1) have more money for retirement and 2) don't become accustomed to a lifestyle of the rich and famous — one that you won't be able to sustain during retirement. This mentality is all about taking personal responsibility now to enable a more realistic yet comfortable retirement than you otherwise might experience.
Of course, all this is more easily said than done, especially if you've already cut your spending as much as you can. If you're living frugally paycheck to paycheck, without any excesses or obligations that might be eliminated, and you're just getting by, there's little you can do to increase your 401(k) contributions.
But many of us are not in that situation. As the nation's budget deficit reflects, Americans tend to overspend. Historically, the average individual savings rate in this country has long been far lower than those of other countries.
So it's no wonder that so many 401(k) plans are underfunded.
To break with this American tradition and assure a better retirement, you can take a tip from Congress and enact your own personal sequester. Here are some ways to make this work:
• Try sequestering 10 cents out of every dollar by just not spending it. If this money is deducted off the top of your paycheck every month, you'll never notice it: out of sight, out of mind. If you spend $25 a week on lunch every day, all you have to do is cut that back by $2.50. But for this to work, you can't spend your paycheck as though the 10 cents had never come out of it and go into debt. Just because you may not be able to contribute the maximum allowable amount to your 401(k) plan doesn't mean you shouldn't try to come as close as possible. This is a matter of degree; every little bit helps.
• Learn to cook (if you don't know how already). Eating out is not only expensive, it doesn't tend to be good for you either. When you cook, you not only spend far less, but you also know what's in your food, so you can cut down on sodium and fat.
• Cut back on credit card spending. Pretend you are Superman and your credit cards are kryptonite. Millions of people carry high credit card balances, and this is a real budget buster. Instead of contributing to their 401(k) plans, they're making payments on cards that include compounding interest. "Compounding interest is the eighth wonder of the world," said Albert Einstein. "He who understands it, earns it, and he who doesn't, pays it."
If you are running a $10,000 balance on a credit card, with compounding, your annual interest payments could be as high as 25 percent of the balance. Over time, this amounts to financial indentured servitude. Instead, gain your freedom by budgeting, using spending discipline to pay off your card and get out from under those payments. If you refinance your home and use the gains to pay off your cards, you've delayed true, mortgage-free home ownership for the trifles you see listed on your credit card charges every month.
Unfortunately, many people have done this. While such spending is good for the nation's economy, it's not good for your personal economy. One way to end the syndrome of credit card spending is to force yourself to realize that this spending is real. Because the money for credit card transactions doesn't immediately come out of your checking account, you might not think it's real spending. But when you see your balance mounting and compounding, it gets real — real fast.
Learning to spend less involves the discipline to do, or not do, two things: • Stop spending on non-essential items.
• Or, if you must, spend less on the items in question. Instead of a $12 bottle of wine, is there a $9 wine you like, or might like, just as much? Often, there might be.
To paraphrase Warren Buffett's classic statement on investing, cutting spending is like dieting: easy to understand but hard to execute. The key is that you learn to budget now so you can budget later — during retirement, where controlled spending will be critical.
This is the route to a dignified retirement. This road starts now – with every dime you spend.
Anthony Kippins is president of Retirement Plan Advisors, Ltd. a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them. An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement. He can be reached at firstname.lastname@example.org. If you have a question for Kippins about 401(k) plans, please send email it and he will try to answer it in an upcoming column.