MONEY IRAs

The Best Way to Tap Your IRA In Retirement

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am 72 years old and subject to mandatory IRA withdrawals. I don’t need all the money for my expenses. What should I do with the leftover money? Jay Kahn, Vienna, VA.

A: You’re in a fortunate position. While there is a real retirement savings crisis for many Americans, there are also people with individual retirement accounts (IRAs) like you who don’t need to tap their nest egg—at least not yet.

Nearly four out of every 10 U.S. households own an IRA, holding more than $5.7 trillion in these accounts, according to a study by the Investment Company Institute. At Vanguard, 20% of investors with an IRA who take a distribution after age 70 ½ put it into another taxable investment account with the company.

The government forces you to start withdrawing your IRA money when you turn 70½ because the IRS wants to collect the income taxes you’ve deferred on the contributions. You must take your first required minimum distribution (RMD) by April of the year after you turn 70½ and by December 31 for subsequent withdrawals.

But there’s no requirement to spend it, and many people like you want to continue to keep growing your money for the future. In that case you have several options, says Tom Mingone, founder and managing partner of Capital Management Group of New York.

First, look at your overall asset allocation and risk tolerance. Add the money to investments where you are underweight, Mingone advises. “You’ll get the most bang for your buck doing that with mutual funds or an exchange traded fund.“

For wealthier investors who are charitably inclined, Mingone recommends doing a direct rollover to a charity. The tax provision would allow you to avoid paying taxes on your RMD by moving it directly from your IRA to a charity. The tax provision expired last year but Congress has extended the rule through 2014 and President Obama is expected to sign it.

You can also gift the money. Putting it into a 529 plan for your grandchildren’s education allows it to grow tax free for many years. Another option is to establish an irrevocable life insurance trust and use the money to pay the premiums. With such a trust, the insurance proceeds won’t be considered part of your estate so your heirs don’t pay taxes on it. “It’s a tax-free, efficient way to leave more to your family,” Mingone says.

Stay away from immediate annuities though. “It’s not that I don’t believe in them, but when you’re already into your 70s, the risk you’ll outlive your capital is diminished,” says Mingone. You’ll be locking in a chunk of money at today’s low interest rates and there’s a shorter period of time to collect. “It’s not a good tradeoff for guaranteed income,” says Mingone.

Beyond investing the extra cash, consider just spending it. Some retirees are reluctant to spend the money they’ve saved for retirement out of fear of running out later on. With retirements that can last 30 years or more, it’s a legitimate worry. “Believe it or not, some people have a hard time spending it down,” says Mingone. But failure to enjoy your hard-earned savings, especially while you are still young enough and in good health to use it, can be a sad outcome too.

If you’ve met all your other financial goals, have some fun. “There’s something to be said for knocking things off the bucket list and enjoying spending your money,” says Mingone.

Update: This story was changed to reflect the Senate passing a bill to extend the IRS rule allowing the direct rollover of an IRA’s required minimum distribution to a charity through 2014.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com

Read next: How Your Earnings Record Affects Your Social Security

MONEY retirement income

Junk Bond Selloff Is a Warning for Retirees Who Reached for Yield

Risky assets have paid off well the past few years. But tremors in the junk bond market signal time for a gut check.

In July, Federal Reserve Chief Janet Yellen warned of the “stretched” values of junk bonds. Few seemed to care, and among the unconcerned were millions of retirees who had reached for these bonds’ higher yields in order to maintain their lifestyle. Now, a reckoning may be at hand.

Yellen’s mid-summer warning on asset prices was reminiscent of the former Fed chief Alan Greenspan’s “irrational exuberance” comment regarding stock prices in 1996. Few listened then, either. It turns out that the Greenspan warning was way early. But the dotcom collapse hit later with devastating results.

Yellen’s remarks may be timelier. High-risk, high-yield corporate bond prices have been falling amid the strongest selling in 18 months. Since June, investors have pulled $22 billion out of the market and prices have dropped 8%. The pace of the decline has quickened since October.

The junk bond selloff began in the energy sector, where oil prices recently hitting a five-year low set off alarms about the future profits—and ability to make bond payments—of some energy companies. In the past month, the selling has spread throughout the junk-bond universe, as mutual fund managers have had to sell to meet redemptions and as worries about further losses in a possibly stalling global economy have gathered steam.

The broad decline means that junk bond investors have little or no gain to show for the risks they have been taking this year. Investors may have collected generous interest payments, and so not really felt the sting of the selloff. But the value of their bonds has fallen from, say, $1,000 to $920. The risk is that prices fall further and, in a period of global economic weakness, that issuers default on their interest payments.

Retirees have been reaching for yield in junk bonds and other relatively risky assets since the financial crisis, which presumably is partly what prompted Yellen’s warning last summer. It’s hard to place blame with retirees. The 10-year Treasury bond yield fell below 2% for a while and remains deeply depressed by historical standards. By stepping up to the higher risks of junk bonds, retirees could get 5% or more and live like it was 10 years ago. Many also flocked to dividend-paying stocks.

So far, taking these risks has generally worked out. Junk bonds returned 7.44% last year and 15.8% in 2012, according to Barclays, as reported in The Wall Street Journal. Meanwhile, stocks have been on a tear. But the backup in junk bond prices this fall should serve as a warning: Companies that pay a high yield on their bonds—and many that pay a fat stock dividend—do so because they are at greater risk of defaulting or going bust. That’s the downside of reaching for yield, and it doesn’t go away even in a diversified mutual fund.

 

MONEY online shopping

Believe it or Not, Amazon Isn’t the King of Cheap Holiday Prices

mouse on top of present
Junos—Getty Images

Amazon is losing its edge as the lowest-cost retailer.

This is shaping up to be the year all the rules of shopping were broken. First came the bombshell revelation from NerdWallet showing that Black Friday goods may not be quite the deals retailers claim, as many were selling year-old items at the same prices as last year’s Black Friday. And if the newest report from ShopSavvy is correct, the decade-long maxim that Amazon.com AMAZON.COM INC. AMZN -0.3848% has the lowest prices could be wrong as well.

For those unaware of the company, ShopSavvy’s purpose is to help would-be shoppers find the best deal on products by providing retailer information through its website and its barcode-scanning mobile app on Android and iOS. And if its recent ShopSavvy Showdown (say that three times fast) is correct, both Amazon and Best Buy BEST BUY BBY 2.6955% offer higher prices on overlapping items than the undisputed King of Retail: Wal-Mart WAL-MART STORES INC. WMT 2.0302% .

The survey says …

This survey is not the first showing that Amazon is losing its edge as the lowest-cost retailer. Earlier this year, a report from Wells Fargo and online price-tracking company 360pi found Amazon had higher prices overall when compared to Wal-Mart and Target in four critical areas: shoes, electronics, housewares, and health products. However, the report found that Amazon typically offered the lowest prices when it came to “like-to-like” items. Essentially, when a specific item was on both sites Amazon still had the lowest price.

However, this newest data finds the exact opposite. The survey, based only on the same products for sale at Walmart, Amazon, and Best Buy, finds that “Wal-Mart has the cheaper option on over 50% more products than Amazon and Best Buy across the categories analyzed.” In addition, the survey notes Wal-Mart’s online price match policy, in which the company specifically agrees to match prices from Amazon and Best Buy.

The survey results were rather shocking when compared with Amazon. In the heavily trafficked categories of electronics and TVs (the survey distinguishes between the two), Wal-Mart was cheaper on 66% and 85% of total products, respectively. The average percentage difference of price was 28% and 23%, again, respectively. Essentially, this survey finds that shopping at Wal-Mart, and not Amazon, for TVs and electronics will save you nearly a quarter of your money.

So I should go to Wal-Mart right now, right?

If these results are correct, you should go directly to Wal-Mart and not worry about shopping around online, right? Well, not so fast. As the survey clearly shows, Wal-Mart didn’t always have the lowest price, although it was a good bet they did. In addition, the survey didn’t go into a lot of detail about the product selection. Without that critical piece of information, it’s hard to know whether these goods are representative of a true head-to-head comparison or whether these items are merely a good selection for Wal-Mart.

In addition, the data presentation concerns me. Although there were three retailers chosen for the survey, the data was only presented as Wal-Mart versus Amazon and Wal-Mart versus Best Buy. Without the third head-to-head comparison, Amazon versus Best Buy, the survey can come across as less of an unbiased comparison and more of a pro-Wal-Mart piece.

Finally, competition between megaretailers is rather intense. In many cases, retailers consider prices of 3%-5% lower as being worthy of running commercials specifically outlining these differences. The closest ShopSavvy comparison between Wal-Mart and the other retailers was in the TV category, with Wal-Mart being “only” 15% cheaper than Best Buy on average. When matched up against Amazon in the Kids category, ShopSavvy reports that Wal-Mart is a massive 45% cheaper on average.

Overall, this doesn’t mean that ShopSavvy’s data is wrong, but this should be considered only one data point in your holiday deal-hunting comparison. One shopping rule that will never be broken is to continue to shop around for the best deal; you’ll be thankful you do.

MONEY retirement income

Why Workers Undervalue Traditional Pension Plans

Gold egg in nest in dark
Simon Katzer—Getty Images

Lifetime income is the hottest button in the retirement industry. So why do workers prefer a 401(k) to a traditional pension?

Despite many drawbacks, the 401(k) plan is our most prized employee benefit other than health care, new research shows. More than half of workers value this savings plan even above a traditional pension that guarantees income for life.

Some 61% of workers with at least $10,000 in investments say that, after health care, an employer-sponsored savings plan is their most important benefit, according to a Wells Fargo/Gallup Investor poll. This is followed by 23% of workers naming paid time off, 5% naming life insurance, and 4% naming stock options. Some 52% say they prefer a 401(k) plan to a traditional pension.

These findings come as new flaws in our 401(k)-based retirement system surface on a regular basis. Plans are still riddled with expenses and hidden fees, though in general expenses have been going down. Too many workers don’t contribute enough and lose out by borrowing from their plans or taking early distributions. Most people don’t know how to make a lump sum last through 20 or 30 years of retirement. And the common rule of withdrawing 4% a year is an imperfect strategy.

The biggest flaw of all may be that most 401(k) plans do not provide a guaranteed lifetime income stream. This issue has gotten loads of attention since the financial crisis, which laid waste to the dreams of millions of folks that had planned to retire at just the wrong moment. Many were forced to sell shares when the market was hitting bottom and suffered permanent, devastating losses.

Policymakers are now feverishly looking for seamless and cost-effective ways for retirees to convert part of their 401(k) plan to an insurance product like an immediate annuity, which would provide guaranteed lifetime income in addition to Social Security and give retirees a stable base to meet monthly expenses for as long as they live. Such a conversion feature would fill the income hole left by employers that have been all but eliminating traditional pensions since the 1980s.

With growing acknowledgement that lifetime income is critical, and largely missing from most workers’ plans, it seems odd that so many workers would value a 401(k) over a traditional pension. This may be because guaranteed income doesn’t seem so important while you are still at work or, as has lately been the case, the stock market is rising at a rapid pace. It may also be that the 401(k) is the only savings plan many young workers have ever known, and they value having control over their assets.

Seven in 10 workers have access to a 401(k) plan and 96% of those contribute regularly, the poll found. Some 86% enjoy an employer match and 81% say the match is very important in helping to save for retirement. The 401(k) is now so ingrained that 77% in the poll favor automatic enrollment and 66% favor automatic escalation of contributions. Four in 10 even want their employer to make age-appropriate investments for them, which speaks to the soaring popularity of automatically adjusting target-date mutual funds.

Read next: How Your Earnings Record Affects Your Social Security

MONEY 401(k)s

401(k)s Are Still a Problem, But They’re Getting Better

Employers are providing more and better choices and driving down fees as they come to grips with their place in the retirement equation.

As 401(k) plans have emerged as most people’s primary retirement savings account, the employers who sponsor these plans generally have beefed up investment choices and driven down fees, new research shows. Small plans remain the most inefficient by a wide margin.

The typical 401(k) plan has 25 investment options, up from 20 in 2006, and the average worker in a plan has annual plan costs equal to 0.53% of assets, down from 0.65% of assets in 2009, according to a study from BrightScope and the Investment Company Institute.

These findings suggest that after years of dumping traditional pensions and trying to avoid the role of retirement planner for workers, companies have on some level accepted their critical place in the retirement security equation. Change has come slowly. But the BrightScope/ICI study shows positive momentum in key areas.

Expense ratios are down by every measure: total plan cost, average participant cost, and average cost of invested dollars. Volumes of research show that costs are a key variable in long-term rates of return. That is why low-cost index funds, most often championed by Vanguard’s John Bogle, have become investor favorites and 401(k) plan staples. These funds account for a quarter of all 401(k) plan assets, the study shows.

Meanwhile, investment options have increased in a way that makes sense. The broadened choice is largely the result of adding target-date mutual funds, possibly the most innovative financial product for individuals in the past 20 years. These are one-stop investments that provide diversification and automatically shift to a more conservative asset allocation as you near retirement. Nearly 70% of plans now offer them, up from less than 30% in 2006, and in many plans they are the default option.

For those in small plans, though, the news isn’t so good. Expenses remain high: In plans with fewer than $1 million in assets, the average expense ratio for domestic equity mutual funds is 0.95%, versus 0.48% for plans with more than $1 billion in assets. Small plans are also far less likely to include an employer matching contribution: Just 75% of plans with fewer than $10 million in assets provide a match, vs. 97% of plans with more than $100 million in assets. Small plans are also less likely to automatically enroll new employees.

The most common match is 50 cents on the dollar up to 6% of annual pay, followed closely by a dollar-for-dollar match on up to 6% of pay.

One area with clear room for improvement is the default contribution rate in plans that automatically enroll new hires. Nearly 60% of these plans set the rate at just 3% of pay and 14% set it at 2% of pay. Only 12% had a default contribution rate of at least 5% of pay. Most advisers say you should contribute at least enough to get the full company match, which is often 6% of pay, and contribute even more if possible. Your savings goal, including the company match, should be 10% to 15% of pay.

The venerable 401(k) still has many problems as a primary retirement savings vehicle. Too many people don’t contribute enough, don’t diversify, and don’t repay loans from the plans; too many take early distributions and try to time the market. 401(k) plans don’t readily provide guaranteed retirement income, though that is changing, and because you don’t know how long you’ll live you have to err on the conservative side and save like crazy.

But we are headed the right direction, which is good, because for better or worse the 401(k) is how America saves.

Get answers to your 401(k) questions in the Ultimate Retirement Guide:
How Should I Invest My 401(k)?
Which Is Better for Me, Roth or Regular?
What If I Need My 401(k) Money Before I Retire?

 

MONEY 401(k)s

This New Retirement Income Solution May Be Headed for Your 401(k)

Target-date mutual funds in 401(k)s can now add an annuity feature, which will provide lifetime income in retirement.

The stunningly popular target-date mutual fund is getting a facelift that promises to cement it as the premier one-stop retirement plan. By adding an automatic lifetime income component, these funds may now take you from cradle to grave.

Last month the federal government blessed new guidelines, on the heels of initial guidance last summer, which together allow savers to seamlessly convert 401(k) assets into guaranteed lifetime income. Specifically, the IRS and the Treasury Department will allow target-date mutual funds in 401(k) plans to invest in immediate or deferred fixed annuities. Plan sponsors can choose to make these target-date funds the default option, meaning workers would have to opt out if they preferred other investments.

Target-date funds are widely considered one of the most innovative investment products of the past 20 years. They automatically shift to a more conservative asset allocation as you age, starting with around 90% stocks when you are young and moving to around 50% stocks at age 65. By simplifying diversification and asset allocation, target-date funds have become 401(k) stalwarts.

They have broad appeal and are a big factor in the rising participation rate of workers, and of younger workers in particular. Nearly half of all 401(k) contributions go into target-date funds, a figure that will hit 63% by 2018, Cerulli Associates projects. By then, Vanguard estimates that 58% of its plan participants and 80% of new plan entrants will be entirely in target-date funds. In all, these funds hold about $1 trillion.

The annuity feature stands to make them even more popular by closing an important loop in the retirement equation. Now, at age 65 or so, a worker may retire with a portion of their 401(k) automatically positioned to kick off monthly income with no threat of running out of money. In simple terms, a target-date fund that has moved from stocks to bonds as you near retirement may now move from bonds to fixed annuities at retirement, easing concerns about outliving your money and being able to meet fixed expenses.

Policymakers have been working towards this kind of solution for the past several years, but have hit a variety of stumbling blocks, including tax and eligibility issues and others having to do with a plan sponsor’s liability for any guarantees or promises it makes through its 401(k) investment options. There are still implementation problems to be worked out, so few plans are likely to add annuities right away. But the new federal guidelines clarify the rules for employers and pave the way for broader acceptance of both immediate and deferred fixed annuities in 401(k) plans. And a guaranteed lifetime income stream is something that workers are clearly looking for in retirement.

More on 401(k)s from Money’s Ultimate Retirement Guide:

Why is a 401(k) such a good deal?

How should I invest in my 401(k)?

What if I need my 401(k) money before I retire?

Read next: Flunking Retirement Readiness, and What to Do About It

MONEY retirement income

The Powerful (and Expensive) Allure of Guaranteed Retirement Income

141203_RET_Guaranteed
D. Hurst—Alamy

Workers may never regain their appetite for measured risk in the wake of the Great Recession, new research shows.

People have always loved a sure thing. But certainty has commanded a higher premium since the Great Recession. Five years into a recovery—and with stocks having tripled from the bottom—workers overwhelmingly say they prefer investments with a guarantee to those with higher growth potential and the possibility of losing value, new research shows.

Such is the lasting impact of a dramatic market downdraft. The S&P 500 plunged 53% in 2007-2009, among the sharpest declines in history. Housing collapsed as well. Yet the S&P 500 long ago regained all the ground it had lost. Housing has been recovering as well.

Still, in an Allianz poll of workers aged 18 to 55, 78% said they preferred lower certain returns than higher returns with risk. Specifically, they chose a hypothetical product with a 4% annual return and no risk of losing money over a product with an 8% annual return and the risk of losing money in a down market. Guarantees make retirees happy.

This reluctance to embrace risk, or at least the urge to dial it way back, may be appropriate for those on the cusp of retirement. But for the vast majority of workers, reaching retirement security without the superior long-term return of stocks would prove a tall order. Asked what would prevent them from putting new cash into a retirement savings account, 40% cited fear of market uncertainty and another 22% cited today’s low interest rates, suggesting that fixed income is the preferred investment of most workers. Here’s what workers would do with new cash, according to Allianz:

  • 39% would invest in a product that caps gains at 10% and limits losses to 10%.
  • 19% would invest in a product with 3% growth potential and no risk of loss.
  • 19% would invest in a savings account earning little or no interest.
  • 12% would hold their extra cash and wait for the market to correct before investing.
  • 11% would invest in a product with high growth potential and no protection from loss.

These results jibe with other findings in the poll, including the top two concerns of pre-retirees: fear of not being able to cover day-to-day expenses and outliving their money. These fears drive them to favor low-risk investments. One product line gaining favor is annuities. Some 41% in the poll said purchasing such an insurance product, locking in guaranteed lifetime income, was one of the smartest things they could do when they are five to 10 years away from retiring.

Lifetime income has become a hot topic. With the erosion of traditional pensions, Social Security is the only sure thing that most of today’s workers have in terms of a reliable income stream that will never run out. Against this backdrop, individuals have been more open to annuities and policymakers, asset managers and financial planners have been searching for ways to build annuities into employer-sponsored defined-contribution plans.

Doing so would address what may be our biggest need in the post defined-benefits world and one that workers want badly enough to forgo the stock market’s better long-run track record.

More from Money’s Ultimate Retirement Guide:

How do I know if buying an annuity is right for me?

What annuity payout options do I have?

How can I get rid of an annuity I no longer want?

MONEY IRAs

Closing the Loophole Behind $10 Million Tax-Free Retirement Accounts

Fewer than 1,100 of 43 million IRA owners have what may be called outsized balances, and the IRS wants to rein them in.

The former presidential hopeful Mitt Romney lit a fuse three years ago when he disclosed his IRA was valued at as much as $102 million. Now the federal government wants to keep the issue from exploding, and is weighing actions that would prevent rich people from accumulating so much in a tax-advantaged account.

Last week, the General Accounting Office recommended that the IRS either restrict the types of investments held in IRAs or set a ceiling for IRA account balances. The idea is to give all taxpayers equal ability to save while making certain the amounts put away tax-advantaged do not go beyond what is generally regarded as sufficient savings to secure a comfortable retirement.

Romney’s campaign disclosure caught almost everyone by surprise. How could one person build such a large IRA balance when yearly allowable contributions — up to $5,500 a year in 2014 and $6,500 if you’re age 50 or older — have always been comparatively low? The answer lies in the types of investments he and privileged others were able to put in their IRA: extremely low-priced and often non-public securities that later soared in value.

One such security might be the shares of a privately owned business. These can reasonably be expected to take flight if the business does well and later goes public. That produces a wealth of tax-advantaged savings to company founders, investment bankers and venture capitalists. But these gains are not generally available to any other investor. Once an asset is inside an IRA there is no limit to how valuable it may become and still remain in the tax-advantaged account.

Restricting eligible IRA holdings to publicly available securities is one way to level the field and rein in the accumulation of tax-advantaged wealth. Another way is to cap IRA balances at, say, $5 million and require IRA holders to take an immediate taxable distribution anytime their combined IRA holdings exceed that threshold.

The GAO found that the federal government stands to forego $17 billion of 2014 tax revenue through the IRA contributions of individuals. That’s not a high price to pay for added retirement security for the masses. The problem is that under current rules only a select few will ever be able to put together multi-million-dollar IRAs. There are 43 million IRA owners in the U.S. with total assets of $5.2 trillion. Fewer than 10,000 have more than $5 million, and the GAO seems to have little quarrel with even this group. They tend to be above-average earners past age 65 who had been contributing to their IRA for many years—pretty much exactly as designed.

But just over 1,100 have account values greater than $10 million and only 300 have account values greater than $25 million, the GAO found. “The accumulation of these large IRA balances by a small number of investors stands in contrast to Congress’s aim to prevent the tax-favored accumulation of balances exceeding what is needed for retirement,” the report states.

Officials are now gathering data on the types of assets held in IRAs, including the so-called “carried interest” stake that private equity managers have in the investment funds they run. These stakes, which give them a percentage of a fund’s gain, are another way that a select few manage to sock away multiple millions of dollars in IRAs. No one doubts the data will illustrate that only a privileged few have access to outsized IRA savings. The Romney campaign showed us that three years ago.

Read next: 3 Ways to Have a Happier, Healthier Retirement

MONEY retirement planning

Retirement Makeover: 30 Years Old, and Already Falling Behind

When she turned 30, Chianti Lomax had an epiphany: Her salary and savings weren't enough to buy a home or start a family. MONEY paired her with a financial expert for help with a plan.

Chianti Lomax grew up poor in Greenville, S.C., raised by a single mother who supported her four children by holding several jobs at once. Inspired by her mom, Lomax worked her way through high school and college; today, the Alexandria, Va., resident makes $83,000 plus bonuses as a management consultant.

But turning 30 last December, Lomax had an epi­phany: Her career and her 401(k)—now worth $35,000 —weren’t enough to achieve her long-term goals: raising a family and buying a house in the rural South.

Her biggest problem, she realized, was her spending. So she downsized from the $1,200-a-month one-bedroom apartment she rented to a $950 studio, canceled her cable, got a free gym membership by teaching a Zumba class, and gave up the 2010 Honda she leased in favor of a 2004 Acura she paid for in cash. With those savings, she doubled her 401(k) contribution to 6% to get her full employer match.

And yet, nearly a year later, Lomax has only $400 in the bank, along with $12,000 in student loans. Having gone as far as she can by herself, Lomax wants advice. As she puts it, “How can I find more ways to save and make my money grow?”

Marcio Silveira of Pavlov Financial Planning in Arlington, Va., says Lomax is doing many things right, including avoiding credit card debt. Spending, however, remains her weakness. Lomax estimates that she spends $500 a month on extras like weekend meals with friends and $5 nonfat caramel macchiatos, but Silveira, studying her cash flow, says it’s probably more like $700. “That money could be put to far better use,” he says.

The Advice

Track the cash: Silveira says Lomax should log her spending with a free online service like Mint (also available as a smartphone app). That will make her more careful about flashing her debit card, he says, and give her the hard data she needs to create a budget. Lomax should cut her discretionary spending, he thinks, by $500 a month. Can a young, single person really socialize on $50 a week? Silveira says yes, given that Lomax cooks for herself most evenings and is busy with volunteer work. Lomax thinks $75 is more doable. “But I’d like to shoot for $50,” she says. “I like challenging myself.”

Setting More Aside infographic
MONEY

Automate savings: Saving money is easier when it’s not in front of you, says Silveira. He advises Lomax to open a Roth IRA and set up an automatic transfer of $200 a month from her checking account, adding in any year-end bonus to reach the current annual Roth contribution limit of $5,500, and putting all the cash into a low-risk short-term Treasury bond fund.

Initially, says Silveira, the Roth will be an emergency fund. Lomax can withdraw contributions tax-free, but will be less tempted to pull money out for everyday expenses than if the money were in a bank account. Once Lomax has $12,000 in the Roth, she should continue saving in a bank account and gradually reallocate the Roth to a stock- heavy retirement mix. Starting the emergency fund in a Roth, says Silveira, has the bonus of getting Lomax in the habit of saving for retirement outside of her 401(k).

Ramp it up: Lomax should increase her 401(k) contribution to 8% immediately and then again to 10% in January—a $140-a-month increase each time. Doing this in two steps, says Silveira, will make the transition easier. Under Silveira’s plan, Lomax will be setting aside 23% of her salary. She won’t be able to save that much upon starting a family or buying a house, he says, but setting aside so much right now will give her retirement savings many years to compound.

Read next:
12 Ways to Stop Wasting Money and Take Control of Your Stuff
Retirement Makeover: 4 Kids, 2 Jobs, No Time to Plan

MONEY consumer psychology

12 Ways to Stop Wasting Money and Take Control of Your Stuff

Digging in overflowing closet
Steve Cole Images—Getty Images/Vetta

If you're swimming in stuff, not to mention debt, check out this list of a dozen tips to stop the madness and streamline your lifestyle.

In my work as a consumer psychologist and author, I’ve read countless studies about consumer behavior, and I’ve conducted plenty of research on my own, interviewing hundreds of shoppers about how, when, and why they shop. Here’s what I’ve learned about how to avoid piling up too much stuff and how to stop making unnecessary, excessive, and ultimately unsatisfying purchases.

Do an inventory check. Jenna Suhl, who has worked as a wardrobe stylist in San Francisco for more than a decade, told me, “It’s not uncommon for people to buy new things because they have so much they can’t see what they already have.” Suhl recommends weeding out what’s worn, ill-fitting, unmatchable, or a style that no longer suits. That’s not only true for clothing and accessories, but also tools, household products, and knickknacks. Another woman once mentioned to me that she actually bought the exact same serving platter twice, forgetting that she already owned it. “At least I have consistent taste,” she laughed, “but clearly I have too much stuff.”

Buy good quality—and use it. Perhaps counterintuitively, I’ve found that it’s common for people to almost never use the things they love the most—a favorite pair or jeans, a vintage Mustang—and that give them the most pleasure. Why? Often, it’s because they want to protect the item in question, because they like it so much and don’t want it to be ruined. Instead of using their favorites regularly, they buy cheaper things—sometimes knockoff imitations—for “everyday” use. The unfortunate result is less satisfaction, and that lack of satisfaction often leads to more buying in the misguided hope that some new item will make us happier. In a similar vein, many people spend more money on an outfit they wear once for a special occasion than they spend the entire year on clothing they use every week, such as workout wear, jeans, or sneakers. The smarter approach is to put your money where you’ll see it in action and enjoy it the most, thereby reducing purchasing cravings.

Count your blessings. First and foremost, being grateful—not just for possessions, but also for the people, places and simple pleasures in life—is good for the soul. But an attitude of gratitude is also a proven antidote to impulse purchasing because it creates a sense of abundance within the individual. When you’re feeling full of gratitude, you’re less likely to subconsciously try to fill emotional holes by treating yourself with gifts and accumulating more stuff.

Turn off the temptation. Imagine having a friend who was constantly telling you about seemingly terrific deals (half-off watches!), or that you simply had to try the new pizzeria in town (free dessert!). Hearing about these offers puts you in the position of considering purchases you might not otherwise have noticed. Worse, you’re likely to get worn down over time, so that you end up jumping at some offer partly to reward yourself for all of the times in the past you behaved virtuously and passed on the latest bargain. These are the effects of signing up for email subscriptions from retailers and deal sites. If you’re trying to rein in your spending, simply cancel those subscriptions. Forget the idea that they somehow save you money. You’ll save a lot more by remaining ignorant of all those seemingly amazing bargains.

Play the waiting game. When you’re tempted to buy something on a whim, wait at least 20 minutes. Then, after clearing your head, reconsider how and when you’ll actually use the product. Instead of simply choosing to have it or not have it, think for a moment about what else you might prefer instead—such as the freedom of having less debt or a bigger purchase that requires saving, such as college tuition, a house or retirement. When considering larger purchases of, say, anything more than $100, make the wait period 24 hours. The typical impulse purchase seems a lot less like a “must-have” after sleeping on it.

Learn to share. I’m not talking about the explosion of “sharing economy” businesses that facilitate things like car-sharing and bike-sharing. I’m talking about the old-fashioned DIY method of buying something with a friend or neighbor and owning it jointly. I recently watched two young women negotiate sharing rights for a relatively expensive gold necklace they both wanted and ultimately bought together at Nordstrom. And I interviewed a family that purchased backyard play equipment with their neighbors. That family is also ingenious about repurposing. For example, they decorated homemade birthday cards with buttons taken from worn-out shirts (which were cut up and used as dust rags). I’ll admit these practices can seem time consuming and not commonplace—but they’re inspiring, and perhaps there’s an opportunity to share or repurpose that will eliminate a new purchase in your life.

Buy only what you need, right now. Part of what makes shopping so alluring is the mental vacation that comes with imagining how a product can be used, such as, “I’ll turn heads in this outfit,” or “We’ll have the wildest parties with this cocktail shaker.” But most homes are cluttered with unused merchandise (often with the tags still attached) purchased for, say, an African safari that never materialized or a slimmer figure that has yet to be acquired. Don’t let your imagination divert attention from the cost and practicality of an object, nor from reality. Before making a purchase, ask yourself if you’ll be using the item in the very near future. If the answer is no or not likely, pass.

Focus on the bottom line, not freebies. “Free” is the four-letter word that always seems to work in marketing. But the free gift with purchase, the free bottle of water while you’re shopping, and the free samples can all cost you. For one thing, getting something for free creates a sense of obligation that makes it harder to say “no” to a persuasive salesperson. Shoppers also often use the free gifts included with purchase to rationalize buying something that’s way beyond their budget. I’ve seen otherwise highly intelligent, logical people spend a fortune to get something for free. And the irony is completely lost on them.

Remember that it’s okay to buy nothing. Shopping takes time, and it can feel like time wasted if a purchase isn’t made. Outlet malls, which typically require a significant drive, are particularly dangerous places for people trying to reduce their consumption. It’s not uncommon for people to purchase something they don’t really need rather than to leave empty-handed, with the feeling like the trip was a total waste. The same phenomenon occurs in upscale “destination” boutiques and at e-retail sites that have drawn shoppers in for significant amounts of time. But don’t fall for the notion that you’ve wasted time if you shop and don’t buy. The truth is that buying something you don’t need only makes for more waste.

Do some quick math as a reality check. If you earn an hourly wage, do a little simple division to see how much of your time, effort, and work is eaten up by a potential purchase. The thought that three hours of your work barely covers the cost of some restaurant meal is likely to inspire you to cook more. The same concept works for salaried workers, just first do the math to break down your roughly per-hour take. Alternately, you could compare the cost of a new purchase to the amount in a savings account, or how long it took to save that amount. Calculating that the cost of a new TV would swallow 50% of the savings that took you two years to compile should be enough to give you pause. Likewise, if you’re really trying to get a better sense of how much you’re spending, don’t use credit cards. Spending with cash feels more tangible, more like you’re spending real money that required your real time, sweat, and effort to earn—and that’s the whole point.

Buy for the right reasons. Research shows that we can think we’re hungry when we’re actually thirsty, think we’re tired when in reality we’re bored, and so forth. In other words, we’re pretty good at identifying when we need something, just not so good at identifying precisely what it is we need. The concept translates directly into the world of shopping and buying: People often buy stuff not because they truly need the stuff, but to fill a variety of other psychological needs, including the craving for human contact, relief from boredom, the opportunity to feel totally competent and in control, and the mental stimulation of something unique or beautiful. To buy less, don’t confuse the real reasons you’re shopping; the tips above about practicing gratitude and waiting for a specified time period before making a purchase should help boost awareness of what it is you truly need.

Shop for stuff you need, not sales. Another of the psychological reasons that many people over-shop and buy is to get a burst of feel-good dopamine that accompanies sale shopping. Snagging a coveted item at 30% off can feel like winning a prize. But sales are nothing special: Virtually everything is discounted at some point in today’s retail world, and at least three-quarters of the purchases shoppers tell me they regret making were bought on sale. They often say they the item isn’t quite the right size, color, shape, or style—but what got them hooked was that the price was right. This is silly, of course. If you don’t like the item, there’s no price that makes it a smart buy. I’ve also found that sale-focused shoppers, ironically, tend to spend more total money than others. Remind yourself when shopping that the point is to seek good-quality items you need, not random stuff that is appealing solely because of a seemingly good price.

MORE: How Do I Set a Budget I Can Stick To?

Hey Impulse Spenders, Here’s a Solution to Your Bad Habit

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Kit Yarrow, Ph.D., is a consumer psychologist who is obsessed with all things related to how, when and why we shop and buy. She conducts research through her professorship at Golden Gate University and shares her findings in speeches, consulting work, and her books, Decoding the New Consumer Mind and Gen BuY.

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