The biggest financial concern for many investors is whether they’ll be able to save enough for retirement. Only 18% of workers reported feeling “very confident” they will have enough money to live comfortably in retirement, according to the 2014 Retirement Confidence Survey by the Employee Benefit Research Institute.1
Investors typically address this concern by cutting their household expenses to boost savings or by adjusting their investment strategy for higher potential returns. Those efforts are valuable, but another aspect of your financial strategy can also have a big impact on your ability to save: the institutions and tools you use to manage your money.
Instead of treating checking accounts, emergency funds, 401(k)s, IRAs, and brokerage accounts as separate financial entities, take a comprehensive look at how you manage your day-to-day finances with your longer-term savings and investing goals. A few small changes—such as consolidating accounts and reducing the fees you pay each month—can free up additional cash and help build your retirement savings.
“These moves are very simple, but they’re often overlooked,” says William “Sam” McLimans, senior vice president of cash management at Fidelity. “And over time, they can amount to significant savings.”
Of course, acquiring the right saving habits (saving more, working longer, maintaining an appropriate asset mix, maintaining appropriate health and disability insurance, etc.) is the first and most important order of business. However, once this is under control, consider these four cash management techniques to boost your retirement savings:
1. Consolidate accounts with one institution.
If you find a financial services institution that offers the mix of products and services you need with low or no fees, consider consolidating your accounts with that provider. Having your checking, brokerage, and retirement accounts all in one place can make it easier to set up automated transfers between accounts.
What’s more, the institution may provide additional tools that give you a comprehensive look at your overall cash position across all accounts, helping you make better decisions about when and how to invest. For example, an account dashboard or cash alert feature can show you when you have more cash than you need in your checking account to cover monthly expenses. In that case you could set a one-time electronic transfer into a brokerage or retirement account and invest that money toward retirement.
“The overall effect of having one relationship with a financial institution is that it allows you to optimize your cash position based on investment goals and opportunities, risk tolerance, and personal liquidity needs,” says McLimans.
2. Look beyond banks to reduce fees.
Traditional banks typically charge a range of fees for services such as maintaining a checking account, using an ATM, or taking advantage of overdraft protection. These individual fees can be small—the average monthly checking account maintenance fee is about $5.50, according to Bankrate2—but they can add up quickly.
There’s no need to pay those fees. Many nonbank financial institutions now offer the same services as banks, but at no charge. Shop around for institutions that charge low or no fees. Then apply those savings directly toward retirement.
For example, the median household pays a total of $43 in monthly bank and credit card fees, according to a study published by professors from the University of California–Davis and Dartmouth College.3 If those households switched to institutions that charged no fees and instead invested that $43 a month for the next 20 years, the funds could grow to more than $22,000, assuming a hypothetical compound annual growth rate of 7%.
Bank fees for noncustomers to use their ATMs have also gone up to an average of $2.60 in 2013, from less than $1.50 in 2003, according to Bankrate.
“Start your analysis by asking yourself, ‘Where am I feeling the most pain relative to the fees I’m paying versus the return I receive?’” says McLimans.
3. Use automated money transfers.
One of the simplest ways to ensure you save regularly for retirement is to put the process on autopilot. Work with a financial institution that lets you schedule regular, automatic sweeps from your checking or savings account into your retirement vehicles.
Regular transfers not only reduce the chance of falling behind on savings goals, they can help you stick to your long-term investing strategy in the face of market fluctuation. For example, establishing an automatic investing plan with your brokerage account allows you to invest the same amount each month, regardless of the price of your chosen investment. This strategy, known as dollar cost averaging, buys more shares in months when the price of your investment is lower and fewer when the share price is higher. Over time, the result can be a lower overall cost per share than if you had invested in larger, less-regular amounts. Dollar cost averaging does not assure a profit or protect against a loss in declining markets. For the strategy to be effective, you must continue to purchase shares both in market ups and market downs.
4. Try a rewards credit card for retirement savings.
Rewards credit cards typically offer points that can be redeemed for airline tickets, hotel rooms, gas, or merchandise. But you can also use a rewards credit card to support your retirement savings. Examine options such as credit cards that offer cash back that can be deposited directly into a cash management, investment, or retirement account.*
You don’t have to change your behavior or remember to save additional money. The rewards you generate on everyday spending are funds you could put toward your retirement. Of course, you have to spend money in order to get cash back, and if you don’t pay off your credit card balances each month, you could be charged an interest rate that could be much higher than the cash-back rewards you might receive. But if you’re diligent about paying off your credit cards, a $50 monthly cash reward deposited directly into your retirement account could grow to $26,000 in 20 years at a hypothetical compound annual growth rate of 7%.
Start now to maximize potential gains.
As with all retirement strategies, the sooner you begin working on a cash management strategy, the greater your potential benefit. Small, simple improvements you make today to manage day-to-day cash needs alongside long-term savings goals can help you put aside a little more money each month. With time and a good investment plan, those extra contributions can add up to a meaningful boost to your savings when it’s time to retire.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917