Running on Financial Autopilot

Running on Financial Autopilot
06 Jan 2017

We live in some amazing times.  The technology that is available to us today far surpasses the quality and ease of use of what was available to us just a few short years ago.  Now, we are able to take our lives and run them nearly effortlessly, at least when it comes to setting up investment and savings plans. One thing we find people taking advantage of is putting their lives on financial autopilot.  So what does this mean exactly?  

Running on Financial Autopilot

Simply put, this is setting up account contributions automatically based on when you are paid.  In this way, contributions to retirement plans are not missed.  It works the other way with outflows, making sure that important payments such as the water bill and mortgage are paid in a timely fashion.  This already occurs on a frequent basis when someone is making deductions from their paycheck.  In fact, the government has mandated payroll taxes be withheld and remitted on a regular basis. Employees earning W-2 income simply receive a paycheck net of the tax withholding. Imagine if you had to write a check every time you were paid to cover the taxes held out of your paycheck?  There would be rioting in the streets!

Why is this an Advantage?  

Because it takes you out of the equation.  Individuals do not need to manually push a button each time they save money.  It simplifies the process by allowing a set of rules be put into place. If something drastic changes in a personal situation that warrants a change, it can be easily made.  Additionally, if contributions need to be increased or decreased due to circumstances, this is quickly accomplished by adjusting the automatic rules.

Just like your taxes, retirement contributions should be an important part of your financial life.  The easiest way to ensure that you are planning for later years is to put it on autopilot.  Setting aside a set amount from each paycheck and having it automatically sweep to a savings account or an investment account will allow you to prepare more adequately for the future.  Even small payments starting early can end up being worth huge amounts due to the compounding power of time in savings and investing accounts.  Employer retirement plans provide a huge benefit in allowing an employee to simply select withholding and not ever see the missing funds.

What if you are self-employed or aren’t covered by a workplace retirement plan?  It is still possible to automatically set up contributions simply based on your pay dates or anticipated receipts.

Let’s look at some examples*.  

Greg and Tina graduate college and start new jobs earning combined total of approximately $66,600 combined.  Neither are covered by workplace plans so they both decide to open Traditional IRAs.  They determine they can contribute approximately 15% of their current income and make a combined contribution of $385 per pay period beginning when they are 25.  They are paid once every two weeks.  Assuming a growth rate of 6.5% after inflation and taxes until they reach age 67, they will have approximately $2.38 million dollars in their IRAs!  And this is assuming that they do not increase their contributions in the future!  

Let’s assume that Greg is paid monthly and Tina is paid semi monthly.  Is it still possible for them to make regular contributions with such an uneven cash flow?  Absolutely!  In this case, it might make more sense to set up a savings or holding account where the funds are swept first.  They would then set up an automatic monthly payment plan of $834.16 if they wanted to make the exact same level of contributions as the prior example.  The investment company or advisor can then set up a bank link directly to that account and perform periodic draws on a regular basis starting after the initial contribution.  

Setting the contribution up trailing the 1st round of automatic sweeps will ensure that there is cash available and that Greg and Tina do not overdraw the account due to the automatic investment contributions.  This can be done similarly for self-employed individuals who have a rough idea on income projections, but have erratic cash flow coming from client payments.  

In conclusion

Young individuals in particular can benefit greatly from setting up automatic contributions, especially early in their investing careers when they are able to take advantage of long investing periods.  It also still remains a viable option for those nearing retirement, who want to maximize the amount of funds they have at retirement as well.  Removing excess manual steps from the equation can help ensure contributions are made, and funds are being set aside for later use. 

Financial Autopilot can be established in many fashions.  You simply need to find a partner with the flexibility to accommodate your personal needs.  

*Hypothetical example for illustration purposes only. This is not a recommendation and does not represent any specific investment product or class of investments. Actual results will vary.

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Casey Mushrush

Have a question or want to see a post written about a specific subject? Send me an e-mail at casey.mushrush@premieriowa.com. I am involved in many of the educational elements of Premier Investments of Iowa, including appearances on WMT Radio, WHO Radio, KXEL Radio, and KCRG Television. In addition, I am a frequent guest host of the Premier Pulse, a personal finance education video blog. I partner with my clients to develop a specific set of financial goals based on their personal situation. We analyze their state of affairs, map out a course of action, and implement a written financial plan based on their own circumstances. We design and implement a long term investment strategy guided by the principles of asset allocation and based on personal risk tolerance. I utilize behavior coaching to help clients deal with the emotional aspects of investing and stick to their long term plan. Additionally, I am responsible for the practice management of an Office of Supervisory Jurisdiction. I aid our advisors by ensuring they are running their businesses in a compliant manner, as well as providing direction and suggestions on process improvement and implementation.