‘Automatic Millionaire’ David Bach: 7 Retirement Planning Tips He Swears By

Planning for retirement can be challenging and even a little scary. It’s an issue that raises some serious questions that need serious answers. Many of us put off retirement planning because it seems too far away or we’re having difficulty making ends meet with our current earnings.

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How much should you save? What are the best methods for growing your nest egg? Where should you invest? David Bach, financial expert and author of 10 New York Times bestsellers, has some advice that might help make answering these questions easier.

Keep reading for a look at seven of Bach’s best tips for retirement, including how much you should try to save, what to do with those savings and how to make the most of your retirement fund.

Tip No. 1: Set Aside an Hour of Earnings Each Day

Bach’s first piece of advice is his trademark go-to phrase: Pay yourself first.

He says, “You’re going to work about 2,000 hours this year, assuming you have a job.”

He goes on to say that most Americans will work around 90,000 hours over the course of their careers, from their first day on the job until retirement. Bach has long maintained that “pay yourself first” means you should keep the first hour of your pay and dedicate it to long-term savings.

For most of us, that 2,000 hours will be over a year of 40-hour work weeks, or around 260 working days per year. This means your goal would be to set aside around 260 times your hourly rate of pay.

For the sake of demonstration, let’s work with a round number and say you make $100 an hour (the actual average hourly wage is considerably less — between $34 and $35). At the end of the year, you will want to have saved a minimum of $26,000, or 260 times the amount you earned for the first hour of every working day that year.

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Tip No. 2: Put Your Savings in a Retirement Account

It’s not enough to “pay yourself first” if you don’t make good use of that money. Bach recommends that “you move the money into a 401(k), 403(b) or IRA account. If you don’t have one of those retirement accounts then get an IRA account today and get it set up automatically. Ask your employer if you can have the money automatically moved from your paycheck to your IRA account.”

Bach says most employers should be able to offer this kind of automatic diversion of funds, but if not, you may be able to make arrangements with your bank.

“If they won’t do it, then have your paycheck automatically deposited, and then set up your bank account to automatically move the money into your IRA account before you can touch it.”

Tip No. 3: Manage Your Retirement Savings Wisely

Make sure to put your retirement savings someplace where they’re guaranteed to grow.

“I suggest you look at your 401(k) plan closely and review the ‘Target Dated Mutual Fund Options.’ They should be low-cost, and they work great because they’re automatic,” Bach wrote.

By automatic, he means the funds are managed for you.

“They’re automatically diversified for you based on age and automatically rebalanced. There’s estimated to be over $800 billion now in these funds, and people who use them are getting better results, typically, than trying to do it themselves.”

Tip No. 4: Leverage Compound Interest

Bach says one of the best ways to contribute to the growth of your retirement fund is by using compound interest. He uses the example of contributing $5,000 annually to an account with an annual percentage yield of 7%. If you keep investing that amount every year and don’t withdraw from the fund, that $5,000 yearly contribution can accumulate substantially over time.

If you invest that amount in an account with an annual return rate of 7% every year for 35 years, you would have over $750,000. Wait five more years, and that amount grows to over $1 million.

Tip No. 5: Balance Debt Repayment and Saving

Bach says one of the most common questions he gets asked is about the prudence of putting money in savings if you’re carrying a debt.

“‘Should I pay down my debt or save?’ It’s a great question. Many experts recommend you pay down your debt first, then save. They’re wrong.”

Instead, he recommends a balanced approach.

“When you focus all of your attention on paying down your debt, the experience can be both frustrating and depressing. It can take years. And many people who concentrate only on paying down their debt never turn to actually investing, which means they can lose decades of time to save and invest.”

Tip No. 6: Prioritize Saving

Bach emphasizes the need to prioritize savings over daily expenses.

“You have to decide that when you earn a paycheck, whether you’re self-employed or an employee, the first person you’re going to pay is you.”

His “pay yourself first” philosophy dictates that you should save before considering your expenses. This means putting money into your savings and investment accounts before taking care of housing, debts, taxes or other costs. Look for options like a tax-deferred IRA or 401(k) account.

Tip No. 7: Skip Traditional Budgeting

If you’ve struggled with traditional budgeting because of the complications, frustrations or unexpected costs that force you to deviate from your plan, Bach suggests you abandon the idea altogether. In his words, “You’ve got to throw the budget out.”

Instead of trying to save money leftover from your expenses, focus on saving first. Again, Bach recommends automating your savings and investments so that a portion of your pay is transferred directly to a savings or investment account.

Successful retirement planning involves more than just saving money. It requires a thoughtful balance of tackling debts strategically, capitalizing on advantages like compound interest and consistently prioritizing savings and long-term investments over expenses.

Bach’s advice to “pay yourself first,” forgo traditional budgeting and make sure your savings are invested wisely in a 401(k) or other high-yield savings account can show significant returns over time.

This article originally appeared on GOBankingRates.com: ‘Automatic Millionaire’ David Bach: 7 Retirement Planning Tips He Swears By