Target retirement savings
Directed savings is a savings plan directed toward a future benefit that is otherwise beyond the means of the saver. An example is the consumer who deposits $X each month into an assigned account that is intended to purchase a mink coat or motorcycle at a future date. It can also be described as “self-enforced saving” in the sense that consumers have chosen to force themselves into savings plans that will achieve their goals.
While targeted savings plans are available for mink coats, motorcycles, and many other expensive tangible goods, they’re not available where they’re needed most, and where their absence affects the largest segment of the population: retirement. Targeted retirement savings plans have not materialized due to the vagueness of the goal, a lack of clarity about the savings needed to achieve any goal, and uncertainty about how long the savings period needs to be to get there. These are formidable barriers.
My first crack at this issue centered on a potential segment of retirement where these barriers seemed manageable: paying down mortgage debt. Homeowners with mortgages can (and many do) adopt savings plans that will eliminate their loan balance for a specified period, which could be the estimated period until retirement. I help them by providing a calculator that shows the additional savings plan needed to eliminate their loan balance during that period.
This calculator is the most visited page on my website, in Mortgage Payoff Calculator – Additional monthly payments to pay off in a specified period. Its popularity suggests that there is a strong appetite for targeted retirement savings programs when both the objective and the means to achieve it are well defined. The plan I’ve developed with Allan Redstone, which we call Retirement Saver (RS), meets that goal:
- He vagueness of benefits it is addressed by defining the benefit as the increase in monthly spendable funds during retirement, for life. While this may not have the motivating force of a mink coat or a motorcycle, most consumers will recognize the value of being able to buy anything they want when the time comes.
- He lack of clarity about the amount of savings required It is treated by showing the relationship between the savings plan and the increase in available funds that results from it. Plans can be adjusted both for amount and frequency of payment.
- He uncertainty about the length of the saving period it is solved by allowing the consumer to try different periods until retirement. I hope consumers who use RS will try different combinations of savings programs and savings periods.
RS is now available to consumers at the retirement savings page of my website.
While targeted savings is consumer-initiated, financial institutions will play a critical role in offering and promoting it. Your answer will be based on your views regarding the profitability of the plan. My mortgage payment calculator is not offered on any other mortgage site than mine because mortgage lenders experience drops in revenue when borrowers prepay their loans.
However, we expect a favorable response to RS, because offering it to clients can only increase your bottom line. Depository institutions, in particular, can benefit from the growth of customer deposits that businesses use to implement savings programs. There is no charge for installation or regular updates for any company that wants to offer the RS option on their own websites.
