Pay Yourself First You already pay your bills on time. So, why not treat retirement savings as a regular monthly bill rather than seeing it as optional?

We know we should save, but there are competing priorities; so funding the retirement account often comes last. The kids want to go to college, and you would like a new boat. But treating your retirement savings as another bill that you must pay will keep it at the front of your mind. You won’t miss payments if you realize that, just like with the mortgage or electric bill, getting behind has consequences.

This simple sounding solution comes from the sophisticated world of institutional investing. Pension fund managers, for example, have to treat future obligations (payments to pensioners) as liabilities. That forces them to deal now with something that may be years or decades away. Using actuarial tables, they calculate the cost of future obligations to determine what return they require on their investments and whether the pension fund is adequate.

While you may not use actuarial tables, you can manage your retirement account like a pension fund. First, determine the savings you need to support the lifestyle you want during retirement. Keep in mind that you probably want to fund retirement through age 90 or 95.

Next, determine how many years you have to reach your savings goal. If you are 45 and plan to retire at 62, for example, you have 17 years to fund your retirement account. Finally, determine how much you must save each year and make projections about returns on your investments.

If you’re already funding your retirement goal by contributing to a 401(k) or other plan at work, treating that money along with all of your other retirement savings as a liability may provide you with a more realistic picture about how much you need to put away. It may also help you envision the quality of retirement you should expect and spur you to save more.

A simple way to establish a monthly liability for your retirement obligation is to divide your goal into equal installments. So, if you have 17 years to save $500,000, divide that obligation into 204 monthly payments of just over $2,450 per month. Given the expected growth of your investments, you’re likely to “over-fund” your retirement obligation. If you want to calculate your payments more precisely, include estimates for the impact of inflation, investment returns, and taxes.

By treating your retirement account as a liability, you’ll be paying yourself along with your other debts. Of course, making calculations about how much you need to save today to fund a debt in the future, while also making judgments about inflation, taxes, and selecting the right investments, may require professional help. Create a disciplined system for planning your retirement now and paying yourself first so you can enjoy your leisure years later.  12:19 PM •