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Thayer Partners Blog

Systematic Investment Programs: The Ultimate Retirement Savings Weapon

[fa icon="calendar"] Dec 5, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

Systematic-Investment-Programs-The-Ultimate-Retirement-Savings-Weapon.jpgDuring the accumulation phase of retirement, you should be setting aside funds to use later in life. From the moment you step into the workforce, you should be building wealth to provide a source of income during retirement.

But with so many competing priorities in your life and so many responsibilities, deadlines, and the occasional crisis to deal with, how can you ensure that you’re saving enough—and often enough—for retirement?

To borrow a line from The Graduate, “Just one word: SIP.” Systematic investment programs (SIPs) are your ultimate retirement savings weapon. When you use such a program, money is taken directly from your paycheck or checking account and invested automatically for you, either in your 401k or your savings account or both, on a regular basis.

Systematic investment programs offer many advantages that can allow you to secure a comfortable retirement.

Easier Savings

To ensure that you have enough retirement savings, you must be diligent, committed, and disciplined. But investing regularly can seem like a pipedream to many Americans. Too many things can get in the way, making you forget—or put off—frequent investing. But when you use a SIP, you only have to set up your withdrawals once, and then you never have to worry about it again.

In addition, whether you set high contributions right away, or escalate your contribution rate gradually, automation makes saving for retirement a whole lot easier. It can eliminate loss aversion: the concept that states it hurts more to give up a dollar you currently have than one you never saw in the first place. The sacrifice will seem easier when you put retirement savings aside before seeing them.

Dollar-Cost Averaging

Using systematic investment programs to build retirement savings also allows you to take advantage of dollar-cost averaging. Instead of worrying about timing the market and knowing when to sell and buy, you can make these fluctuations in the market work for you. Thanks to dollar-cost averaging, your regular deposits will buy more units when the prices are low and fewer when the prices are high—automatically. The result? A lower average cost per share if your investment grows over time.

When you’re far, far away from selling, then saving early with a SIP can turn even the toughest markets in your favor by giving you the ability to buy stocks at lower prices.

Bust Market Risk

Every once in a while, stocks will take a dive. When this happens, you could try to hedge your bets. But the more effective way to bust market risk and ensure that you’re building adequate retirement savings isn’t to change your investment strategy, allocate funds in different asset classes, or sell immediately. It’s to use a systematic investment plan to increase your contribution rate and save regularly so that you have more in retirement.

With a SIP, you can set automatic annual increases in your contribution rate for your 401k plan. Studies show that employees who increase their contribution rates are more likely to be on track for a comfortable retirement.

You may be able to sign up for this service through your company’s 401k plan. If your company does not offer this service, then try to make it a habit to increase your contributions at the same time once a year, like on your birthday or on New Year’s Day.

Reduce Dependency on High Returns

Systematic investment programs can help you steadily save more. And this can help you reduce your dependency on high returns. If you start saving early and consistently with a SIP, you can have a greater margin for error in your investments. You can choose to take on more risk, as you will be able to take on losses and still have time to earn your necessary return over the years. Most important, though, you will not be forced to take on higher risk while playing catch up.

Avoid Commissions

Many investors smartly use systematic investment programs to automatically invest in the market via an index fund. By using a SIP to invest in a mutual fund, you can avoid paying commission fees and trading charges, both of which can reduce your returns. The majority of fund companies will be happy to accept regular automated investments into a mutual fund.

Avoid Running Out Of Money At Retirement

Topics: Retirement

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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