Fool yourself into saving smarter

Four ways to make sure your best intentions aren't thwarted by the temptation to spend money now.

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By Walter Updegrave, Money Magazine senior editor

Stretch your retirement savings
Walter Updegrave offers strategies to ensure your money lasts a lifetime.
Weapons of delayed gratification
Use one of these four techniques to ramp up your savings rate.
Pay a fine
Punish yourself if you miss your savings target.
Dangle a carrot
If you save $5,000, say, let yourself buy an iPod.
Make it automatic
You won't forget to invest if you set up regular deposits.
Trick yourself
A Roth 401(k) ensures that you'll invest your tax savings.

(Money Magazine) -- When it comes to saving, the spirit is willing but the flesh is weak. A recent TD Ameritrade survey shows that 40% of people who make New Year's resolutions cite saving more money as a goal. However, the same poll also found that nearly half of those who resolve to stash away more bucks abandon that plan within a month.

And that's a problem because saving is the single most important thing you must do to have a shot at a comfortable retirement.

That disconnect isn't surprising. "While some parts of our brains are geared for rational decision-making, others are hard-wired for immediate gratification," says Harvard University behavioral economist Brigitte Madrian.

The result is a sort of ongoing war inside your mind, with the rational part nagging you to save and the gratification side spurring you to buy a new car. When you consider that you can drive the car today but don't get to spend your retirement savings for decades, well, you can see what has the edge.

There are ways, however, to improve the rational side's odds of winning. Adopting one or more of these strategies will help you boost your savings and enter retirement with a larger nest egg.

Put it on autopilot. The reason 401(k)s are so effective is that they make saving automatic and relatively painless; your contributions flow into your account before you even have a chance to spend the money. Ah, if only you could apply that concept to saving outside your 401(k).

You can. Sign up to have money automatically transferred from your checking account into a mutual fund each month. Most fund companies offer this option, with many allowing you to start with $250 a month or less.

I can testify to the effectiveness of this approach. A little more than 10 years ago, I began auto-investing $300 a month (later raised to $500) in a stock-index fund. I'll admit that I felt a squeeze at first. But after a few months I no longer missed the money or, for that matter, felt that I was "saving" anything. But I was. To date I have more than $100,000 in that account.

Reward yourself. Maybe you need a more immediate incentive than the possibility of an extra six figures a decade down the road. If that's the case, set an annual savings target and promise yourself a nice reward if you reach it.

You and your spouse might agree that if you tuck away $5,000, you'll buy each other an iPod. If that works, you might up the ante the next year with a higher target, perhaps $10,000, and the prospect of a richer reward, like a big-screen TV.

Granted, bribing yourself with gifts may seem antithetical to encouraging thrift. But face it, you probably would have bought the iPods or the HDTV anyway, so you might as well get the goodies and stash some extra moola away for retirement too.

Wield a stick. You may be one of those people who respond more to the fear of punishment than the promise of a prize. Well, you can make a threat work for you too.

Outline a savings regimen - say, investing $500 a month - with the condition that you'll incur a penalty each time you don't follow it. Maybe you can't watch your favorite TV shows for a month or you have to forgo eating out. Your spouse or a friend can be the enforcer.

Or up the ante even further and make the penalty cold hard cash. A new website called, created by a Yale economics professor and two colleagues, allows you to create "commitment contracts" for resolutions ranging from losing weight to saving more dough. If you don't hold up your end of the deal (as verified by a designated "referee"), you pay an amount that you've agreed to in advance - $100, $1,000, whatever.

The idea is that you'll be more likely to stay the course if you stand to lose real bucks (or suffer in other ways) for breaking your resolution. This money can go to a friend or a charity or, in a clever twist, you can stipulate that the payment go to a nonprofit whose goals aren't simpatico with yours. So, for example, if you're an advocate of gun control, the National Rifle Association Foundation might get a donation each time you lapse.

Invest in a Roth. If you contribute $10,000 to a regular 401(k), not only will you have socked away 10 grand, you'll also lower your tax bill. If you're like most people, you won't invest those tax savings. But there's a way to fool yourself into investing your tax break instead of frittering it away; fund a Roth 401(k) instead.

If you put $10,000 into a Roth and earn 8% for 10 years, you'll end up with $21,589 tax-free. To get that amount after-tax from your 401(k), you'd have to put in every cent of your tax savings on top of that $10,000.

Don't forget that you're putting after-tax dollars into the Roth. So if you're in the 28% tax bracket, you'll need to earn $13,889 before taxes to invest $10,000 after-tax, which means your paycheck will be a bit smaller.

If you don't have a Roth 401(k) option where you work, go ahead and fund your regular 401(k), and boost your tax savings by contributing to a Roth IRA instead of a regular IRA.

There is a potential downside to the Roth strategy. If you end up in a lower tax bracket when you withdraw the money, you'll have paid taxes at a higher rate by doing the Roth. But I think that risk is worth taking (for why, see "What's next for boomers").

If nothing else, putting some money in a Roth as well as a regular 401(k) allows you to hedge your bets on future tax rates.

Of course, you can always adopt the strategy most people resort to - promise yourself that you'll start socking away more as soon as you've bought that fancy sports car you can't live without. I just wouldn't expect to retire on that money.

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