11/13/2014 07:05 pm ET Updated Jan 13, 2015

Solving the Rubik's Cube of Retirement Saving

Some people can solve a Rubik's Cube calmly and quickly. Others go round in circles for a few minutes and then quietly give it up. Still others make an intense effort that goes nowhere, and then smash the thing against the wall in frustration.

Those different approaches to a colorful puzzle are like the different approaches people take to retirement saving. Some handle it efficiently, some would rather ignore the problem and still others make destructive moves out of frustration. As with Rubik's Cube, the more you understand about the way retirement planning works, the better you can stay on track to the right solution even when the pieces have still seem out of place.

Breaking the puzzle into parts

Rubik's Cube has six sides, and retirement planning can be seen as having six sides as well. In each case, the trick is getting them all to line up at the same time:

  1. Wages. Think of this as the side of the puzzle you start on. Naturally, your wages have a lot to do with how much you save, but the trick is not assuming that future wage growth will make everything easier. Build retirement savings into every budget, even when you are just starting your career.
  2. Debt. Think of debt as the piece on the opposite side of the Rubik's Cube that keeps fouling up the side you are trying to get straight. Debt is the opposite of savings, so you cannot solve the savings problem without first eliminating debt -- or at least having a viable plan to eliminate debt.
  3. Investment gains. Investments should help your nest egg grow, but the more you invest for growth, the less predictable your returns will be. This is like that side of the Rubik's Cube that looks promising one minute, and all out of whack the next. You have to just be patient, and stick to strategies most likely to make everything line up in the long run.
  4. Time. This is like the side of the puzzle that first seems one way, but then starts to change completely. At first, time is your friend -- the longer you save and invest, the larger your savings are likely to be. However, as your time to retirement nears, and the years of retirement you need to fund stretch out before you, time can turn into an enemy.
  5. Cost of living. Inflation is a subtle problem that will gradually get worse over time if you don't watch it. This is the side of the puzzle that starts out fine, but slowly one square, then another, then another moves out of place.
  6. Income. The object of this exercise is to provide retirement income, and like the solution to Rubik's Cube, that can be elusive. When bank rates and bond yields started heading toward zero, it raised the amount of savings needed to provide a viable amount of retirement income.

The real point of any puzzle is the process of solving it. Looking at the process of retirement savings as a Rubik's Cube with six sides will help you account for all the different pieces that need to fall into place. That doesn't make it easy, but it beats focusing on just one or two sides of the puzzle and then finding that everything else is a mess.

Also by Richard Barrington:

5 Ideas For A Thrifty Retirement