“I know I need to save for retirement and should start now but I just can’t do it. I don’t have the money.”
I hear this frequently. And a few reasons are legitimate, such as someone is just starting out in a career and the person has just enough money to pay weekly bills. But some peoples’ excuses are overlooking the opportunities to save and some people just don’t impose enough self-discipline. Let us consider these excuses and possible remedies.
Start with Pennies; End with a Lot
Can you put aside your small change, and maybe add a dollar or two a day?
Maybe you collect your loose change each day. Maybe you buy one less Starbucks coffee a day. Maybe you pack a lunch when you go to work and save a bundle because you don’t eat out each day. Maybe you find a way to save three or four bucks a day. Most of us can find a few extra bucks if we try hard. That’s because wasteful spending practices seem to plague all of us at some time.
Add up the wasteful spending that you have recovered. Put the money into an investment—I would recommend an S&P 500 index fund—each month. Do it every month over a long period. Make a regular part of your life; the same as paying your bills each month. Set up automatic deductions and put just a $100 a month into it to start. Do it like clockwork every month. Just earn nine percent a year and after 40 years, you will have an extra $471,000. Not bad for just putting your loose change aside on a regular basis over decades.
But besides that, sometimes there’s help elsewhere. It is the kind of help that can add up to millions of dollars over the long run. It is the kind of help that some people don’t understand so they don’t use it.
No One Will Help Me. I Can’t Do It Alone
This belief that you are always all alone in saving is often wrong. There are tax breaks and employee retirement saving matches that are often available. For instance, say you put $6,000 in a tax deferred retirement account.
Do you have to come up with $6,000 over the course of a year for your retirement fund?
In most cases the answer is no. Most people in low- and middle-income categories will get a tax break for contributing to an IRA or other “qualified” retirement accounts that qualify for special tax treatment. About a third of your contribution will come back to you in the form of a tax break. So, this is how a $4,000 contribution becomes $6,000. And an extra $2,000 a year in retirement savings over the long term can make a big difference.
I’ll Never Be Able to Build a Big Account
How does $4,000 a year saving become $12,000 a year? Let’s say you put $6,000 a year into a qualified retirement account at work. Again, it’s not really $6,000 coming out of your salary because part of the money will come back to you in the form of a tax break, which will probably come to about $2,000. But you might also be working in a workplace where your employer will match your contributions to your 401(k)-retirement plan dollar for dollar, up to maybe six percent. You put in six percent and the employer will put up, or match, up to six percent. (By the way, if the matching option exists in your workplace, use it today. I worked 15 years for a company that offered the matching option for 10 years. Then the company got in trouble and still offered the retirement program but it wasn’t so generous. You could contribute, but the company would no longer match your contributions).
The Numbers Add Up Over the Long Term
By the way, let’s say the total contributions to your plan come to $500 a month and you do it for 30 years. Let’s say you earn an average of nine percent a year. At the end of 30 years, you have some $922,000. Add an extra five years, do it for 35 years at the same contribution levels and rates of return, and you have about $1.49 million. That’s a lot of mullah for someone who never thought he or she could save anything; that he or she could ever achieve financial independence. But this person put these automatic savings vehicles in place early and then let them work over the long term. They can work very well if you let them work, which means starting early. However, some people never put these savings vehicles to work and many will be working forever.
Are You Your Own Worst Enemy?
I’ve known people who worked in companies that offered very generous qualified retirement plans—six percent contributions become twelve percent contributions to your plan—and they never put a cent in a plan.
Were they crazy or lazy or both?
Did they understand they were passing up a chance to slowly accumulate a big retirement stash that could make them independent? Others I know weren’t lucky enough to work for a big employer that had a generous retirement plan. Still, they neglected to set up their own retirement plan.
They might have a manana mentality—“I’ll get around to it next year” —but next year never seems to come and they go into their 50s or 60s with no retirement assets. They wonder if they will have to work forever. In some cases, I fear the answer is yes.
Today Begins the Road to Financial Independence
You don’t have to be this person. You can do it. Get going now. There are many ways to save. They begin with this resolution.
I am not waiting for someone to save me. I am going to save myself.
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