When you’re young, retirement feels like a distant “unreality” and saving for a time that feels like it may never come, doesn’t seem like a good idea.
There are plenty of other excuses for spending your money in the now, rather than saving it for retirement. But as the cliché goes, time flies.
One day, sooner than you think, you’ll be retired – voluntarily or otherwise – and you’re going to need money.
While some excuses for not saving for retirement may be valid, others defy logic.
Here are eight excuses you can’t use to avoid saving for retirement.
“I don’t make enough money.”
Here are a few reasons why this excuse doesn’t work: First, whatever you can save regularly adds up over time – even if it feels like very little.
Second, if your income increases as you go up the career ladder, so does the amount you can save.
And third, as interest compounds on your savings, your money accumulates over a 40-plus year working career.
Don’t assume that a meager income means that a 401(k) and IRA accounts are out of your reach. Low-income taxpayers can qualify for a saver’s tax credit if you contribute to an IRA or 401(k), and your adjusted gross income is less with a Roth IRA, which you contribute to with after-tax money.
When it comes time for you to withdraw your money from a Roth, you withdraw the money from a Roth savings plan, there’ll be no income tax on the cash.
“I have too much debt and too many expenses.”
So, you’re burdened with debt and your monthly rent or mortgage is a fixed expense. You’re certainly not alone, but you’re not a special case when it comes to putting off retirement savings.
Bite the bullet and draw up a tough budget. Use Mint to track your spending, review all your monthly expenses and see what can be cut. Check whether refinancing your loans will give you a financial advantage.
Any surplus of cash you get from these efforts, stash it away for retirement. Instead of thinking of it as deprivation today, consider it a good investment for tomorrow.
“I don’t know anything about investing.”
Investing may seem like an impenetrable mystery. But with a little time and effort, you can educate yourself in the simpler aspects of investing. Use Mint tools to figure out your investment style and find easy ways to invest your money.
If you don’t have time enough to study on your own, you can hire a certified financial planner to guide you. Don’t think you have to know every mutual fund and asset class out there. Even “safe” investments will add significantly to your retirement nest egg.
“I need to save for my kids’ college investment.”
Higher education, like retirement, costs money. While many parents put great importance on their child’s education, that doesn’t mean it should come at the expense of their retirement savings.
Students have opportunities to finance their educations with student and government loans, grants and scholarships. Those options don’t exist for retirees.
For that reason alone, retirement savings should be your first priority. Any money left over you can gladly put away for your kids.
“When I retire, I’ll get a part-time job and cut expenses.”
You may think your lifestyle will change significantly in retirement, but numerous studies indicate it won’t.
People need between 70% and 80% of the money they earned while working to live the lifestyle they anticipate in retirement; some financial planners recommend closer to 100%. It’s just not possible to cut back enough to justify not saving.
While more Americans are working into their golden years, it’s not guaranteed that you’ll find a post-retirement job. And if you’re laid off now, the job market of the future is far from certain.
A study from Rutgers University found that workers who lost their jobs in 2009 due to the recession are still struggling today, with only 23% over the age of 50 holding a full-time job, and 35% still unemployed.
And what happens when you physically can’t work anymore? The top reason people retire early is due to health issues.
“Social Security will cover me for retirement.”
Even the Social Security Administration says, “Don’t count on it.” According to a 2010 report from the Social Security and Medicare Boards of Trustees, Social Security funds may be exhausted by 2036.
Some experts believe that the best-case scenario for younger working Americans is that they’ll get 75 percent of their scheduled benefits. But because the average monthly benefit for retirees is $1,172 – the maximum is $2,300 – that certainly won’t be enough to live on.
Whether the Social Security system can be saved or not, your savings will have to make up a major portion of your future retirement income.
“I’m too old and I missed my chance.”
It’s never too late to start saving. And, if you’re currently working and plan to do so for another 10, 15, 20 years, starting a savings program now, will reap you benefits later. You can start 401(k)s or IRAs, including the Roth plans which offer tax incentives.
If you are 50 or older in 2013, the law allows you an additional “catch up” contribution of $1,000 to your traditional or Roth IRAs, for a total of $6,500. There are additional tax breaks for older savers, which can add to your retirement bottom line.
It’s best to consult with a tax accountant or other financial experts for advice on your specific situation, but don’t hesitate to put aside money any longer.
“I’m young and have plenty of time to invest later.”
Youth is often wasted on the young, and sometimes, so is investment savings. But not saving in your 20s will have major consequences decades later.
The way you save for retirement may also come back to bite you. According to a study from Hewitt and Associates, a human resources consulting firm, less than one third of workers aged 18 to 25 partcipate in their employer retirement plan.
Worse, for those who are contributing, 35% of their money is going into fixed-income securities with low returns, like government bonds, CDs and money market investments. That means young workers are placing more of their money into fixed income investments than people twice their age.
Failing to invest while you are young and failing to make the right investment choices will prove extremely expensive later on.
Let’s use four hypothetical examples: Anne doesn’t join her retirement plan until she’s age 40, and when she does, she places her money into bonds.
Bob also starts at age 40, but chooses stocks when he starts investing.
Carl joins his employer plan as soon as he starts his career at age 20, but he chooses bonds. Diane also leaps in right away at age 20, but chooses stocks.
Let’s assume that all four started their careers with a $20,000 salary, and then get a 3% annual raise. When they start contributing, they each place 5% into their retirement plans and plan to retire at age 65.
Let’s also assume that during their years or participation, they earn the average annual returns by bonds (5.08%) and stocks (10.46%). The results when they all turn 65:
- Anne (started investing in bonds at age 40) – $118,000
- Bob (started investing in stocks at age 40) – $240,000
- Carl (started investing in bonds at age 20) – $265,000
- Diane (started investing in stocks at age 20) – $1,128,000
The Bottom Line
The message is clear: The sooner you begin to save, and the more you emphasize stocks for your long-term savings, the more you can expect to accumulate.
None of the excuses above stand up to the simple fact that: Whatever amount you set aside today, will accumulate for when that distant tomorrow known as “retirement” arrives.
Vanessa Richardson is a freelance writer in San Francisco who writes about small business and personal finance.