Saving For Retirement When You’re Paycheck-to-Paycheck
The first Ask the Investment Guy submission- and it’s from a real person!
Investment Guy, I know that starting a 401K or 403B or IRA is beneficial, but I currently live paycheck to paycheck. I’m 34- how can I make this happen? – Kevin
Hi Kevin- Thanks for asking! That’s a great question. Living paycheck to paycheck certainly makes this goal seem intimidating, but it’s attainable with a little bit of effort. Recognizing the need to save for retirement is an awesome first step. In order to save for retirement while your cash flow is tight requires commitment and sacrifice; once you are committed, read on.
Where is your money is currently going?
If you haven’t already created a budget, do so. It’s an interesting exercise that will show you exactly where your dollars are going each month, and maybe you can find some wasted expenses to redirect towards saving. I’m not going to suggest you cut your diet down to ramen noodles, but maybe brown bagging your lunch every day is an opportunity to save a few bucks. It’s little things that go a long way. (here are 2 budget templates: one is for families , another if you are single)
How much to contribute:
Anything is much more than nothing- and it doesn’t have to be a lot. Can you afford $20/week? Contributing $20/week with market growth of 5% over the next 30 years will total more than $66,000! Additionally, at the end of the year you will see an account statement with a bottom line number representing your progress. If you want to really improve your odds at a successful retirement, each year you should try to increase your contributions by a few dollars.
Make automatic contributions
Set up contributions to occur automatically straight from your paycheck or checking account. This keeps the money out of your hands and instills the discipline of consistency.
Behold of the power of tax deduction…
If you contribute $20 to a 401k, this money goes into your account before taxes are taken out. Therefore, assuming a 20% tax bracket, your take home pay only goes down $16 and you saved $20 in your 401k for an additional $4 to you each week.
… and tax deferral
Inside of your retirement account the IRS allows you a free pass from paying taxes on gains that are owed in non-retirement accounts. In exchange for these tax benefits, you are waiving access to these dollars until you are 59 ½ at the earliest. These may seem small, but over time are powerful. It’s also one of the very few ways to legally avoid paying taxes.
Finally, if it’s simply not possible to find the extra money in your current budget, maybe you can try these 2 harder approaches: ask your employer for a raise of $20/week (ya never know) or find a second job for a couple of hours a week. If you ask me, it’s better to bust your hump while you’re in your 30’s instead of working into your 80’s.
Good luck Kevin!
