Your retirement savings should last about 20 to 30 years. It's a long time. And saving enough to cover these expenses takes just as much, if not longer. But a surprising number of Americans have no retirement savings. According to a survey by Northwestern Mutual, one in three Americans has less than $ 5,000 in retirement savings, and 21% have no savings.
People use many excuses to explain why they have not started saving yet, but few realize the consequences of these choices. Below, I explain some of the most common – and worst – excuses that people use for not saving for retirement and how they can affect your future financial security.
1. I do not earn much money now, so I'll wait until I earn more to start saving.
Setting aside $ 50 a month for retirement might not seem like a lot. After all, $ 50 will not take you very far today, and in the future, it will probably be worth even less. But you forget that your retirement savings is progressively composed. If you invested $ 50 a month for 40 years, you would end up with more than $ 155,000, assuming an annual rate of return of 8%. In comparison, if you wait 10 years before you start saving, and then invest $ 100 a month, you would only have $ 136,000 after 30 years, assuming the same 8% annual rate of return . It's a difference of $ 19,000.
Your early retirement contributions are more important than your subsequent contributions because they have more time to compose. That's why it's best to start saving for retirement as soon as possible, even if you can only save a few dollars. The longer you wait to start, the more you will have to save each month to reach your target savings goal.
2. My employer does not offer a 401 (k).
A 401 (k) facilitates saving for retirement because you can set it up to automatically deduct a portion of your earnings from each pay check and your employer can also match some of your contributions. But you do not need a 401 (k) to save for retirement.
Consider opening an IRA if you do not have access to a 401 (k). These accounts have annual contribution limits of less than 401 (k) s. You can only contribute up to $ 6,000 in 2019 to an IRA or $ 7,000 if you are 50 or older, while you can contribute $ 19,000 to $ 401 (k) in 2019 or $ 25,000. USD if you are 50 years old or older. But the advantage is that you will have much more choice in investing in an IRA, instead of being limited to a few pre-selected options, such as in a 401 (k). You can invest in equities, bonds, mutual funds and exchange-traded funds – collections of stocks and bonds that you buy together – real estate, and so on. IRAs are also known to have lower administrative costs than most 401 (k) s, which can help you keep more of what you've earned.
You can open a traditional IRA, Roth IRA or both. Because traditional IRAs are tax-deferred, your contributions reduce your taxable income this year, and you pay taxes on your distributions when you retire. The Roth IRA contributions will not affect your taxable income this year, but you will not have to pay taxes on your retirement distributions because you have already paid taxes on your initial contributions. A traditional IRA makes more sense if you believe you are in a higher tax bracket today than you will be retired, while a Roth IRA makes more sense if you believe you are. in the same tax bracket or in a lower tax bracket today. will be retired.
3. I save first for college education for my child.
It seems noble to place your child's college education before your own retirement, but this decision can come back to make you and your child suffer both if you run out of money in retirement. Your child may not have a student loan, but he or she will now have to support you for five, ten or even twenty years at the end of your life, while trying to raise your own family and children. Save for your children. college and their own retreat.
If you can afford to save for your kids' college and retirement at the same time, go for it. But if you can not, choose your retirement. Your child can apply for scholarships and grants, work while studying, and borrow money if needed. If you receive additional funds, you can give them to your child, but you must first think of your future financial security so that it does not become the burden of your child.
Saving for retirement is not always easy, but it is almost always necessary. This money will be your lifeline during your last years, and the bigger your cushion, the better. Start saving today, even if you can only save a little money each month. Look for places to reduce your expenses, such as restaurant meals, to make more money available, and if you get a raise, always increase your retirement savings first. It may not be as fun to spend that money today, but when you're ready to retire, you'll be grateful to have had the foresight to plan for your future.