I have heard pretty much every excuse in the book when I ask people why they haven't saved more for retirement. Some say things like "I just can't afford to save right now" or "It's too late to start now", and some say "I have no idea how to get started."
Whatever your excuses are for not saving as much as you should for retirement, they are just that – excuses. Here are some of the more common excuses and why you shouldn't let them get in the way.
I can't afford it
First of all – yes you can. If you have a job and can afford your basic living expenses, you can afford to save something for your retirement.
Pretty much everyone in the U.S. has access to a tax-deferred retirement account, either through an employer's plan or through a traditional IRA you set up yourself. With these accounts, a dollar saved doesn't really cost you a dollar.
For example, anything you save in a traditional IRA could qualify for a tax write off. And, if you are not covered by a retirement plan at work, there is no income limit to be eligible for a deduction.
If you have a low income, you could qualify for additional benefits to make it easier to save. The IRS actually has a tax credit designed to encourage people who "can't afford it" to start saving for their retirement.
The Retirement Savings Contributions Credit gives you a tax credit worth up to 50% of your first $2,000 in retirement plan or IRA contributions. To get the full credit, your adjusted gross income must be below $17,750 for single taxpayers (double for married filing jointly), but there are partial credits available for incomes up to $29,500. This is literally free money to save for your retirement.
It's too late
No such thing! While it's definitely better to start early, anything is better than nothing, especially if you earn a decent salary and can afford to play catch-up.
For the 2014 tax year, the IRS allows an additional $1,000 in IRA contributions for people over 50 years old, meaning you can contribute $6,500 this year to a tax-advantaged retirement account. And this amount is likely to rise over the next several years to adjust for cost-of-living increases.
As an extreme example, let's say you are 50 and don't have a nickel saved for retirement. By investing $6,500 per year in an IRA, assuming 8% average annual investment returns, you could have nearly $200,000 put away by the time you turn 65. And if you're willing to wait until you're 70 to retire, your nest egg could be more than $325,000.
Assuming you withdraw 4% of this amount in retirement, that's nearly an extra $1,100 per month added to your social security income. You won't exactly be "living the high life", but it's definitely better than social security alone.
Now, odds are if you're 50 you aren't in such bad shape, but the point is that whatever you do now can make a huge difference in your post-retirement standard of living.
It's too early to start thinking about retiring
This is perhaps the worst excuse I've ever heard. As an investor, the most powerful weapon you have at your disposal is time, or more specifically, the effect of time on compound returns.
If you want to retire at 65 with $1 million in the bank, assuming 8% returns, you'll need to start investing $484 per month if you start at age 30. Starting just five years earlier, that amount is nearly cut to just $322 per month.
The earlier you start, the easier it'll be to reach your goals. $1,000 compounded at 8% annual returns will grow into almost $22,000 after 40 years, and 8% is actually pretty low on a historical basis (S&P average annual return is 9.4%).
I don't know where to start
You're not alone. The world of stocks, bonds, and mutual funds can be confusing. However, the best way to get started is to go ahead and open up an IRA with the brokerage of your choice. Most retirement accounts have no minimum opening deposit, so whatever you have is a start.
Then, if you're uncomfortable with picking individual stocks, start out by simply using index funds such as the SPDR S&P 500 (NYSEMKT:SPY) which simply tracks the performance of the S&P 500 index. Click here for an overview of some other index funds that can take the guesswork out of investing.
The bottom line here is that you shouldn't let excuses get in the way of saving and planning for your future. It may seem like a burden to start now, but it'll be much more of a burden later on if you don't do it.