Your retirement savings have to last you about 20 to 30 years. That's a long time. And saving enough to cover these expenses takes just as long, if not longer. But a surprising amount of Americans have no retirement savings at all. One in 3 Americans has less than $5,000 saved for retirement, according to a Northwestern Mutual survey, and 21% have no savings at all.
People use many excuses to explain why they haven't started saving yet, but few realize the consequences of these choices. Below, I explain some of the most common -- and bad -- excuses people use for not saving for retirement and how they can affect your future financial security.
1. I don't make much money now, so I'll wait until I'm earning more to start saving.
Setting aside $50 a month for retirement may not seem like it will amount to much. After all, $50 doesn't get you very far today, and in the future it'll probably be worth even less. But you're forgetting that your retirement savings compound over time. If you invested $50 per month every month for 40 years, you'd end up with over $155,000, assuming an 8% annual rate of return. By comparison, if you waited 10 years to start saving and then began investing $100 per month, you'd have only about $136,000 after 30 years, assuming the same 8% annual rate of return. That's a difference of $19,000.
Your early retirement contributions mean more than your later ones because they have more time to compound. That's why it's best to start saving for retirement as early as possible, even if you can spare only a few dollars. The longer you wait to begin, the more money you have to save each month in order to hit your target savings goal.
2. My employer doesn't offer a 401(k).
A 401(k) does make saving for retirement easier because you can set it up to automatically deduct a portion of your earnings from each paycheck, and your employer may also match some of your contributions. But you don't need a 401(k) to save for retirement.
Consider opening an IRA if you don't have access to a 401(k). These accounts have lower annual contribution limits than 401(k)s. You can contribute only up to $6,000 in 2019 to an IRA or $7,000 if you're 50 or older, while you can contribute $19,000 to a 401(k) in 2019 or $25,000 if you're 50 or older. But the upside is that you'll have many more investment choices in an IRA, instead of being limited to a few preselected options as you are in a 401(k). You can invest in stocks, bonds, mutual funds, and exchange-traded funds -- collections of stocks and bonds you purchase as a package -- real estate, and more. IRAs are also known for having lower administrative fees than most 401(k)s, which can help you hold on to more of what you've earned.
You can open a traditional IRA, Roth IRA, or both. Traditional IRAs are tax deferred, so your contributions reduce your taxable income this year and then you pay taxes on your distributions in retirement. Roth IRA contributions don't affect your taxable income this year, but you won't owe taxes on your retirement distributions because you'll already have paid taxes on your initial contributions. A traditional IRA makes more sense if you believe you're in a higher income tax bracket today than you will be in retirement, while a Roth IRA makes more sense if you believe you're in the same or a lower tax bracket today than you will be in retirement.
3. I'm saving for my child's college education first.
It seems noble to place your child's college education before your own retirement, but this decision can come back to hurt both you and your child if you run out of money in retirement. Your child may not have any student loans, but he or she will now have to support you for five, 10, or even 20 years at the end of your life while they're also trying to raise their own family and save for their children's college and their own retirement.
If you can afford to save for your children's college and your own retirement at the same time, go for it. But if you can't, choose your retirement. Your child can apply for scholarships and grants, work while in school, and take out loans as needed. If you get extra cash, you can give it to your child to put toward their loans, but you need to think about your future financial security first so that doesn't become your child's burden.
Saving for retirement isn't always easy, but it's almost always necessary. This money is going to be your lifeline in your final years, and the bigger your cushion the better. Start saving today, even if you can set aside only a little money each month. Look for areas to cut expenses, like dining out, to free up more cash for savings, and if you get a raise, always increase your retirement savings first. It may not be as much fun as spending that money today, but when you're ready to retire, you'll be grateful you had the foresight to plan for your future.