There are plenty of excuses we make for not saving for retirement. Perhaps we are putting off funding a retirement account until we get a raise, get out of debt, or start a college fund for our children. But while these justifications might seem reasonable at the time, they can seriously jeopardize your ability to retire comfortably. Here's how to overcome seven common excuses for not saving for retirement:
Earn too little. It's extremely difficult to save for retirement on a small wage, and you probably have other more immediate expenses demanding your limited paychecks. However, starting out by saving even very small amounts will help you significantly in the future. "If you take just $10 a month and then increase it to $20 a month after six months, you probably won't miss it," says Kimberly Foss, a certified financial planner and president of Empyrion Wealth Management in Roseville, Calif. "Each year when you get a pay raise or cost-of-living increase or bonus, take half of that amount and put it into your retirement plan." Also, take advantage of savings perks specifically for low-income individuals who save for retirement. If you contribute to an IRA or 401(k) when your modified adjusted gross income is less than $28,250 ($56,500 for couples) in 2011, you may qualify for the saver's tax credit, which could reduce your federal tax bill by up to $1,000 for individuals and $2,000 for couples. Also, consider funneling some of your retirement savings into a Roth 401(k) or Roth IRA. Roth accounts allow you to pay income tax on your retirement savings now, while you are in a low-tax bracket, then withdrawals will be tax-free in retirement.
College first. Parents sometimes delay saving for retirement so they can pay for their children's college education. But most financial advisers caution against sacrificing your retirement savings to fund a 529 plan. "Children can borrow to go to college, but you can't borrow to retire," says Patricia Raskob, a certified financial planner and president of Raskob Kambourian Financial Advisors in Tucson, Ariz. You can always help your children to pay off their student loans later if you end up in a better financial position. A 401(k) match from your employer is likely to be the best possible return you can get on an investment. "When you are saving in a company plan like a 401(k), you are actually saving even more money because of the pre-tax benefit and you are also usually getting a matching contribution," says Carole Peck, a certified financial planner and owner of the Carole Peck Financial Center. "You don't have a match for saving for a college education and you don't necessarily have an immediate tax benefit, either." You may also be able to get relatives to chip in for your children's college costs. "Enlist people like the grandparents who, instead of giving them a $50 present at two years old, can put $40 in a 529 plan and give them a $10 gift," advises Foss. "Have other people fund 529s while you save for retirement."
Retirement is far away. With so many immediate expenses clamoring for our limited paychecks, it's difficult to focus on a financial goal that could be decades away. But starting to save early means that you can save less each year and still reach the same goal. "Look at the long-term growth potential for starting in your 20s as opposed to starting in your 40s," says Peck. If you save $2,500 per year in a 401(k) beginning at age 25, you will have $517,808 at age 65, assuming a 7 percent annual return. However, if you wait until age 40 to start saving, you will need to save about $7,900 per year to have the same amount for retirement at age 65.
No retirement plan at work. It certainly makes saving for retirement easier if you receive help from an employer. "Seek out an employer, if you can, that has a 401(k) and matches your contributions or helps you to save for your retirement," advises Foss. If you don't receive any employer help, it's even more important to save for retirement on your own. You can defer taxes on up to $5,000 by saving in an IRA, or $6,000 if you are age 50 or older. Consider setting up a direct deposit from your paycheck to a retirement or taxable investment account to make saving as automatic as it would be if you had a 401(k).
Don't know how to invest. Picking funds can be intimidating if you don't know much about investing. If you don't feel comfortable selecting an investment allocation yourself, make an appointment with an independent expert who can explain it to you and recommend choices appropriate for your situation. "Get on the phone with somebody who is objective and spend a little bit of time walking through it," says Peck. If you don't like your initial investment choices, you can always change them later.
Pay off debt first. If you have high-interest credit card debt or personal loans, it's usually a good idea to pay those off before funding an IRA. But if you have student loans, mortgage payments, or other low-interest debt, you may be able to get a better return by investing your cash. To figure out if it's better to pay off debt or save for retirement, compare the interest and fees you are paying on your debt to how much you are likely to earn on your savings. Be sure to factor in any 401(k) match and tax deductions or credits you will earn by saving for retirement.
It's too late. Some people in their 50s and 60s think it's too late to begin saving for retirement. But depending on when you plan to retire, you may have a decade or more to accumulate a nest egg. There are significantly bigger tax incentives for older workers to save for retirement than younger workers. Workers age 50 and over can contribute $5,500 more to a 401(k) and $1,000 more to an IRA than younger workers are allowed to. "In your 50s, you still have a good 10 or 15 years to contribute to a retirement plan, even if you haven't started already," says Peck. "It's better to start than to rely only on Social Security or your kids later on."