If you're behind on saving, don't let common excuses keep you poor. Laura covers three reasons why you may not be saving for retirement and how to overcome them, no matter how much or little money you have.
2. You don’t have a retirement savings plan at work.
Having a retirement plan at work—such as a traditional or a Roth 401k—is terrific, especially if your employer offers free matching funds to incentivize participation.
For example, if you earn $40,000 a year and save 10%, that equals $4,000 a year. If you invested that amount consistently for 40 years and earned 7% on average, you’d have a nest egg worth $875,000.
If your company matches contributions up to 3% of your salary, it adds $1,200 (3% of $40,000) a year to your account. Now you’d be saving a total of $5,200 ($4,000 plus $1,200) a year, which would give you more than $1.1 million in 40 years. That’s an extra quarter of a million to spend in retirement thanks to free matching funds!
You (and a non-working spouse) can have an Individual Retirement Arrangement (IRA) no matter where you work.
Even if your employer doesn’t match contributions, I’m still a big fan of using a workplace retirement account because it comes with multiple benefits. These plans automate investing by deducting contributions directly from your paycheck, give you federal legal protections, have high annual contribution limits, and don’t have income limits.
But if you don’t have a retirement plan at work, don’t despair or use it as an excuse not to save. You (and a non-working spouse) can have an Individual Retirement Arrangement (IRA) no matter where you work. If you work for yourself, there are a variety of retirement accounts for the self-employed—such as a solo 401k, SEP-IRA, or SIMPLE IRA—designed just for you.
If you have a retirement account at work, that should be your go-to account. But if you don’t, find out which types of retirement accounts you’re eligible for. Contribute as much as you can and slowly increase your saving rate until you max them out.
To learn more about retirement accounts and the best places to open them, the Retirement Account Comparison Chart is a free, one-page resource that you may find helpful.
3. You’re afraid of losing money.
If you aren’t saving because you’re scared of investment risk, it’s time to take a step back and look at the big picture. Yes, investing means that you could possibly lose money. However, you can easily cut risk by choosing the right types of investments. I’ll tell you more in a moment.
If your goal is to have a nest egg that allows you to stop working and maintain your lifestyle in retirement, keeping money in a safe place—like a savings account or a low-yield CD—simply won’t get you there.
For example, if you save $5,000 a year for 40 years in a bank account with an average return of 1%, you’ll accumulate less than $250,000. But if you invest the same amount over four decades at a 7% return, you’ll have more than $1 million.
That could certainly make the difference between scraping by or being comfortable in retirement. Therefore, taking calculated investment risk is an important part of your financial life. Without it, your money won’t grow fast enough to achieve your long-term goals.
Your investment options will vary from company to company, but the best investment strategy is called diversification. It allows you to earn higher average returns while reducing risk, because you own hundreds or thousands of investments and it’s not likely that all of them could drop in value at the same time. If the price of one stock in a fund takes a dive, it’s no big deal because you own many others that may be holding steady or going up.
In contrast, if you put your life’s savings into one technology stock and it tanks, you’re in trouble. But if that stock only makes up a fraction of your portfolio, the loss is negligible. Having a mix of investments that respond to market conditions in different ways is the key to smoothing out risk.
The best investment choices are mutual funds, index funds, and exchange-traded funds (ETFs) because they own hundreds or thousands of underlying investments, which gives you instance, built-in diversification.
If you have more than 10 years before retirement, choosing funds made up primarily of stocks, or labeled as growth funds, is the best way to get an optimal return on your investment.
Many retirement accounts offer target date funds that invest based on the year when you plan to retire. For example, if you want to retire in 2040, the name of the fund would be something like “Target Date 2040 Index Fund.”
Target date funds are diversified and very convenient because they automatically rebalance on a periodic basis to achieve growth in the early years, but then become more conservative as you approach retirement.
The Secret to Building Wealth
The saying time is money and the early bird gets the worm are absolute truths when it comes to building wealth. Investors who start late usually have to make huge financial sacrifices to accumulate enough money to reach their goals—or they’re forced to work much longer than they want to.
If you haven’t started saving, don’t beat yourself up about it. The key factors you can control are opening a retirement account and starting small.
If you’re living paycheck to paycheck, figure out how to ruthlessly cut your spending so you can come up with more money to save. Consider increasing your income with a second job or side gig.
Whether you avoid risk intentionally or have simply been procrastinating saving, the result could be devastating to your financial future. The reality is that not taking enough investment risk might actually be the riskiest move of all.
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