The Future is Now: How to Save for Retirement When You’re Struggling

I’ve heard “I’ll never be able to retire” from friends of all ages, and I’m here to tell you that if you take action now, it may not be true. Saving money is a habit without an immediate reward system, which makes it a tough one to start. And it’s hard to think about putting funds aside for retirement while struggling to pay today’s bills—but like keeping up your dental hygiene, saving is a necessary evil. The good news is you can open a retirement account today, from your couch, without novocaine.

The Beauty of Compound Interest

Picture this: You open a tax-deferred retirement account at age 25, and manage to sock away $3,000 a year (which is less than $60 per week) for 10 years, then stop saving entirely. By the time you’re 65, that $30,000 you’ve invested, assuming a 7% annual return, will have grown to more than $338,000, even though you didn’t put in one penny past the age of 35. But don’t take my word for it, use this handy calculator and do the math yourself.

Saving Money is a Mindset

You must start with how you think about it. Tell yourself to stop saying “I can’t” and instead ask, “how can I?” My grandmother who lived through the Great Depression never stopped saving, especially in lean times. She shunned credit and always seemed to have an extra buck, even in her later years. How’d she do it? She played a game with herself. By taking advantage of clearance sales, coupons and special promotions, she took the money she saved at the cash register and put it into her own account, then forgot about it. Surprised to have lived as long as she did, she found that having a her own stash of cash provided a comforting freedom as she got older. Because she stuck to a long term plan, she had enough money to reduce some of the stress of old age.

Adjust Your Perspective

Retirement may be decades away, but it will approach faster than you think. Imagine your 65-year-old self. If you could have a conversation with the Future You, what do you think your wise old self would say? Sure, you might talk about places you would like to visit. Or hobbies that will fill your later days. Hopefully, you’ll talk about how to stay healthy and keep medical expenses as low as possible. But, it’s a pretty good bet that you’ll get a lecture about when you started your retirement account. One could say that every day wasted is another penny lost.

The Power of Deferred Taxes (Open an IRA!)

Stashing your savings in a traditional IRA means you are deferring your taxes. Let’s say you pay 25% in taxes for every dollar you earn. What if you had that money for your own financial future? IRAs are designed to provide tax-advantaged ways to invest for retirement. Two great options are the Traditional IRA and a Roth IRA. Both can provide growth by diverting the money you would pay in taxes back into your own pocket.

Traditional IRAs offer tax breaks right away—you pay the taxes after the age of 59.5. Why is this method a good one? Because once you retire, your average tax rate is likely to be lower. So, what you pay in taxes on the money you invested and the interest you’ve earned over the years should be less. It’s important to remember that there is a 10% penalty before you reach the age of 59½ on withdrawals from a Traditional IRA. Contributions to your Roth IRA are not tax deductible, but you can make withdrawals without having to pay additional taxes on the amount you put in. Before you make a decision, do some research to take advantage of each type’s unique advantages and requirements.

Choose Low Cost Investments

You have to spend money to make money. But stay alert to what you’re paying for a company to manage your portfolios. Stay involved, and if you learn how to manage your own portfolio, you will keep more of what you invest. Seek out investment companies like Vanguard. With no stockholders or outside owners to answer to, they can operate their funds at cost, so you keep more of your returns. Vanguard boasts that their average expense ratio is 82% less than the industry average for mutual funds and ETFs (exchange-traded funds). They claim it takes less than 15 minutes to open an account and start on the road to building a retirement nest egg.

Think of Inflation

You’ve probably heard that if you stash your spare money under the mattress, it’s value will decrease over time, leaving you wanting. By accruing interest, you can ward off the inevitable inflation (which is serious—over the past 20 years, the inflation rate has averaged 3.22% per year). When you’re making a retirement plan, consider “The Rule of 72” to help calculate the impact inflation will have on the value of your future dollar. According to experts, it’s likely that prices will double in 24 years—so that $100 bill in the couch cushion will be worth $50. This is why it’s important to invest money, rather than just save.

The amount of advice available on the internet is as overwhelming as it is comforting. I suggest you start by reading blogs, talking to friends, and perhaps choosing a great money podcast to subscribe to. My next article will explore a few painless ways to start a lifestyle of saving. In the meantime, if you’re serious and want some great tips, check out these ideas on how to retire with a million dollars.

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