Updated on 11.21.17

Saving Enough for Retirement When Money Is Tight

Trent Hamm

One of the biggest financial challenges for everyone during their professional years is saving for retirement. The idea of needing to save hundreds of thousands of dollars – or even millions of dollars – for a goal that seems incredibly far off in the future feels simultaneously distant and incredibly intimidating, highly important but not at all urgent, like a mountain on the horizon.

It’s not even a question – most Americans must save for retirement. Social Security provides only a hand-to-mouth existence and very few companies or organizations today offer a pension plan (if you have one, you’re lucky, and I truly hope that the pension is secure).

Like it or not, the last thirty years or so have seen the responsibility for retirement income swing almost entirely in the direction of individuals having to be fully responsible for saving money early in life in order to be able to have a great retirement late in life. The traditional “work thirty years for a company and retire with a great pension” has become “work a few years for a company that might have a retirement savings plan of some kind, then move to another company, then move to another company.”

If you want a life with options in retirement, you have to save for it. There’s no two ways about it.

At the same time, finances for many Americans are tight. As I’ve mentioned many times on Money360, and more than 10% of Americans making $100,000 or more a year can’t make ends meet. Money is tight for a lot of people.

In other words, the important long term goal of saving for retirement looms on the horizon for pretty much everyone, but the immediate realities of life push as hard as possible away from saving for retirement.

How does a person navigate this apparent conflict? With money so tight, what can a person do to squeeze out space for retirement savings? Here are some strategies that actually work.

Make Automatic Contributions

Here’s the neat part about automatic contributions to retirement: they never show up in your checking account (or, if they do, they show up for a day or so and then disappear). The money is just automatically moved for you. The only change that you really notice is that there’s just a bit less money in your checking account.

Well, isn’t that “bit less money” a problem? What actually happens for most people is that they simply make unconscious changes to spend a little less than before. When you check their account balance and find a little less money in it, you won’t choose to go without important things – rather, you’ll choose to go without minor spur of the moment things.

In other words, your retirement savings will be funded by things like not going into a convenience store when gassing up or not buying a spur of the moment extra book at a bookstore – the kinds of forgettable purchases that we all make when we have some extra money. Those purchases really add up.

How do you automate your contributions? If you have a workplace retirement savings plan, it’s pretty easy – just fill out a form to have contributions taken automatically from your check straight into your retirement account. If you’re managing your own account – say, a Roth IRA – just log onto the website for your account and set up an automatic transfer from your checking account that lines up well with your paydays.

In any case, the money will either never grace your checking account at all or only be in there for a moment. The magical part? You’ll barely notice it at all. It’s easy to think that you’ll definitely notice the change, but the truth is that the difference will be noticed in the form of buying fewer quickly-forgotten spur of the moment items.

Get Every Dime of Matching

One of the most efficient ways to save for retirement is to gobble up every single dime of employer matching if your employer offers it.

Many companies and most public employers offer some form of matching of your retirement contributions. They usually take the form of matching you dollar for dollar up to a certain amount of contributions. For example, some employers will match your contributions up to 5% of your salary, so if you put 5% of your salary away in your retirement plan, they’ll kick in 5%, too. That instantly doubles your money.

Gobble up every dollar of matching. It’s free money, or, at the very least, a part of your salary that will go unclaimed if you don’t take it. Do not leave it sitting on the table (unless you enjoy throwing money away, that is).

Let’s say you make $1,000 per paycheck. If your employer offers full matching of the first 5% of your contributions, start contributing 5%. Your pay goes down to $950, but you’re actually adding $100 per paycheck to your retirement savings. That’s well worth a 5% drop in your pay.

Start Young! (Meaning Start Now!)

The longer you wait to start saving for retirement, the more you’re going to have to save each and every pay period to make it to a decent retirement.

That might be obvious at first glance, but it’s actually even more intense than that. See, the earlier in your life that you contribute to retirement, the more years your contributions have to grow in value.

For example, let’s say you put money into retirement that’s going to grow at 7% a year until you’re 65.

If you put in $100 a month starting at age 25, your total contributions will be $48,000 over the course of those forty years ($100 times 12 times 40).

On the other hand, if you put in $200 a month starting at age 45, your total contributions will also be $48,000 when you reach age 65 ($200 times 12 times 20).

The difference comes in the investment returns.

If you start with $100 per month at age 25, your retirement account will be worth $247,946.81 (given the 7% annual return mentioned above).

On the other hand, if you start with $200 per month at age 45, your retirement account will only be worth $101,832.80 (again, given the 7% return mentioned above).

In both cases, the total contribution by the account holder is $48,000, but by starting earlier, the contributions end up working a lot harder for you, resulting in far more money saved up for retirement.

What does that mean? Start now. Start at the absolute first second you can. The longer the money sits there, the better off you’ll be.

Hands down, the single best decision I made during my twenties in terms of my finances is to contribute to my retirement plans, enough to get full matching from my employer. Because of that, my retirement accounts are already multiples of my current salary and I barely have to contribute any more throughout my adult life to have enough to retire at around age 65 or 70. Anything else I contribute just allows me to retire even earlier or add a bit of panache.

What if you’re older? Start. Now. Every month you wait, the harder the path becomes to a good retirement. You need every possible year between now and retirement for your savings to grow, so start today.

Remember – The Perfect Is the Enemy of the Good

It’s really easy to convince yourself that you can never possibly save “enough,” so why bother? It’s a calculus that many people make.

Here’s the thing: the perfect is always the enemy of the good. Having something saved for retirement is better than having nothing at all.

Even if you just contribute a little, even if you start late, even if you don’t have employer matching, anything you save is going to help. Having $5,000 is better than having nothing. Having $500 is better than having nothing.

People often talk about how much money they should have for retirement and those kinds of numbers seem overwhelming, but the truth is that those numbers present an optimum, perfect case. That’s what you’d need to save in order to have a life with a ton of financial flexibility while retiring early in your sixties.

Don’t worry about the “perfect” picture. Don’t give up because you feel like it’s impossible to achieve that kind of “perfection.” Worry instead about making your own picture a little better.

The perfect is always the enemy of the good. Shoot for good. Don’t worry about perfect.

Good luck.

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