The reality of retirement savings comes down to a very simple decision.
Each paycheck or each week or each month, you have a choice to make. You can either put a certain amount of money away for retirement, or you can keep it and spend it on other expenses as you see fit.
Every time you choose to put some money away, it essentially disappears out of your life for a long while. It goes into a 401(k) or an IRA or some other savings vehicle and it grows slowly, ideally earning a bit of a return each year.
When you actually reach retirement age – around 60 for most of these plans – you can access that money without penalty and, ideally, that money has grown quite a bit. Let’s say, hypothetically, that it has quadrupled.
So let’s look at it that way. If you could put a dollar into a machine knowing that it would spit out four dollars when you’re old, would you do it? How many times would you do it?
It’s easy to think of it as a simple exchange. You’re thinking about having a coffee at Starbucks, but then you realize you could just drop $5 in the machine instead, knowing that you’ll have $20 when you’re older. You choose to skip this little forgettable thing and that little forgettable thing, knowing that by doing so, you’re passing money to yourself that you might really need later.
In other words, it seems very reasonable to skip out on some of the most inessential items in life if you know that by doing so you’ll help yourself with the essentials of life later on.
Here’s the problem, though, and I think it’s why a lot of Americans don’t save for retirement or don’t save enough.
It’s easy to make that choice in the moment with regards to one little inessential expense that’s right in front of us. The choice to forego a little treat or something like that is an easy one in the moment.
It’s a lot harder to make that decision outside of the moment when you’re looking at a bunch of inessential expenses at once.
What’s the difference? When you look at a bunch of inessential expenses at once, you don’t see the loss of three cups of coffee and two magazines. You see the loss of freedom of choice. The idea that you would choose to bring home a smaller paycheck seems very painful because it means that you have fewer opportunities.
The thing to always keep in mind is that every dollar you put into retirement is only eliminating the least essential things you might buy. Putting away $20 a week for retirement means $20 you’re not spending on a bigger cup of coffee at Starbucks or a celebrity gossip magazine or a song downloaded from iTunes. It’s $20 not spent on the most forgettable stuff in your life.
Now, roll the clock forward to retirement. Your only income is Social Security plus whatever you chose to put away during your working years. Over that time, your $20 has turned into $80. $80 on top of Social Security makes a big difference in terms of making ends meet.
Saving for retirement simply means dropping the least essential expenses today so that you have the money for highly essential expenses later.
If you’re afraid to sign up for retirement because you don’t want to lose a little bit out of your paycheck, keep this idea in mind. You’re not losing freedom. You’re simply choosing to give up some of the least important ways you spend money so that you’ll have enough money to keep food on the table later on.