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Five Very Simple Truths About Saving for Retirement
Let’s get the scary truth out there: CNN estimates that half of all Americans are saving nothing for retirement.
Half of Americans aren’t saving a dime.
Why? There are a lot of reasons, but one big one, according to the study’s findings, is that people don’t know how retirement plans work. Another is the perception is that people can’t afford retirement savings. Still others include some of the statements I see in reader emails, often repeated.
Here are five simple facts about retirement savings. Each one of these hammers down on a myth I often hear about retirement savings.
Retirement savings plans are not scams.
A retirement plan is just an investment account with a few extra rules attached to it, most of which benefit a person who is saving for retirement. That’s it.
An investment account is like a bank account, except that instead of having an account at your local bank, you have it with an investment firm. Just like a bank account, you deposit money. Just like a bank account, you can withdraw money from it. The only difference is rather than a bank just holding onto your money, an investment house will use it to buy investments at your discretion – stocks, bonds, and so forth.
It’s not a scam. It’s not something to be afraid of.
You will survive just fine with a slightly smaller paycheck.
Many people are absolutely afraid of the idea of seeing their check get any smaller. They’re barely making ends meet as it is – how can they possibly live with a smaller check?
Here’s the truth: most of us spend just a little more freely if we have ample cash in our checking account. It’s a lot easier to buy a bottle of soda at the gas station if you have plenty in checking. It’s a lot easier just to roll through Starbucks when it’s not going to grind you down to nothing.
Yet, when we look at our account and see it’s about empty, we’ll skip those treats with no hard feelings. They’ll come around again.
For an awful lot of people, all retirement savings does is spread out those treats a little bit. If you put, say, 10% of your income into your 401(k), you’re usually only dropping your paycheck by 7% or so. Even if you just save 5%, you’re only actually cutting your paycheck by 3%. That’s $3 out of every $100. For most paychecks, that’s a stop at the coffee shop – and that’s about it.
You won’t even miss it. It seems like a big deal, but when it comes down to the reality of your paycheck, it really fades into the woodwork quite seamlessly.
Virtually any investment option is better than not investing at all for retirement.
Some people get locked down because of the investment choices. They’re worried about not picking the right one and get so tied up in that choice that they simply avoid ever signing up.
Here’s the truth: you’re better off closing your eyes and pointing at one at random on the page than you are skipping even a week or two of retirement savings.
Yes, you might not pick the “best” one. Guess what? If you simply take the recommended option, you’re probably going to get pretty close to the best results.
What if I change my mind later? The money is in a retirement account. You can change your investments around without worry or taxes.
The sign-up process is very simple and someone will walk you through every step.
If you’re intimidated by the applications, don’t be. Just ask for some help at the human resources office.
Most businesses have someone on hand who can help you go through the paperwork. Most of the paperwork amounts to personal information. Beyond that, you mostly just have to say how much you’re wanting to save each month and, beyond that, you just choose what you want to invest it in.
The information you need to give is really straightforward. If you are unsure about the investment choices, as suggested above, just pick the default one. You can change it later if you decide something else will work better.
Not saving for retirement has some seriously negative downsides.
If you choose to save nothing for retirement, the only income you’ll have when you reach your late sixties and seventies is Social Security. Unless you live extremely lean, Social Security won’t cut it for an enjoyable lifestyle. Another aspect of reaching retirement age is the increased expense of medical bills. Retirees without any savings generally rely on basic Medicare for medical expenses, but what about the costs of long-term care?
By not signing up, you’re choosing to add a lot of misery to your later years just so you can have a few minor creature comforts now. It’s a pretty poor long-term tradeoff.
In the end, there’s no excuse not to be saving for retirement. You can afford it and you don’t need to have a lot of knowledge to get started. The downsides to not doing it are tremendous.
If you haven’t signed up for a retirement plan at work, you owe it to yourself to do it right now. If your work doesn’t offer one, ask your friends for a recommendation about starting a Roth IRA – and do it right now. You won’t regret it.