In What to Do If You Cannot Afford to Retire, I offered as a strategy that you plan to have at least some money saved for the retirement years. I even dared to suggest that you should save for retirement no matter how old you are. This is such an important topic that it needs a post all it’s own.
Millions of people have no money saved for retirement, perhaps even the majority of Americans. Upon reaching the age of 50,55, 60, 65 or 70, they abandon all hope, believing that it’s simply too late to make a difference. They reason No matter how much I save from this point, it will never be enough for me to retire.
That may be true. In fact, you may not be able to save up enough for you to retire. But, you CAN save up enough to make your retirement years better.
Why You Should Save for Retirement No Matter How Old You Are
According to a 2015 report by the US Government Accountability Office (GAO),
52% of Americans 55 and older have no retirement savings. We can also surmise that many of the 48% do have retirement savings have no more than a few thousand dollars.
This is a bleak picture, and it confirms that millions of people who are approaching or already in the retirement years either have no capability to save for retirement, or they’ve simply given up on the effort.
But even if you don’t have any money saved for retirement at all, it’s still one of the best strategies you can implement. It doesn’t matter if you are a few years away from retirement, or already in the retirement years. Anything that you can save for retirement is better than having nothing at all.
The financial industry has done a superb job of indoctrinating us to believe that we need to have hundreds of thousands of dollars – or even millions – say the way to secure retirement. Numbers this big can intimidate small investors out of even trying.
But if you have little or nothing in the way of retirement savings, you can count yourself among the majority of Americans. You’re not weird or incapable – in fact, you’re quite normal.
But that doesn’t mean that you should stay in that situation indefinitely. No matter how old you are, having at least some money saved will help you in the retirement years, just as it can during your working life.
No Matter How Little You Save, it Will Make Your Life Easier
Once you retire, you will continue to need a savings cushion. This will be especially true if you won’t have the type of retirement income and assets that will afford you a full-blown retirement.
If like most people, you’ll be scraping by in the retirement years, you’ll need a savings cushion even more. You should think of retirement savings at this point as less of a source of income generation, and more as a large emergency fund.
You’ll need it too. If you will continue to work in the retirement years, you will need a source of ready cash to cover times of reduced income. You will also need cash to cover the increased medical costs that typically come with old age. You may even need extra money in order to help your adult children, or grandchildren.
There’s also the emotional benefit that comes with having savings. Just knowing that you have money put away reduces stress. It also makes it easier to sleep at night.
Even if you never accumulate $500,000 or $1 million, just having something like $50,000 saved can be a serious stress reliever, at a time in life when more stress is the last thing you need.
If you currently have no retirement savings, building a well-stocked emergency fund will be even more important for you. You should plan to do that, at a minimum. And anything that you can save beyond an emergency fund will make your retirement years that much more comfortable.
Why Saving Late in Life is Often Easier
I think another barrier to saving for retirement late in life is psychological. You might reason that if you’ve never been able to save money up to this point, you simply lack the capability. But you don’t lack the capability, only the implementation of the actual strategy.
It’s often easier to save money late in life. By the time you reach your 50s or 60s, it’s likely that your kids are grown and gone. You don’t have child-rearing expenses, nor the cost burdens of college education. You may have even paid off your mortgage.
The point is, when you reach that stage of life, the major obligations are behind you. It’s a time of lowered expenses, that should enable you to have more income for savings.
To be sure, a lot of people find themselves in reduced income capacities by the time they reach their 50s. It’s become the new normal in the 21st-century economy.
But an even bigger problem may be behavioral. Since your life up to this point is required that virtually all of your income go to pay expenses allocating some of it towards savings is simply beyond your behavioral norm.
And that’s what has to change.
How to Save for Retirement Even if You Never Did up to this Point
It can be a major adjustment to go from non-saver to saver. But if you’ve never been a saver before, it’s an adjustment that you’ll have to make, no matter how uncomfortable it might be.
I suggest that you start with the ”savings snowball” strategy. That’s where you start saving small amounts, and gradually work your way up. You target a doable amount, say $1,000. Once you reach that level, you go for $2,000, and then $3,000, and so on.
As your savings increase, your ability to save it comes real. That’s important! Savers develop confidence about their ability to save money. Once you do, you can become unstoppable.
Once again, don’t get hung up on “only” saving a small amount of money. If you haven’t saved up anything up to this point, any money that you can save is a definite step forward.
An Example of Going from Zero Savings to $100,000+ by Age 70
Let’s say that you’re 55 years old and you have no savings. You commit to saving $1,000 in the next six months. You then set another goal to save $1,000 in the next six months after that. After one year, you have $2,000.
Empowered by your newfound ability to save money, you raise the bar in the next year. Instead of saving $2,000 in year number two, you commit to $4,000. By the end of year number two, you’ve got $6,000.
You similarly decide to increase your savings by $2,000 each year, until you reach the point where you can save $10,000 per year consistently. It requires that each year that you increase your savings level you must cut an equivalent amount spending, or increase your income. Most likely, you’ll need to do a combination of both.
Here’s how that look in each successive year past 55:
- 56, $2,000 saved, $2,000 cumulative savings
- 57, $4,000 saved, $6,000 cumulative savings
- 58, $6,000 saved, $12,000 cumulative savings
- 59, $8,000 saved, $20,000 cumulative savings
- 61, $10,000 saved, $40,000 cumulative savings
- 62, $10,000 saved, $50,000 cumulative savings
- 63, $10,000 saved, $60,000 cumulative savings
- 64, $10,000 saved, $70,000 cumulative savings
- 65, $10,000 saved, $80,000 cumulative savings
- 66, $10,000 saved, $90,000 cumulative savings
- 67, $10,000 saved, $100,000 cumulative savings
- 68, $10,000 saved, $110,000 cumulative savings
- 69, $10,000 saved, $120,000 cumulative savings
- 70, $10,000 saved, $130,000 cumulative savings
Do These Numbers Look Too Optimistic?
These numbers may look overly optimistic, but there are a few potential positives we didn’t even consider. For example, we’ve assumed that at 55 you have no money whatsoever. We’ve also ignored the possibility of investment income earned on the money saved. (I won’t suggest investment strategies, since a) everyone’s risk appetite is different, and b) the financial markets are looking way too rich these days.)
But one factor is absolutely clear: in each year that you save money, your overall financial situation steadily improves.
At no point do you have enough money to fully retire. But you have progressively more money to create an easier life for yourself. If you are living in your retirement years on a combination of Social Security and some form of employment income, a savings cushion of this size will go a long way toward evening out income fluctuations.
It’s a strategy worth implementing for that reason alone.
Where to Save for Retirement
You don’t need to get fancy here, but there are several basic options.
An employer sponsored 401(k) or 403(b) plan. If you work for an employer that provides a retirement plan, but you haven’t participated up to this point, sign up immediately. This is particularly true if the employer provides a contribution match. For example, if the employer will match 50% up to a 6% contribution by you (3% by the employer), you should contribute a minimum of 6%. That will give you a 9% annual contribution.
Self-employed retirement plans. If you have your own business, or plan to start one in retirement, there are plenty of good retirement plan options. Self-employed retirement plans can be more generous than those available for employees. It might even be worth it to set up a side business just add a self-employed retirement plan to your savings strategy.
A traditional IRA. This is the most basic form of retirement savings. If you are 50 or older, you can contribute up to $6,500 per year. The advantage with the traditional IRA is that the contribution is tax-deductible. That means you’ll be getting at least some help on the contribution from the federal and state governments, in the form of reduced income taxes. The accounts are also self-directed, which means you can invest them anyway you like.
A Roth IRA. These work like traditional IRAs, except that the contributions aren’t tax-deductible. The advantage is that once you’re in the plan for at least five years, and you are at least 59 ½ years old, withdrawals taken from the plan are tax-free. This is probably the most liquid form of retirement savings.
Non-traditional Retirement Savings
When we think of saving money for retirement, we automatically think about specific retirement plans. But you can also save money for your retirement without even opening up a formal retirement plan.
Since your need for cash will be more immediate, non-retirement savings can even be a benefit. You can access the money anytime that you want, and you won’t have to pay income tax on the withdrawals.
Non-retirement savings include the usual savings vehicles. This includes savings accounts, certificates of deposit, mutual funds, and investment brokerage accounts. Take advantage of any of these that you can. There’s no need to set up a dedicated retirement plan.
Still another way to save for retirement is to pay off your mortgage. If you stay in the house after it’s paid, you have eliminated what is probably your single largest expense. But if you decide that you need cash, you can sell the house and keep all the proceeds as retirement savings.
This is a more passive and less obvious way to save money. But it’s also a fact that some people are better at paying off debt than they are at saving money. If that describes you, then paying off your mortgage may be your preferred way to save for retirement.
When it Comes to Saving for Retirement, Perfection Isn’t Necessary
If you haven’t saved for retirement up to this point, please dispense with any notions of a perfect outcome. At this point, setting perfection as a goal will be your worst enemy. If your life hasn’t been perfect, your retirement years won’t be either – but that’s perfectly okay. The idea isn’t, and never was, to create a perfect retirement life. But you can create a better retirement life, and that needs to be the goal.
In addition to the fact of creating a cash cushion for emergencies, contingencies or income disruptions, savings can provide you with the ability to afford at least some of the luxuries in life that you may not be able to afford on a reduced income in the retirement years. In that way, savings can ease a sense of desperation. If breathing room is important in your working years, it will be even more important in the retirement years.
But there’s another factor that’s even more important.
The ability to save money gives you the discipline to be able to live beneath your means. People who can become experts in creating margin in their lives improve their circumstances by default. Margin is the “extra” that enables you to live better than your income might suggest. It’s a skill that’s well worth learning, even more so as you approach the retirement years.
If you can live beneath your means, you can survive come what may. A lot of people who lived through the Great Depression and World War II, and the years before, learned that as a survival skill. That’s why so many have been able to live in their retirement years comfortably, despite limited financial resources.
If you’re worried about retirement because you don’t have “enough” retirement savings, you may have to adopt a few new strategies. Saving money – no matter what your age or income situation – may be the most important strategy.
As a friend of mine told me years ago, ”Life looks a lot different when the “vault” is full, than when it’s empty.” Make sure your vault is full, or at least a lot fuller than it is right now. That’s basic but incredibly important.
While we don’t want to fixate on money, it’s a fact that life tends to go better when we have at least some extra. If you don’t have a large amount of retirement savings, don’t simply give up. Do what you can with what you have. It won’t be perfect, but it’ll is still be better than what you would have otherwise.
Can you offer any savings strategies that will help a non-saver become a saver, even if they can never fully retire?