May
26
Lame Excuses for Not Contributing to Retirement Plans ( 401k, IRA )
May 26, 2005 | Comments Off
And their rebuttal …
People know they need to save for retirement. People know the Social Security system just provides for the basics (the green flyer they send every year says so). Yet, most people either don’t save for retirement at all, or if they do, they start very late in life.
The US Government has developed plans that allow us to periodically contribute earned income into retirement accounts that may be sheltered from taxes until retirement. By starting early, and letting the
compounding effect to take care of them, a little contribution now may mean a significant income level 20 or 40 years from now. When I ask people why they have not maximized their contributions to the 401k /
403k / IRA plans, more often than not, I get a lot of lame excuses.
I have compiled a short list of very common excuses (and my answer to them):
Lame Excuse: I can’t afford to save
This is the most common. People say they have too many financial commitments. They must accept the fact that there is an even greater financial commitment that hasn’t been allocated yet:
Retirement. But they prefer to ignore what is far away in the future, and let the present take precedence. We can not afford to live in misery when you are old and frail.
People! I am not suggesting that we suddenly put 20% of pre-tax income in retirement accounts. That would be ideal. That would get to the goal closer. But what I am suggesting is that we
INCREASE our contribution to retirement accounts by 2%.
2% of a 40,000 USD income is 67 USD. When we think that this is pre-tax money, it is the equivalent of reducing take home pay by about 45 or 50 USD. I bet almost anyone can find 50 USD of superfluous
money spent if that person reviews past month’s spending. A 50 USD reduction in take home pay will not leave anyone in the average family any hungrier, or colder, or sicker than what he/she is
now. However, a 2% of 40,000 USD from when you are 25 years old until 60, would mean a 250 to 600 USD monthly income (adjusted for inflation, depending if you invest on Certificate of Deposits or
Stocks, respectively).
Try increasing your contributions by 2%. After a couple of months contributing, I bet you will not even feel the difference in spending money. What you will notice is how better you sleep, knowing that
you are saving for retirement.
Lame Excuse: I am afraid of the stock market
I do recommend investing using relatively safe, widely diversified, low fee instruments like an index mutual fund that closely follows the Standard & Poor’s 500 Index. I do recommend stocks since over
long periods of time (5 years or more) they provide better rate of returns than other products (like Certificate of Deposits, Money Markets, and Bonds).
However, if you do not like the idea of investing your money in the companies that make up America’s (or the World’s) Economy that is fine with me. There are plenty of other options to choose in most
retirement plans. If it is an IRA, you can make it as simple as a Certificate of Deposit insured by the FDIC. If it is a 401k you can choose a mutual fund specialized in long-term trusty United States
government bonds (make sure it is a buy and hold type of fund, not a speculative Bond Fund).
Even if you don’t have the time NOW to educate yourself regarding the investment choices you have in your particular retirement plan, you always have the option of placing the money in a money market account
inside the retirement plan. Contribute and accumulate the money. It will be there when your mind is ready to choose the best investment vehicle for you. In this particular case, half-procrastinating is better than full procrastinating.
Lame Excuse: I do not have the time to invest
That is the whole purpose of automatic investments. You choose your strategy once (or maybe once every couple of years), and you just go on with your life. These investments where designed with the person who don’t have time for money management.
Even if you do not have time to choose the investment vehicle, you can always contribute to a temporary holding account (like the money market) and make the decision later, when you have some down time in
your life. (see previous Excuse).
Lame Excuse: I want to retire BEFORE 59 ½ years
Great! So do I.
The first step in retiring at 50, or 40 years is making sure you CAN retire at 60. Once you accomplish the goal of retiring at 60, you take care of the years between 50 and 60 or 40 and 60.
If you have already taken care of your golden years (after 60), then you may not need to read this article. Otherwise, maximize your retirement plan, and then invest outside of it.
Usually, the best instruments for saving for the years between 60 and a 100 are the 401k, IRA, and other similarly defined plans.
Lame Excuse: I need to save for my child education first
How sweet of you.
If Junior decides to go to Harvard, you may get some financial aid, personal education loans, or a home equity line. Some retirement plans (like the 401k in most companies) allow you to take a loan
against your own money for college education. In the worst case, Mom and Dad can work a 2nd job to pay Junior’s education. As expensive as it sounds, college education is a temporary thing.
Retirement is kind of long term (unless you don’t plan on living long). If Junior decides to go to Harvard and study Basket Weaving, there will be no one to take care of you when you are old.
Plan for both items: retirement, and kid’s education. But don’t neglect retirement ever.
Lame Excuse: I need to pay off my credit card debt first
Yes, you need to pay your credit cards. If you are paying double-digit interest rates, try to get a consolidation loan, or a low interest credit card that charges around 9%. Prepare a payment
plan. Freeze your cards so you don’t keep spending so much on those shopping sprees.
Try to correct your spending habits first! Try to force yourself to Live Below Your Means! Once you do so, you will certainly have some extra money to pay a bit more than what you charged that month.
But keep contributing to your retirement. Every month you let go by without saving for retirement, you are making your life a lot harder, as you will have to work a lot harder to fill up your nest egg and be ready for retirement.
Lame Excuse: I need to pay off my house first
You will pay off your house in 30 years. Keep paying the regular mortgage payment. Don’t force yourself into paying it too soon. Your interest rate is 6%? That is lower than the rate of return you will get on your retirement vehicles (when you consider the tax advantages on the interest payments). Your interest rate
is higher than 6%? Then you may do better refinancing it!
Lame Excuse: I need to have a rainy day fund
There will be a storm during your retirement. Any light rain now will probably be minor compared to the maladies an old person without a job, or the skills for a then modern job will have when you are 70.
And if it is a real storm what you get during your youth years, Uncle Sam allows you to retire money from most of these investment vehicles, penalty free, for qualified reasons.
My advice: Contribute to both: retirement accounts, and rainy fund. But never stop contributing to retirement.
——
If I happen to think about more, I will add to the list. For now,
think about them, and increase your periodic contributions to your
retirement plans!
Related Posts:
Comments
Subscribe
