The funny thing about retirement math is that numbers rarely lie. The more money you save, the better off you’ll be.
When it comes to 401(k)s, millions of Americans find any number of reasons not to save. Since 401(k)s are voluntary savings plans, you have to deliberately make contributions. For most workers, the days of guaranteed pension contributions and benefits are long gone. For a 401(k)-style plan to work, you need to leave the money alone to compound for decades.
I don’t think it’s a revelation that far too many retirement savers tap their 401(k)s for short-term spending and loans, according to the Employee Benefit Research Institute (EBRI). They also have a tendency to go into debt and rack up credit card bills.
In recent research, EBRI found that “households with spending spikes that lack the income and cash reserves to support spending volatility are likely to increase their credit card debt or take a loan from their 401(k) plan.”
“As expected, this research found that the lack of income and cash reserves to support spending spikes is likely to result in higher credit card debt,” stated Craig Copeland, director, Wealth Benefits Research, EBRI. “What’s interesting is how having household credit card debt impacts the household’s retirement security, since higher credit card utilization is correlated with lower 401(k) plan contributions and account balances, even when controlling for tenure and income.”
Sure, there are going to be times when you need to spend more money than you anticipated to buy a new washer/dryer, out-of-pocket healthcare or any number of other emergency expenditures. Been there, done that. Yet only 30% of Americans have emergency savings accounts, according to Bankrate. That leads me to some ways to save:
1) Set up a Short-Term Savings Fund. This should be one of three “buckets” for savings, the other two being “mid-term” (non-payroll taxes, down payments, pending college) and “long-term” for retirement. Find the highest rates on a money-market fund and contribute to it every month, ideally to cover at least three months of expenses. You can cover emergency spending such as appliance and vehicle repairs with this fund.
2) Set Up Your 401(k) for Regular, Automatic Contributions. Nearly every company offers this auto-save feature. The best plans automatically boost your contribution when you get a raise. Out of sight, out of mind.
3) Don’t Touch Your 401(k) Account Until You Retire. You will pay a 10% penalty prior to age 59 1/2 on retirement plan withdrawals plus federal income tax. Do you want to hand Uncle Sam all that money? That’s the best reason for having an emergency savings account.
As always, you can’t save if you don’t manage your spending. Make sure that your mantra every month is “pay yourself first,” which means saving money in your emergency and retirement accounts. It may be hard to do, but it’s worth the effort when you’re older.