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How to Save for Retirement When You Can’t Afford it

CantAffordIt_400In a perfect world, you’d be contributing the maximum to retirement plans and IRAs that the law allows. But life isn’t always perfect. You might not be able to set aside big chunks of your paycheck, due to all the bills you have to pay each month. This simple strategy from The Truth About Retirement Plans and IRAs will help you save, painlessly.

I won’t suggest that you cancel your cable TV subscription or take the bus instead of driving to work. Heck, you’ve probably already made those sacrifices. And still you’re finding it impossible to save. So here’s what to do: Forget about contributing the maximum to your retirement plan at work. Instead, just contribute 1% of your pay. The average starting salary for college graduates in 2012, according to the National Association of Colleges and Employers, was $44,259. If you’re paid twice a month, that’s $1,844 per paycheck. A 1% contribution would be $18.44.

And even though you contribute $18.44, your income doesn’t have to go down by that much. That’s because your contribution lowers your income taxes. This means you can tell your employer to reduce the amount that gets withheld for taxes. The result: About $5 less can be withheld for taxes, meaning that your paycheck might drop by only about $13.

That’s about a dollar a day.

You can afford that!

Not sure you agree? Here’s an easy way you can find out. Just tell your employer to divert 1% of your pay to the retirement plan and to reduce your tax withholding accordingly.

Then wait for your next paycheck and see if you notice the cut in pay.

If you do notice: Wait for your next paycheck and see if you still notice the reduction. I bet that after two or three pay periods, you won’t notice anymore—meaning your contribution has become completely painless. It also means you’re ready to go to the next paragraph.

If you don’t notice: You’re not feeling any pain. The key to successful retirement (and the answer to the question How much should I be saving for my future?) is “Save until it hurts.” If a 1% contribution hurts, stay at that level until it doesn’t hurt anymore (that’s the paragraph above). If it doesn’t hurt (which is this paragraph), you’re ready to increase your contribution by another 1%. Do that and then repeat–and keep repeating until you’re saving the maximum.

Is the pain of contributing just 1% (or even ten bucks) too much for you to bear? OK, fine. I won’t argue with you. Instead, just do this:

Do not contribute any of your current paycheck. Instead, wait for your next pay raise. When you get it, place half of that raise into the retirement plan. Your paycheck will still go up—because half of your raise will flow into it—and you’ll find yourself contributing to the plan! Best of all, your contribution will be completely painless—because you’ll be funding the plan with your pay raise! Since you never had that money before, there’s no cut in pay—and no pain. Then, at your next raise do the same. Eventually, thanks to future pay raises, you’ll find yourself contributing the maximum to your plan!

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