You’ll often hear or read that Americans are sorely lacking in retirement savings, and while some of that data is perhaps incomplete or exaggerated, it’s safe to say that a large chunk of workers are not taking steps to build a nest egg. Earlier this year, the Center for Financial Services Innovation found that 42% of U.S. adults don’t have any retirement savings at all.
Why is this problematic? Without savings, you risk struggling financially at a time when you deserve to lead a dignified lifestyle. Social Security, for example, pays the average recipient today $17,532 a year — that’s several notches above the poverty line, but it’s hardly rolling in cash.
Of course, some workers can look forward to pension income or perhaps funds from an inheritance to pay the bills during their golden years. But if you’re not one of them, then you’ll need savings on top of Social Security for a shot at a comfortable lifestyle.
Now some financial experts will tell you that if you’re not in the habit of saving for retirement, and don’t have money in your budget allocated for that purpose, then you’ll need to drastically alter your current lifestyle to fund your nest egg. Many, in fact, will advise you to cut back on just about every luxury possible in an effort to ramp up your savings.
In theory, that’s decent advice. In practice, it’s nearly impossible to follow. And that’s why you’re better taking a middle-ground approach to building long-term savings.
You need to save, but you also need to live
There’s a difference between eliminating some indulgences and completely doing away with any semblance of gratification in life.
Depriving yourself of every single luxury you enjoy is no way to function, and if you push yourself to go that route in an effort to focus on savings, you’re likely to give up early on when you realize it’s just too hard. A better approach, therefore, is to be reasonable. If you’re not currently saving enough (or any) money for retirement, go through your expenses, identify those that aren’t essentials — think restaurant meals, store-bought coffee, cable, streaming services, rideshares, movie tickets, and live entertainment — and choose a few that you’re willing to part with or cut back on.
For example, if you’re currently depleting your entire paycheck but typically spend $300 a month on restaurants, $150 a month on cable, and $100 a month on a fancy gym with a sauna, you might cancel that gym membership and downgrade to a cable package that’s $40 cheaper, but keep going to restaurants if that’s your favorite thing to do. Similarly, you might decide to give up a car you can technically live without and deal with the inconvenience of taking the bus, all while maintaining your current level of spending in other categories with wiggle room.
The point is to make reasonable, sustainable lifestyle choices that allow you to save money as needed, but also enjoy your day-to-day existence. And the good news? You don’t need to sock away a fortune each month to build a solid nest egg. Sure, the more you’re able to save, the better, but setting aside even a few hundred dollars a month will go a long way if you start early enough and give your invested savings enough time to grow.
Check out the following table, which shows what your nest egg might amount to depending on when you start saving modestly:
| If You Start Saving $300 a Month at Age: | Here’s What You’ll Have by Age 67 (Assumes a 7% Average Annual Return): |
|---|---|
| 27 | $719,000 |
| 32 | $498,000 |
| 37 | $340,000 |
| 42 | $228,000 |
| 47 | $148,000 |
The more time you give yourself to build savings, the better, especially if you’re not going to get anywhere close to maxing out a 401(k) or even an IRA. With the former, you can sock away up to $19,000 a year if you’re under 50, and with the latter, $6,000. At the same time, cutting back on some luxuries could do the trick of freeing up $300 a month, and once invested, that money can grow into a far more substantial sum over several decades’ time. And in case you’re wondering about the 7% return, it’s actually a couple of percentage points below the stock market’s average, which means it’s a reasonable figure to work with over a lengthy investment window.
The less you spend, the more you can save — that’s pretty obvious. But just as it’s advisable to spend in moderation, so too it is reasonable to save in moderation when your income is limited and you can’t bear the thought of cutting out every luxury under the sun. So don’t do that. Instead, make some compromises, but also let yourself live a little on the road to retirement. You deserve it.