photo credit: mujitra (´???)
This is a guest post from A, a pf blogger at I Pick Up Pennies. Thanks to A for guest blogging while I’m on vacation!
My husband and I turned 30 in 2008, and I decided it was time to start planning for retirement.
Neither of us have worked for companies with 401(k) matching programs, so no one was going to hold our hands (or match our funds). We were on our own.
Do it yourself (whether you want to or not)
Plenty of jobs out there offer 401(k) matching programs, although these may be in jeopardy as the economy dwindles. Even these people probably shouldn’t rest on their laurels when it comes to IRAs, but at least they have an excuse.
There are, however, plenty of people who don’t have access to a matching-funds program, or even a company-chosen bank to invest with. Whether they’re stay-at-home parents, self-employed or simply with a company that doesn’t provide retirement help, these folks are the ones who need to get going on an IRA.
Maybe they put it off because they think they don’t have enough money to bother. The fact is, there is no magic number when it comes to retirement contributions. Each day you procrastinate, however, can have long-term effects on your future.
In “Deal With Your Debt,” Liz Pulliam Westin gives the perfect example:
There is a pair of twins. One contributes $3,000 every year, from age 22-32. Then she stops and never puts in another nickel. The second contributes $3,000 from 32-62. The early saver will save nearly $100,000 more than her sister: $437,320 vs $339,860. (This assumes an average return of 8%, since this example was written in far more optimistic times.)
Take the first step – however small
The moral of the above story is that the sooner you act, the more benefits you reap. Still, some people think that they couldn’t put enough in the plan to make it worthwhile. And this is where they’re wrong.
Of course, each of you must decide for yourselves what you are comfortable contributing. It will depend greatly on your income, your assets, your debt and basic costs of living. For the two of us, that amount was $20 a week. (Which you probably knew from the title.)
My husband and I have an income of just under $3,150 a month. From that we pay: $700 for rent, $502 for my husband’s health insurance, and about $100 for a medication not covered by Medicare. Beyond food and utilities, most of the rest gets thrown at our debt: $8,600 to the credit card companies and $5,000 to relatives.
Despite this tight budget, we both agreed that we could budget around $20. That amount probably wouldn’t be missed. Anything more than that, though, might hinder our ability to pay down debt as quickly as possible.
Some of you may wonder why we even bother contributing such a small amount. The thing to remember is that those little amounts add up. At $20 per week, we accrue $1040 in a year (minus a $20 bank fee). Maybe that’s still not very impressive for most people. But it’s a step in the right direction – and the first step is usually the hardest.
I look at the IRA as a symbol of our commitment to creating a secure future for ourselves. And it reminds us that, even in this low-income situation, we can start our plans for a better future – just in a slightly smaller way than we might like.
Still not convinced? Okay, then let’s look at the math:
Let’s say our contributions never get beyond $1020 a year (52 weeks x $20/week and minus $20 bank fees). But we contribute for 30 years and get a 3 percent return. (Given the current markets, I think it’s best to be conservative.) At the end of that 30 years, we would have $49,934, completely tax free (which we’ll address later). And if in 5 years, my husband is able to start his own IRA, he’d have $42,769 at the end of 25 years. That would make for a total of $92,703.
From $20 a week, we can grow over $90,000. Imagine what we can do when we get out debts paid off.