How Can You Save for Retirement When You Live from Paycheck to Paycheck

How can workers save for retirement when they live from paycheck to paycheck? That question has been near the top of the list of things keeping people awake at night for years, and even more so in these tough economic times.

Unless the situation is truly dire, however, most workers find they can save something from each paycheck. The ones who have done this successfully--and there are many--have learned a few tricks. It begins with discipline, iron clad and unwavering.

Take advantage of your employer's 401(k) plan

Especially if this is a matching 401(k) plan, you are walking away from free money and nice tax breaks if you don't participate. If you can't do the maximum right now, do the minimum. Having the money deducted from your paycheck before it gets to you assures your savings.

But even this method will not be successful if you tap into it before retirement. Unless there is a serious emergency, do not draw money from this fund for any reason. Not only do you reduce the amount you will have at retirement, you may incur penalties and taxes on the amount you withdraw. That's why a six-month emergency fund is also an important part of a retirement plan.

Your six-month fund should be in cash (a savings account, a money market or short-term CDs), so you can fund emergencies should they arise. Anyone can have a large car repair bill, unexpected home repair or other sudden unplanned expense.

Don't underestimate small amounts

Many people choose to save any raises or bonuses they get. Others work a part-time job and earmark all that income for retirement. Still others collect their change at the end of the day until they have enough saved to make a small deposit. When you pay off a credit card debt or a car loan, put at least some of that money in your retirement account or emergency cash fund. Re-think cell phone and cable bills, daily spending on coffee, lunch, parking, entertainment, gifts, donations, and frills such as jewelry, make-up, salon trips, gym memberships or the latest tech gadget. All these so-called incidentals add up to big money.

Set a daily or weekly goal if necessary: say, $100 dollars a month or whatever works for you. Never underestimate the long-term effect of sustained small amounts contributed steadily over decades. This is especially true of money you save during your 20s.

Set up a Roth IRA. You will contribute money you have already paid taxes on, but when you withdraw money in retirement, you will not owe any taxes. This may mean that your overall nest egg can be smaller, since the money you withdraw is tax-free. There are yearly limits, but those who start young and make regular contributions throughout their working years can expect to have a tidy sum.

Remember, most workers have four decades or longer to work. Set one-, five- and ten-year goals and adjust accordingly. Even if you fall short some years, vow to make it up when conditions improve.

Improving your fiscal fitness is a lot like improving your physical fitness--getting started and sticking with a plan are the biggest challenges. Start with small amounts and build as you enjoy success. Establishing the habit, and sticking to it may ultimately be more profitable than setting lofty goals that are doomed to fail.

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