4 Things To Know About Saving Up For Retirement In A Recession

Written on August 24, 2010 – 10:30 am | by Alicia Ross

You’ve always wanted to be a millionaire right? According to The Chicago Tribune, with the right retirement savings plan, it’s very possible: If you’re 30 years old earning $50,000, and save 6% of your paycheck each year until retirement, get a 3% matching contribution from your employer, get a 3% raise annually, and earn 7% on your 401(k) investments, you can retire with $1,098,000. Welcome to the Millionaire’s Club.

So that sounds pretty complicated, and it doesn’t account for inflation, your employers’ contribution, and more, but the point here is that in our recession, saving up for retirement is not a luxury but a beneficial necessity. Really, it’s the most important thing you can do for yourself after paying off debt because it’s the key to being financially secure later on in life.

Here are four things to know now about retirement savings now to help you get to your golden years comfortably.

No Brainer: If your employer matches your (401)K, start there. If your employer offers matching contributions for your (401)K, take full advantage and contribute as much as possible. Your employer’s contribution is basically free money towards your retirement, and this recession should teach you that breaks like this are rare and worthwhile. Plus, automatic paycheck contributions make it a breeze to save up your nest egg.
Tip: Some employers have a vesting period, or a number of years you have to work with the company before you can keep the matching retirement savings contribution.
Keep contributing, no matter what. The budget-tightening woes of the recession have forced companies to temporarily stop matching contributions to their employees’ 401(k)s. But don’t let that stop you from contributing either. Even if you tell yourself you’ll save up again after your employer starts pitching in, you might get too comfortable with the extra money in your paycheck. Retirement savings are designed to grow over long periods of time, through rocky recessions or stock market crashes. Keep squirreling savings to your 401(k) and don’t short-change your retirement.
Don’t jump on this bandwagon: Americans withdrawing from their retirement accounts in record numbers. More and more workers are taking out loans and hardship withdrawals from their retirement savings, reports MarketWatch. It’s a terrible circumstance of the recession, but whatever you do, don’t tap into your retirement savings. While it may seem like a logical conclusion when you’re stuck between a bunch of bills (“I mean, the money is just sitting there”), this account is not a savings account or an emergency fund. This is for your financial security later, so avoid compromising your future all costs.
Never too young to start. Retirement sounds far away, but the reason why you should start saving up now is simple yet compelling: more $$. The earlier you start, the more interest you’ll earn over time because your interest earns even more interest. Take LearnVest’s example of a Roth IRA retirement account:

Chelsea and Katie both put in $24,000 over the years, but Chelsea began putting in money ($50 per month) at age 25 while Katie began saving ($100 per month) at age 45. Even though they both put in the same total amount, Chelsea has almost twice as much money for retirement as Katie (when they’re 65). Thanks to compounding interest, Chelsea’s savings have earned more interest on interest over time than Katie’s.

Bottomline: An older, wiser You, sitting on a beach with a pina colada in hand, will look back and thank you for being smart about saving money for retirement even through this rocky recession.

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