How to Save For Retirement During a Recesison

Tips on Saving For Retirement in a Recession

By: Pam Grundy

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With the recession deepening and household budgets strapped, saving for retirement may not seem like a priority. The truth, however, is that saving during a recession is more important, not less.Retirement savings are a necessary asset and can’t be put on the back burner, especially with entitlement reform (Social Security reform) currently on the table for cutbacks and changes.
Saving money for retirement during a recession isn’t impossible, and it doesn’t have to be painful either.
Here are some basic savings strategies that anyone can embrace:

Contribute to Your 401k

If you have a 401k through your employer, it is vital that you continue to contribute. If you haven’t started, set up an automatic payroll deduction that goes directly into the plan. People live on what they make. While you may think you can’t ‘afford’ to contribute, even 3% is better than nothing, and you will not miss it once it is automatically deducted from each check.

Take Advantage of Employer Matching Funds

Many employers match whatever you contribute to a 401k up to a certain percentage, typically between 3% and 7%. Try to contribute at least as much as the highest matching percentage. Passing up that money is like turning down a free raise, and yet, incredibly, most people do pass it up.

Open an IRA

If you don’t have a 401k through your employer, open an IRA and set up automatic deductions from your paycheck or monthly deductions from your checking account. Most IRA contributions are tax deductible.

Pay Your Savings First

The average person saves by putting a portion of whatever is left after the bills are paid into a savings account. A better idea is to pay your savings account first, as if it were a bill, before any other bills are paid.
Arrange for a set amount to be deducted monthly from a paycheck or checking account and directly deposited into savings. If you set up the savings account at the same bank where you keep a checking account, you are more likely to dip into it and fail to accumulate any real savings, so set your savings up at an online bank or at least a bank that you know you will be less likely to frequent.

Pay Down Your Mortgage If you pay even $20 extra each month on your mortgage, you will save thousands of dollars over the life of the loan.
That money is not gone; it accumulates as equity that you can tap at retirement. You will also pay off your home much sooner. While real estate prices are falling in most parts of the country right now, eventually they will stabilize and your home will appreciate again. The more of it you actually own (and the less the bank owns), the greater your worth.

Go On a Money Diet

Everyone needs a treat now and then, but most working people fall easily into habits that are a lot more expensive than they realize. For example, buying a coffee and a snack at your morning and afternoon break can easily run $5 per day. That seems like no big deal until you figure that $5 a day amounts to $1,300 per year. Pick one luxury you won’t miss (for example, bring your own tea and an apple) and throw the money you would have spent into a jar. Put that money in your savings once a month. Once you start thinking this way, you’ll be amazed at the money you find.

Save Your Change

Lots of people actually throw away pennies or give away all their pocket change. Instead, throw your change into a jar on your dresser or kitchen table, and then put it in the bank once a month.

Pay Off Credit Cards

If you could earn a 19% return on an investment, wouldn’t you jump at that chance? If you paid off a credit card that charges 19% (most cards charge even more interest than that) and put the money in savings or in your 401k instead, you will in fact have earned that 19% plus whatever return you get from the savings on top of it.

Keep Paying on your Car

If you have an auto loan or other installment loan that you are about to pay off, don’t stop making the monthly payment, just make it to yourself instead of to the loan. Take that same payment amount and have it automatically deposited into a high yield savings account, IRA, or 401k.

Summary

Saving for retirement during a recession is mostly a matter of setting up habits that are hard to break, and also looking for waste that can be eliminated. The key is to not simply cut back on spending, but to take the money you would have spent and put it in savings instead.
Aim for three to six months of take home pay in a liquid savings account, and once you hit that, deposit the rest into your 401k, and IRA, or open a Certificate of Deposit (CD). Saving during good or bad times is all about developing a habit. Once that habit is firmly in place, it is hard not to save.

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Inspiration...

Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like." - Will Smith
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