We've heard the imperatives: Save for retirement ASAP! Time is on your side! The sooner you get started, the better!
But even with the best of intentions, other life expenses can get in the way—and "I'll up my contribution next week" turns into next month, next year … and so on.
Before you know it, your meager retirement balance makes you want to put your head in the sand.
"If you make yourself so upset about the fact that your nest egg isn't big enough that you don't do anything about it, you're just creating a bigger problem," says Tom Gilmour, a CFP® with LearnVest Planning Services. "But even if you're in your 30s or 40s, you still have lots of time to save. You just need to get started now."
That's the kind of message that Jenny Parks*, a landmarks preservationist who works for the New York City government, needs to hear.
The 40-year-old has about $30,000 in retirement savings, which she built up earlier in her career, before she got married and had a child.
While Jenny earns $63,000 a year and is in a dual-income household, the high cost of living in New York, along with her $22,000-a-year day care bill, means she's living paycheck to paycheck—with no extra income earmarked for investing.
"I'll be getting a pension from the government, which I know will help a little, but it definitely won't be enough to cover all of my expenses in retirement," Jenny says. "Someone recently told me I should have around $200,000 in my 401(k) by now, which made me feel horrible. When my statements arrive in the mail, I don't even open them. I feel bad that I've dropped the ball on this."
We asked Jenny to share her take-home pay, monthly expenses and concerns for her golden years, so that Gilmour could help her find ways to catch up on her retirement savings—and feel more confident about her future.
What Jenny Says About Her Nest Egg …
"When I graduated from college in 1997, I got very smart advice from my sister when I landed my first job at an internet start-up: 'Whatever you do, invest in a 401(k),' she told me.
So I did. I was making about $40,000 a year, and put 5% of my salary into a 401(k). When I was laid off after three years, I had reached about $15,000 in that account.
Instead of finding another job right away, I decided to reassess what I really wanted to do, and took an administrative job at a university, where I could take some classes for free.
While there, I signed up for a historic preservation class—and loved it. So I quit my job and entered a full-time, two-year graduate program. I had to halt contributions to my retirement savings, while accumulating $70,000 in student loans.
Although I love historic preservation, it's safe to say I didn't get into it for the money. My first full-time position in the field only paid $45,000, and subsequent jobs didn't get me much further up the pay scale—but I did try to save 5% of my income for retirement when I could.
By the time I took my current job a little less than five years ago, I had about $30,000 saved between two 401(k)s. My salary now is more than I'd made in the past, but as a government employee, I'm required to put a portion of my income—about $220 per paycheck—into my pension.
Because of this, I decided not to put anything extra toward retirement, even though there is the danger that I'll lose the pension if I leave before I vest. And, honestly, I don't know how I'd find the extra money, since I basically use up my $3,000 in monthly take-home pay.
Why It's So Hard to Save My financial situation has been tighter than usual since I had my daughter last year. My office doesn't offer maternity leave, but I can take up to six months of unpaid leave, with the option to work part-time for another six months. So that's what I chose to do.
I'm currently working part-time, but will go back full-time in September. My husband, Evan*, and I normally split our shared household expenses in half, since our incomes have always been similar. But his take-home pay ($3,914 a month) has been covering the majority of our costs while my salary has been reduced.
Once I'm full-time again, I'll go back to paying half—but even so, I don't anticipate having anything to put toward retirement. I have a monthly $410 student loan bill and my new biggest expense is child care: $1,800 a month!
My total monthly fixed costs—including my share of our mortgage, cell phone, utilities, etc.—come to $2,280 a month, which doesn't give me much wiggle room."
What the CFP Says About Jenny's Nest Egg …
"Jenny has to stop feeling bad about not having $200,000 saved for retirement. She's still got 27 years to save—that's a lot of time for money to grow!
Plus, unlike most people, she'll get a pension when she retires. So this is not a hopeless situation."
How Jenny Could Boost Her Savings Once she goes back to working full-time, Jenny's flexible spending (the amount she has leftover from her take-home pay after her fixed costs, minimum debt payments and any financial goal contributions are covered) comes to about $167 a week.
Rather than make cuts in her flex spending right now, I'd prefer Jenny find money in her budget by changing how she and Evan divide their household expenses. Since their income split is about 60/40, I would recommend that they split their shared costs 60/40. This would free up about $350 a month extra for Jenny.
But before she puts that money toward retirement, I'd recommend they first build an emergency fund equal to one month's worth of Evan's take-home pay, since he's the higher earner. This will help ensure they aren't caught off guard by an emergency.
Once that's funded, she could put that money into a Roth IRA. These contributions, along with the $30,000 she has saved already, could grow to a $521,000 nest egg at retirement, assuming a hypothetical 7% growth rate. Not bad!
Why invest in a Roth? It will give Jenny flexibility from a tax perspective once she retires. While she won't get a tax break today on her contributions now, she'll be able to withdraw her contributions and the earnings on that money tax-free in retirement.
This could be beneficial given the 27-year time horizon she has for her portfolio to grow—plus, it allows her to take advantage of today's tax rates, which are likely to go up over time.
And one thing I'd urge Jenny to keep in mind is that if she's not able to put the full $350 into her Roth IRA one month—say, she has an unexpected cost pop up—that's OK. Saving something is better than not saving at all.
Then, as opportunities arise to free up cash—like future raises, loans getting paid off or her child no longer needing day care—she can boost her retirement contributions.
In terms of how and where to allocate funds, I'd suggest Jenny consider a target-date fund. What I like about these funds is that they set the appropriate mix between stocks and bonds based on how aggressive (or not) you should be, relative to how close you are to your retirement date.
Finally, Jenny should consider rolling over her existing 401(k)s into a traditional IRA with the same discount brokerage firm that would manage her Roth IRA. With all of her retirement accounts with one firm, she'll be able to see what her accounts are doing in one place—eliminating the need to gather paper statements from each plan provider, which could stress her out.
And maybe she'll even start to enjoy keeping tabs on how her nest egg is growing!"
What Jenny Says About the CFP's Advice …
"Seeing the numbers makes me feel more confident that saving for retirement is an achievable goal.
I do worry that some of my expenses may go up as my daughter gets older—like paying more for food—but if I'm careful with my budgeting, I think I can start saving again, even if it's just with a small amount.
Evan is willing to split our costs 60/40, but I'd be more comfortable waiting to see if he gets a raise this year, since he's been paying for the bulk of our expenses—and even put his retirement contributions on hold while I've been part-time.
We do have a month of his take-home pay in savings, so I'm glad we at least have that covered.
Saving for retirement has always been in the back of my mind, but I just haven't had the chance (nor the time!) to face reality between the baby and working part-time. But I know it's time to get back on track now that I'm 40."
*Names have been changed.