The Tortoise Approach to Saving
by Kara Stefan
We are not a nation of savers. Forty percent of us with household incomes of $35,000 or less say our retirement income is more likely to come from a lottery win than from savings or investments.
A sobering statistic, but here's one that's even more dismal: only 1 percent of Americans aged 65 or older can afford anything beyond their living expenses, according to the federal government.
If you think your chances are low that you'll be in that flush 1 percent, your chances of winning a big lottery are one in 10 million to 20 million. But there's hope.
|Think like a millionaire — 80 percent of American millionaires are self-made and started out with very ordinary incomes.|
|Pay yourself first — set aside money each month before you pay your bills.|
|Get rid of high-cost debt — ignore minimums and pay down as much as you can each month.|
|Take advantage of "free money" at work — participate in your employee's retirement plan, many of which match contributions to a certain percent.|
|Give yourself a legal tax break — invest in an IRA or other tax-deferred account.|
|Make your home your castle — pay off your mortgage early to help build equity fast.|
"The good news is that most of the unprepared households could get ready for retirement by taking advantage of interest compounding," says Stephen Brobeck, executive director of the Consumer Federation of America, a nonprofit consumer interest organization.
Just how much impact can you make on your future retirement plan? Consider these numbers:
Saving just $25 a week for 40 years, with a 5 percent annual yield, will give you more than $165,000; at 7 percent, you'd have $286,640.
A tortoise approach to the problem perhaps, but remember who won the race.
If you need more inspiration to start saving now, here are a few more statistics from the federal survey of senior Americans:
- 22 percent must continue working
- 28 percent rely solely on Welfare and Social Security
- 45 percent are dependent upon their relatives
- Just 4 percent can meet their own expenses
The CFA says half of American households have less than $1,000 in net assets, and only 27 percent of households participate in employer-sponsored 401(k) plans. The economy is booming and we are spending, but we are not saving or planning well for retirement.
Oh, and taking the tortoise approach to saving, double the weekly amount to $50, find a 9 percent return, and you'll have tucked away $1,026,853 at the end of 40 years.
That's right. You could become a millionaire on just $50 a week. Think of that next time you line up for your lottery ticket, your Starbucks mocha and those Burger King value meals.
Kara Stefan is a Virginia-based writer who specializes in personal finance and consumer investment issues.
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