With 69% of Americans currently holding less than $1,000 in retirement accounts, according to a study by GoBankingRates.com, the long-term financial health for U.S. households in retirement are in definite peril.
Yet even households that live paycheck to paycheck have a path to a decent retirement - if, that is, they deploy proper planning and financial discipline.
What the paycheck-to-paycheck retirement saver needs is a creative and realistic blueprint to start saving big for retirement.
Building one should be a priority.
"For Americans who are living paycheck to paycheck, it's more important than ever to start saving for retirement," says James Schramm, a financial advisor at Schramm Financial Group, near Los Angeles, Cal. "With Social Security not keeping up with inflation for retirees, it's important to have some money saved."
"People say that it's impossible to save when they are living paycheck to paycheck, but there are ways to do so."
For starters, Schramm says to look at your bank account.
"First off, a lot of people spend what they have in the bank because it's there," he notes. "Set up an automatic deposit with your bank account and every month deposit just a small amount into an IRA or Roth IRA - most people wouldn't know the difference."
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Another idea that won't make a dent in your pocketbook is signing up for a credit card with cash back.
"Fidelity Investments has a cash back card that gives 2% and the money has to go into one of their investment accounts," he adds. "If you leave that money alone and transfer it into a Roth IRA account, over time that money will add up, especially if you invest it in a low-cost index fund."
Paycheck-to-paycheck savers should also take advantage of free money from their 401(k) accounts.
"One thing everyone should do, regardless of how tight their budget might be, is get the full company 401(k) match, if their employer offers one," says Susan Hosage, a company pension specialist at OneSource HR Solutions, in Wyoming, Pa. "I don't know of any investments where contributions are immediately doubled even before the investment returns are considered, but that's what a 401(k) company match can do for you."
If you're already strapped for cash, another easy savings option is to wait until your next pay increase is added to your paycheck and divert that amount into your defined contribution plan. "Remember, pension contributions (other than Roth options) lower taxable income, so an individual can actually contribute their pay increase amount and still see a slight increase in their paycheck," says Hosage.
Turning to handy digital apps can also help you scoop up extra savings for retirement, without too much of a burden on your household financial bottom line.
"For example, Digit automates savings by monitoring spending and income patterns to set aside small amounts of money that won't be missed," says Alexander Lowry, a finance professor at Gordon College, in Wenham, Ma. "Digit's goal is to help users achieve long-term financial health. The intent is to provide a service that fits into the everyday busy lives of people so they can achieve financial health with minimal effort.
"Imagine putting small amounts of cash into your retirement account and knowing they wouldn't be missed," Lowry adds. "Pretty soon, you realize they add up over time."
One last tip on saving for retirement even if you're living paycheck to paycheck -- take a "staircase" approach.
"A great way to save for retirement when living paycheck to paycheck is to start off small and work your way toward bigger savings," notes Ryan Boggs, a money manager at FourStar Wealth Advisors, LLC, in Chicago, Ill. "Even if living paycheck to paycheck, one can start small by contributing 1% of their paycheck to the 401(k) and then increasing the contribution 1% each year moving forward."
Many company 401(k)'s have an automated feature to do this annual increase for you (ask your employer how to automate your 401(k) savings.) "This savings strategy works for a couple of reasons," Boggs says.
First, it gets you to start saving, even if just a small amount.
Second, by increasing it by 1% each year, it allows the retirement saver to work within their budget without creating a difficult situation by taking too much out of the paycheck in the beginning. That could create a situation in which they don't have enough money to pay their monthly expenses, Boggs says.
Lastly, the 1% contribution will have little or no change in your take-home pay as the contribution goes in pre-tax on a traditional 401(k).
Also, if your company offers a 401(k) company match, leverage it to add to your automatic retirement plan increases.
"Let's say your company matches 3% of your 401(k) plan contributions," Boggs says. "You should try to start contributing at least 3% and then add 1% each year. That will help you increase your retirement savings and start you on the path to a potential happy retirement."
Retirement plan savers who struggle to live paycheck to paycheck understandably may be skeptical about creating a long-term savings program when cash is so tight.
The fact is, though, building retirement savings on a budget is doable if you're committed to the process. Use the tips listed above to get that long-term savings party started.