There’s no shortage of personal finance advice on the internet, much of which focuses on retirement savings. Social Security benefits will replace only about 40 percent of a typical worker’s preretirement paycheck, and the program’s overall outlook remains uncertain. Under any scenario, building personal retirement savings is key.
But with inflation and housing prices soaring, many Americans are worried that they can’t afford to do this. Only 45 percent of workers expect to have enough money to live well in retirement, according to Gallup, and 61 percent of those surveyed with household incomes of $100,000 or more feel this way.
Making matters worse is the onslaught of splurge-shaming, with phrases along the lines of “stop buying coffee if you want to build retirement savings.” If you’re struggling to save, know that the solution rarely requires eliminating every small joy from your budget.
It’s not your daily coffee
It’s true that money you spend on anything other than a retirement plan contribution won’t go toward building a nest egg. That does not make modest splurges inherently bad.
“Buying coffee each and every day won’t necessarily keep you from retiring, said Bruce Maginn, an adviser at Solomon Financial in Carmel, Indiana, adding that it’s the habit of making daily, unexamined purchases that could derail your financial goals.
If you spend your paycheck each month in its entirety without contributing toward retirement, you risk a serious shortfall later in life. But if you systematically carve out money for retirement first, Maginn said, the rest is yours to enjoy guilt-free.
“Once you have a financial foundation, you will find that you can enjoy that coffee, vacation or luxury purchase without guilt,” he said.
Maginn recommends that you aim to set aside 20 percent of your income for savings and investments. If 20 percent feels out of reach, start with 3 percent or 5 percent of your pay and try to work your way up.
Build smart financial routines
Just as your morning coffee might be part of your regular routine, so too should retirement plan contributions, said Ernie Wingard, adviser at Capital Choice Financial Group in North Richland Hills, Texas.
“The coffee itself isn’t the villain. The autopilot is the issue,” he said. “The best way to fix it is to make the saving automatic so you never see the money.”
Wingard recommends signing up for a workplace 401(k) plan if your employer offers one. Contributions are deducted from your paycheck, so the money never hits your bank account for you to spend. You can also set up automatic Individual Retirement Account transfers from your checking account each payday so the money moves over before you get a chance to touch it.
One of the advantages of a 401(k) plan is that it often features an employer match for at least part of your contributions. That match represents free money you can invest and grow on top of your own contributions.
At the same time, building up an emergency fund by contributing money to a high-yield savings account can prove helpful, Magninn said.
In addition, a taxable brokerage account gives you unrestricted access to your money in the event you need to retire earlier than planned. IRAs and 401(k)s generally impose a 10 percent penalty for taking withdrawals before turning 59-1/2.
Your emergency fund, meanwhile, is there to bail you out when unplanned expenses arise, if you can save enough money to cover three to six months of bills. This allows you to leave your retirement savings untouched when you’re in a pinch, helping you avoid penalties while allowing your long-term investments to keep growing.
Scrutinize your spending
While buying coffee every day certainly won’t ruin your retirement, Wingard said it is worth assessing your spending overall if you’re not satisfied with your current savings rate.
“Can you cut a couple of streaming services until the shows you like are back in season?” he asked. “The impact of $100 a month over a long period can be huge.”
You might not be able to afford every luxury, Maginn noted, but prioritizing the splurges you genuinely care about allows you to enjoy life today while saving for later.
“The takeaway here shouldn’t be whether or not you can afford the coffee,” he said. “The real question is whether your overall spending and savings plan are aligned with the retirement your future will require.”
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