How to Save for Retirement in a down Economy

A lot of people struggling in difficult economic times wonder how they’re going to make ends meet now, let alone set aside money for retirement.  But if you put your mind to it, chances are you can continue to build your retirement nest egg even in a weak economy.

There are a number of factors to consider in this context.  First off, are you personally really all that bad off?  Unemployment is higher than its historic average, but far, far more people have a job than don’t.  The stock market took a beating for awhile, but a lot of that it’s gained back.  In 2008, the economy looked like it was at its highest risk of falling into a depression since the 1930s, but it didn’t.  It’s weak in certain respects, but not calamitously weak.

There are certainly individuals and families in very bad shape, but if you’re one of the many people who have only taken a modest hit at most, don’t fall into the trap of thinking the state of “the economy” in general somehow means you specifically are somehow justified in loosening up on your usual self-discipline about setting aside money for retirement.  Chances are you really don’t need all your resources, all your focus on the present just to get by.  You still can and should take care of your future as well.

Even if you’ve taken a moderate rather than modest hit in this economy – had a period of unemployment, had significant medical or other expenses take a bite out of your net worth, find the value of your investments down by 25% or more from their peak, etc. – that doesn’t mean you can’t save for retirement.   It means something has to give, but that “something” is a function of your priorities.

Unless things are really, really desperate, you don’t cut back on paying your rent or your mortgage, because that’s a top priority.  On the other hand, you probably will put off that major overseas vacation that you were vaguely thinking of taking “some day,” because indefinite luxuries like that are low on your priority list.  But where does saving for retirement fit?

Especially when you’re young, it’s tempting to give it a low priority and treat it as one of the things to let slide when you’re facing a little belt tightening.  It just seems so far away, like eventually being old doesn’t feel real enough to treat with urgency.

But this can be a mistake.  Retirement savings should be up there on the list of priorities below only the most extreme of necessities, like food and a place to live.

The way to save for retirement when you’re struggling financially is to make your cuts elsewhere.  Cut down on cell phone use.  Eat out less often.  Wait to replace your car a year longer than you normally would.  Use less electricity.  Bike, jog, and work out on your own rather than keeping a membership at an expensive health club.  You may have to make some cuts that cause a little discomfort, but if they’re not more important than your retirement savings, so be it.

There is always also the option of increasing your income rather than decreasing your spending.  If someone in the family is not currently working, this may be the time for them to take a part time job.  Perhaps you can earn a little extra money selling items online or starting a small scale home-based business.

Difficult economic times should also cause us to step back and realize the importance of changing our behavior when things are going better.

Let’s say since early in your work life you’ve been very disciplined and you’ve set aside 10% or some designated amount every year in an IRA or other retirement account.  You are to be commended for that.  But now you don’t see any way you can do that this year, because your income has dropped off in a down economy and you’re just trying to survive.

Well, let’s rewind and take another look at those years when you were able to manage the 10% set aside for retirement.  Surely there was at least a little room to do better than 10%.  What if in addition to the 10% you put in an IRA, you’d managed your money carefully and been able to slide another 2%, 3%, 5% or whatever into just regular non-retirement “rainy day” savings some of those years?

Now when you have a down year or two, and it would be a huge blow to your lifestyle to subtract from your suddenly meager income to fund your IRA, you’d have another option.  Some or all of what you need for your usual IRA contribution could come from the other savings you accumulated when things were going better for you.

In summary, everyone is bound to experience some off years economically when it’s a lot harder to save for retirement, so anticipating that should be part of your long term plan.  Save a little extra in the good years, and when the bad years come, fall back on that extra, as well as looking for ways to economize and tinker with your income and spending.  Keep retirement savings high on your list of priorities.  One day, not nearly as far off as it seems, you’ll be glad you did.