A Little Savings Goes a Long Way

I barely have enough money to pay my bills. How can I afford to save for retirement?

It may be a lot easier than you'd expect. The government and most employers kick in some money to help you reach your goals, so you can set aside a substantial amount of money without taking much of a hit in your paycheck.

If you have a 401(k) with an employer match, you could get a ton of free money. If, for example, your employer matches 50 cents on the dollar for up to 6% of your salary and you earn $40,000, you'll get the maximum match if you contribute $2,400 in a 401(k). In that case, you'll get $1,200 from your employer, bringing your total contribution up to $3,600, just by contributing $2,400.

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And that $2,400 doesn't lower your paycheck dollar for dollar, either, since you're investing the money before you pay taxes on it. If you're in the 25% bracket, investing $2,400 will only reduce your take-home pay by $1,800 for the year. So it actually costs you just $150 per month to end up with a $3,600 contribution every year. If you start doing that at age 30, you'll have about $670,000 by the time you're 65, if your investments return 8% per year. (Calculate how much your 401(k) can grow over time.)

And if you can afford to invest even more, open up a Roth IRA, which will give you tax-free money in retirement. Even a little bit can add up, especially when you're young. Investing just $100 per month into a Roth IRA can add up to $1,200 by the end of the year. And if you're 30 now, keep up that savings pace for the next 35 years and your investments earn 8% annually, then you'll have more than $220,000 in tax-free money by the time you're 65 -- just by investing $100 per month. Add that to the $150 per month in the 401(k) example above and you'll end up with retirement savings of about $890,000.

That's a big chunk of your savings goal, but it may not be not enough to cover all of your retirement needs -- especially if you start saving after age 30. Keep adding more money to your retirement savings whenever you get a raise or bonus at work or a big gift. That way, you'll invest the money before you get used to having it. You can also look for ways to trim your spending to free up cash for investing. See Stop Living Paycheck to Paycheck for some helpful tips.

You can contribute up to $15,000 in a 401(k) in 2006 ($20,000 if you're 50 or older) and $4,000 to an IRA ($5,000 if 50 or older). If you can start maxing out your 401(k) and IRA at age 40 and continue at that pace for the next 25 years, you could end up with $1.5 million in retirement savings by age 65, if your investments return 8% per year. That's in addition to any retirement savings you set aside before you turned 40, which has even more time to grow by the time you retire.

For advice on saving for retirement, and calculating your savings goals, see How Much is Enough? Then run your numbers through our retirement savings calculator to help set your specific target.