5 ways to save for retirement when you're living paycheck to paycheck

It's easy to put off saving for retirement, especially if you're struggling to pay your bills. But time flies and the sooner you start, the more prepared for retirement you'll be.

We get it. Thinking about pension plans and 401(k)s is overwhelming when you're living paycheck to paycheck, but doing nothing is costly. Even small, regular contributions can yield big results by retirement age.

How do you start? Many people begin investing in a 401(k), a tax-advantaged retirement savings plan offered by many employers. If you sign up for your company's 401(k), you agree to have a percentage of each paycheck paid directly into your investment account. You can choose how much to invest each pay period and your money stays with you if you change employers.

If you don't have access to a 401(k), you still have options. You can invest through an individual retirement account (IRA) or other savings vehicle. Look for tax-free or tax-deferred savings options through your bank, insurance company, or online or local financial advisor.

It may seem daunting, but there are ways to reach your retirement goals, even if money is tight. Let's take it one step at a time.

1. Start saving now, even if your contribution seems small

The more time your savings have to accumulate interest, the less you personally have to contribute. Even the smallest contributions have the potential to grow, thanks to compound interest.

How does it work? Let's say you contribute $60 a month toward your retirement and you earn a 7% annual return on your investment. In 35 years, those monthly investments would total $100,000. But if you only have 10 years to save before retirement, you would need to contribute $600 per month to accumulate the same $100,000, assuming the same 7% return.

And don't forget the emotional side of saving. Planning and saving for your future can give you a sense of accomplishment and ease some of your financial stress and anxiety.

2. Automate your retirement savings

Automating your savings helps you avoid spending the money you intended to save while growing your funds with compound interest. Your budget and spending habits will likely adjust based on the income that's left after your automated transfer to savings. But if you've been too aggressive with your savings, adjust accordingly.   

Setting up automatic withdrawals to a retirement account is easy if you're contributing to your 401(k) through your employer. If you haven't already, enroll in your 401(k) and choose a percentage of your income to be withdrawn each payday. Some plans also allow you to automate annual percentage increases.

If you're contributing to another type of retirement account, you can set up an automated transfer from your bank account to your retirement account each month. Many employers allow direct deposits into multiple accounts, which means a portion of your pay could be sent right to your investment saving account.

3. Take advantage of employer matching contributions

Are you turning away free money? Many employers put money in an employee's retirement account based on the amount the employee contributes. The specifics of matching programs vary, but typically employers match a percentage of an employee’s contribution up to a predetermined limit.

For example, an employer might match 50 percent of the first 6 percent of an employee’s salary deposited into the retirement account. In this case, if the employee contributes 6 percent, they would receive an additional 3 percent from the employer, resulting in a total contribution of 9 percent of their pay. Ask your employer about the specifics of your company’s program to determine how much you would need to contribute to maximize that benefit. If saving that much doesn’t work with your budget, contribute what you can now and increase it as you’re able.

Keep in mind that company contributions are often tied to a timeline or waiting period known as a vesting schedule. You may have to work for your employer for a certain time to be able to keep 100% your company's contributions to your fund. But the money you deposit in your 401(k) is always yours to keep.

4. Avoid early 401(k) withdrawals

Tapping in to your retirement savings is tempting, especially if you're buying a home or in a financial jam. But it's a costly move. You'll face a penalty fee for early withdrawal. You can begin withdrawing money from your 401(k) without facing the penalty once you reach age 59 and a half. But every dollar you take out will be taxed as earned income for the year.

Whether withdrawing money outright or borrowing from your account, you'll lose out on the long-term growth potential from compound interest. Your retirement account is meant to grow over time. Withdrawing funds from your 401(k) or other retirement account early can quickly undermine your retirement goals.

Borrowing from your 401(k) comes with other risks. Not only will you have to repay your loan with after-tax dollars, but if you lose your job, you'll have to repay the loan by the due date for your next tax return.

5. Make the most of extra income

Look for ways to add more money to your retirement fund in line with your other goals for saving and debt reduction. Any windfalls and extra income –bonuses, tax refunds, even birthday money – could go to your retirement. Every time you get a raise, consider increasing your contribution percentage.

The gig economy and remote work have unlocked new ways to earn, whether through freelance work, selling items online, or driving for a ridesharing or delivery service. You may also consider looking for a higher paying full-time job. Every additional dollar you earn can move you closer to your financial goals.

Building your financial future

It's easy to tell yourself you'll wait to save for retirement until you're making more or you pay off some bills. But no matter where you are on your financial journey, taking a few important steps now can help you set a good foundation and reach your retirement goals. The sooner you start, the easier it will be.

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