What Living Paycheck to Paycheck Really Costs You When You Get to Retirement Age
It's never good to spend all you make, but it's downright dangerous when you don't have much time left to make more.
According to a recent study from Schroders, 58% of retirees admitted they didn’t know how long their retirement savings would last, and 64% wished they had planned more before leaving the workforce. With 49% noting that expenses are higher in retirement than expected, it’s more important than ever that you take retirement planning seriously. If you live paycheck to paycheck during your career, you could severely impact your overall quality of life when you reach 65.
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We consulted with retirement experts to explore the potential consequences of staying on a paycheck-to-paycheck financial plan up to retirement age of around 65.
The Financial Impact of Not Saving for Retirement
“Living paycheck to paycheck can have a significant long-term cost because it reduces the amount of time your money has to potentially benefit from compound growth,” said Alex Langan, a financial advisor and the chief investment officer of Langan Financial Group. If you don’t allocate a portion of your income towards retirement savings, you’ll miss out on tremendous growth opportunities.
Langan provided the following hypothetical scenario for someone who invests $500 per month from age 30 to 65 at an assumed 7% annual return:
“You could accumulate about $901,000. Waiting until age 45 to begin would result in roughly $260,000 under the same assumptions.”
What makes this calculation eye-opening is that you would regret not setting aside $500 per month for retirement, especially if you end up with no savings.
Keith Watson, a retirement educator at Retirement Made Simple, said that the cost isn’t money you didn’t save, but rather the decade you didn’t use for compounding.
“The last 10 working years usually do the heaviest lifting on a retirement balance," he said, "because that's when the balance is biggest, and every dollar of growth is applied to the largest number you'll ever have.”
The experts agreed that no amount of catching up in your 60s can replace decades of compounding. The sooner that you start saving for retirement, the sooner that you can have compound interest working for you.
The Impact on Your Financial Buffers
“Living paycheck to paycheck often makes it difficult to consistently save for retirement or establish important financial safety nets, such as an emergency fund,” said Langan. If you don’t build an emergency fund, then unexpected expenses like vehicle repairs, medical bills or home maintenance could be added to your credit card at a higher interest rate. Then suddenly you're entering your golden years with credit card debt, which means that you may have to work longer.
Langan also said that living paycheck to paycheck could mean missing employer retirement plan matches or relying more heavily on high-interest debt, which can further increase the long term financial impact.
The Impact on Your Emotional and Mental Well-Being
The harsh reality is that the effects of living paycheck to paycheck extend well beyond finances and can significantly impact your emotional well-being. Langan said that constantly worrying about paying monthly bills, covering unexpected expenses or making ends meet could lead to chronic stress, anxiety and feelings of uncertainty about the future.
The experts also said that financial pressure is associated with sleep disturbances, relationship conflicts and a reduced overall quality of life, especially for seniors. This stress can make it more challenging to make wise financial decisions as you get older, leaving you feeling trapped in a stressful environment. You could be forced to work in a job that’s physically demanding on your body, or be stuck in a toxic workplace that you can’t escape.
Another issue, according to Watson, could be the loss of choice in retirement. He said that there's a big difference between deciding it's time to stop working and being forced to stop.
“The people I meet who seem most comfortable in retirement aren't always the ones with the biggest balances," he said. "They're the ones who knew the decision was theirs.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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