How $10 could save your retirement

By MP Dunleavey

The economy is in turmoil. You may have noticed.

Your house is worth less, your job is less secure, credit is harder to come by, and filling the gas tank consumes virtually a whole day's pay. Many Americans are experiencing their worst financial pinch in decades.

Thinking about the future seems almost pointless.

There is a solution, though. Don't listen to your budget howl about how tight money is and how you need every dime for today. Now, more than ever, it's vital to build a cushion for tomorrow.

It's not a pipe dream. It's essential. As difficult as it might be now to make ends meet, it would be far worse when you're old and gray and don't have bus fare, let alone money to fix the car.

The good news (and isn't my column always good news?): Ten bucks will do it.

Unbelievably depressing data

First, let's contemplate the scary data from the 2008 Retirement Confidence Survey (.pdf file) by the Employee Benefit Research Institute, a nonprofit organization that tracks 20 million participants (i.e., real people) in 54,000 401(k) plans:

• Nearly half of all workers 25 and older have less than $50,000 saved for retirement (excluding their homes and any pensions).

• 22% of workers and 28% of retirees say they have nothing saved.

• The top financial obstacles people listed were, in order: the rising cost of living, health insurance or medical expenses, mortgage payments, debt, and fuel and energy costs.

Cost of living versus cost of not saving

Those would be the reasons my husband and I have a hard time saving, too. (Except I'd change making mortgage payments to "paying for my rapidly growing 19-month-old food- and clothing-consumption machine.")

Our heating bills last winter were close to $2,500. It now costs more than $50 to fill up the car, and, honestly, I can't even add up the gas or grocery receipts each month because it's so depressing.

I did it in February. Not including gas, we spent about $600 on food and miscellaneous household expenses, about $150 to $200 more than we did last spring.

We even cut back our retirement savings for two months in order to play catch-up with our taxes. Yes, the personal-finance police had to come to our house and interrogate me.

But we kept saving, and we're still saving. Because no one in this economy can afford not to save.

"When you spend a dollar today, you're giving up about $16 in 36 years from now," says David Wray, the president of the Profit-Sharing/401k Council of America, a nonprofit association of companies that provide defined-benefit plans to about 5 million workers.

Add before you subtract

Wray uses something called the Rule of 72, which is a standard personal-finance tool to demonstrate the power of compounding.

The Rule of 72 estimates the rate at which your money saved will double. Just take a hypothetical rate of return -- Wray uses 8% -- and divide that into 72. By this estimate, your money would double every nine years.

That means a dollar invested at 8% today would be worth $2 in nine years, $4 after 18 years, $8 after 27 years and $16 after 36 years.

Of course, there are countless factors that affect the real-life growth rate of your savings: how your money is invested, the time frame, the rate of inflation, taxes and so forth.

The point is that whatever amount you save won't remain the same; it grows exponentially over time. Thus it's less important how much you save than that you harness that financial momentum by saving absolutely anything at all. Even $10 at a time.

The $10 retirement revival plan

How much might the average strapped American be able to save? Out of a hat, I picked $10. It's a round number, and a small one, but it can add up quickly, as you'll see.

According to MSN Money's Savings Calculator, if you saved just $10 a week, or $40 a month, you'd end up with almost $60,000 in 30 years, assuming an 8% return. (Historically, that's been the long-term return for investing in stocks.)

If that's too taxing, let's say you were to save only $10 a month. In 30 years you would have more than $14,000.

You might ask: "What's the point of saving such puny amounts? I can't retire on $15,000 or even $60,000!"

In fact, if you have some home equity (and in a few years many of us will recoup some of that cash, even if we're underwater today), plus Social Security, that $15,000 or $60,000 could keep you afloat in your golden years. It's a lot more than nothing.

An additional cushion of even relatively small amounts like those can cover some medical costs, car and home repairs or other expenses that might otherwise send you into debt or leave you flat broke.

Continued: Simple math shows impressive results

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