The idea of skipping retirement contributions for a year and spending instead might seem attractive at first, particularly in a challenging year when money feels tight. However, this is indeed a financial fallacy for several important reasons. Firstly, retirement contributions shouldn’t be seen as optional or as a luxury that can be skipped. They’re an essential part of securing your financial future. When you skip a year of contributions, you lose out significantly on potential gains, primarily due to the power of compounding.
The power of compounding allows your money to make more money over time. When you skip a year, you miss out on the gains that your contributions would have earned during that year. Plus, those earning would themselves compound in the following years. This reduced compounded growth results in a much smaller retirement fund down the line.
It’s easy to understand why people fall for this fallacy. We live in a consumer-driven society where spending can often feel satisfying and rewarding in the short term. Skipping a retirement contribution for a year could mean having more money to spend today. Also, the long-term nature of retirement may make the idea of it less urgent compared to immediate needs. Moreover, individuals might believe they can simply make larger contributions in subsequent years, misunderstanding how retirement saving works.
A recommended approach involves consistency in spending habits and savings habits, especially when it comes to retirement contributions. It’s crucial to treat retirement contributions as a necessary and consistent expense, just like any other monthly bill you need to pay. If funds are tight, instead of cutting your retirement contributions, look elsewhere in your budget for spending categories you can adjust.
Further readings that provide insight into this financial fallacy and its countermeasures include:
“The Total Money Makeover: A Proven Plan for Financial Fitness” by Dave Ramsey. Book Link.
“Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence” by Vicki Robin and Joe Dominguez. Book Link.
“The Power of Compound Interest” - Investopedia Article
“The Latte Factor: Why You Don’t Have to Be Rich to Live Rich” by David Bach. Book Link.
“Money illusion” - Wikipedia. A concept that explains why people may view their income and savings in nominal rather than real terms, which may lead them to make such damaging decisions as skipping retirement contributions for a year.