Saving for retirement can seem like an unwinnable battle. With all the other financial priorities you may have—from paying your rent or mortgage to student loans to everyday living expenses—setting aside enough money for retirement may seem impossible.
Sound familiar? You’re not alone. Recent statistics from the Employee Benefit Research Institute (EBRI) show that 60% of Americans have less than $25,000 in total savings and less than half (44%) have even tried to figure out how much they need to save.1
But don’t let these other priorities prevent you from saving for retirement. With a little diligence and budgeting, putting money away doesn’t have to be so difficult. Here are three steps to help you get your savings on track:
1. Just Do It
Start now. The best thing you can do for yourself is to start saving as soon as possible. Your workplace retirement plan is a great tool. You select what percentage of your income to contribute—whether 2% or 20%—and your employer will automatically withdraw that amount from each paycheck and put it in your account. Workplace plans often provide some extra incentives: Employers sometimes match a portion of employees’ contributions and contributions are typically tax-deferred—meaning you won’t owe taxes on that money until you withdraw it at retirement age.
If you don’t have a workplace retirement plan, you can set up an individual retirement account (IRA) at a brokerage or mutual fund company and have contributions automatically withdrawn from a checking or savings account.
Even a 2% or 3% contribution is a great start. You can increase your contribution rate later on, but the goal should be to save regularly. Ongoing contributions to a retirement plan potentially benefit from the power of compounding—the concept that your investment earnings generate their own earnings over many years, turning small contributions made now into a large sum of money over time. For example, a $100 monthly contribution will grow to nearly $100,000 after 30 years, assuming a 6% average annual investment return.2
2. Know Your Target
Once you start saving, the next step is figuring out how much you need to save in total, based on your expected retirement costs and goals. Many online calculators and tools can help you accomplish this, or you can get help from a workplace retirement plan representative. Knowing how much you think you'll ultimately need can help you gauge whether your savings is on track.
3. Stay the Course
One of the biggest mistakes people make is letting short-term issues—a job loss or a large, unexpected expense—throw off their retirement-savings progress. Some people even cash out their workplace retirement savings when they need extra money. Don’t do it. Not only will you drastically hurt your long-term savings potential, you may also face a 10% early-withdrawal penalty if you're under age 59. One helpful way to avoid tapping your retirement plan is to build an emergency savings account with at least three months’ worth of living expenses. If you lose your job or face another financial emergency, you’ll have a go-to source of money.
One easy way to establish emergency savings is to set up a separate account at your bank and have a small amount—such as $50 or $100—automatically deposited in it each month from your checking account until you reach the needed amount.
Saving for retirement can be a very rewarding experience. And by saving regularly and increasing your contributions over time, the power of compounding can help you reach your ultimate goal.
1Employee Benefit Research Institute, 2014 Retirement Confidence Survey
2Savings Calculator, Finra.org