by Kara Hill

Saving for retirement can seem like a daunting or even impossible task. From determining the percentage of gross income to save to selecting the best savings account, many Americans fall short. According to a recent study by Northwestern Mutual, 1 in 5 Americans have less than $5,000 saved for retirement, and roughly 15% of Americans have no retirement savings at all. Even more shocking, 47% of Americans believe that they will need to work beyond the traditional retirement age of 65 due to financial necessity.

Understanding Your Numbers
With life expectancy reaching into the low 80s, it is anticipated that most Americans will need to account for roughly 15 years of post-retirement living expenses. As a general rule of thumb, a retirement account should contain at least 80 percent of the yearly salary you earned while working. To determine the total amount necessary to retire, multiply the 80 percent by how many years you are expected to live beyond retirement. For example, someone who is expected to live 15 years post-retirement, with an annual salary of $65,000, should aim to save a total of $780,000. 

Eg. $65,000 x 80% = $52,000 per year;

$52,000 x 15 = $780,000.

Once you have determined the amount of money you will likely need to retire comfortably, it is imperative to set up a plan and start saving. Financial experts recommend contributing up to 15% of your gross income to a retirement savings fund whether that be a Roth IRA or a 401(k). The idea is to contribute monthly into a retirement program and then reap the benefits of the money growing over the years.

However, for many Americans, it’s simply not feasible to set aside 15% of their gross income. Suppose you earn $65,000 per year and contribute 15% to your 401(k). 15% of $65,000 is approximately $9,750 per year, which is roughly $813 per month. If panic is setting in, take a deep breath! There are steps to take to get back on track. Although these numbers seem impossible to reach, there are programs in place and steps to take that make saving for retirement achievable.

Start Saving Now
The first step is to start saving now. The sooner you start contributing to your retirement account, the more money you will be able to save over the span of your career. For instance, the chart below represents three different saving scenarios based on the following facts: Abby, Bobby and Claude each contribute $500 per month, which equates to an annual contribution of $6,000. They invest in a 401(k) with an annual return on investment of 8%. Below, each employee begins contributing to a different age. As you can see, even a five-year difference can make a huge impact on the amount of money that accumulates in your retirement account. The sooner you start saving, the more prepared you will be for retirement.

Small Contributions Add Up
Although financial experts recommend contributing 15% of your gross income, remember that any contribution is better than no contribution. If contributing a full 15% is unfeasible, don’t fret! Starting to invest with even a couple hundred dollars per paycheck is a huge step in the right direction—especially if you start now.

Take Advantage of Matching
If your employer offers to match a percentage of your monthly contribution, you should contribute enough to receive that benefit. Even if you can’t afford to contribute a full 15 percent of your paycheck, any amount is better than nothing at all. For instance, if you contribute $100 per month and your employer offers a 25% match, your monthly contribution is now $125. This matching is important because it is essentially free money.

Increase Contribution over Time
Increasing your payroll deduction incrementally is an easy way to build up to the maximum deduction. Even starting with a 3% contribution that increases quarterly or yearly can make a huge difference in the long run due to compounding interest. This method is simple, effective and easy on the bank because a one percent increase only decreases take-home income slightly.

In conclusion, the benefits of starting a 401(k) early are immense. Investing even a small portion of your paycheck is better than investing nothing at all. So don’t wait—start now.