How to Avoid Joining the 25% of Americans Without $1,000 in Retirement Savings

how to start saving for retirement

How much money do you need to retire? Have you thought about how to start saving for retirement?

If you answered “no,” you’re not alone. A recent report by the Employee Benefit Research Institute (EBRI) found that about 25 percent of all workers have less than $1,000 saved for retirement.

In fact, among people aged 25 to 34, one in three has barely considered how to start saving for retirement. In general, people start preparing the closer they are to retirement.

However, they may be vastly underestimating how much they’ll need to live comfortably. Even if retirement feels far away, there’s plenty you can do today to get ready.

How to start saving for retirement

1. Calculate how much you’ll need

The EBRI found a general lack of preparedness across age groups. But surprisingly, 60 percent of workers felt confident they would have enough saved for retirement.

So how much is enough when you’re ready to retire? The actual numbers will look different for everyone. You might be comfortable living on $40,000 a year. Or you might want $80,000 to maintain your lifestyle.

Of course, no one can predict the future. But you can use the information at your disposal to make an educated guess.

To predict how much you’ll need for retirement, take a look at your current expenses. Consider upcoming costs, like buying a house or paying for your kids’ college education.

Then use the widely accepted four percent rule to estimate how much you’ll need to save. The four percent rule suggests that you’ll withdraw four percent of your savings every year you’re retired. So if your goal is to live off $40,000 a year, divide it by 0.04 to calculate how much you should save in total.

Using this formula, you would need $1 million in your retirement savings. If you’re aiming for $80,000 a year in retirement, you would need $2 million. The four percent rule isn’t perfect, but it gives you a general estimate. This retirement savings calculator can help you predict your financial needs in retirement.

Once you’ve figured out how much you need to save, automate a percentage of your paycheck to your account. Save what you can reasonably afford after rent, food, and bills. You can always start out small and increase the percentage over time. It’s easy to sign into your online account and adjust your automatic contributions.

2. Max out your employer’s 401(k) match

Of the people not saving for retirement, 73 percent said they would start doing so if their employer offered a 401(k) match.

A 401(k) is an employer-sponsored retirement savings account. Some employers not only offer a 401(k), but also match a certain percentage of employees’ contributions.

Let’s say your employer offers a five percent annual match. If your salary is $50,000, your employer will put $2,500 a year into your account if you also deposit at least $2,500.

If your employer offers 401(k) matching, strive to get the full match every year. It’s free money toward your retirement.

3. Open one or more retirement savings accounts

According to the EBRI, people with a retirement savings account have saved far more than those without one. They also feel less stressed about retirement preparation.

You have a few options for retirement savings accounts.

  • Your employer might offer a 401(k) and might even match your contributions up to a certain percentage.
  • You could open an independent retirement account (IRA). It takes just a few minutes to sign up with a broker such as a Vanguard or Wealthfront. Some companies require an initial deposit, while others have no account minimum.
  • You may choose to hold both an employer-sponsored 401(k) and an IRA. 401(k) accounts tend to have higher contribution limits than IRAs. Plus, you may benefit from holding both a pre-tax and post-tax account, depending on your financial situation.

If you decide to open up an IRA, you’ll need to choose your account type – a Roth IRA, a traditional IRA, or both. Both have different rules and tax advantages, so look at the pros and cons of both before choosing.

In a traditional IRA, contributions are made pre-tax. You will pay taxes on withdrawals in retirement. On the other hand, contributions to a Roth IRA are made after-tax. This means withdrawals made in retirement are tax-free.

Typically, Roth IRAs are preferable for younger investors who will make more money – and thus move into a higher tax bracket – later in life. If time is on your side, a Roth IRA may be the better choice for you.

In any case, the earlier you start saving, the better so you can take advantage of compounding interest.

4. Save 10 percent of your annual income

Financial advisors recommend saving 10 percent of your annual income. If you can swing it, saving 10 percent may help you reach the $1 million mark before retirement.

If 10 percent is too steep, you can always increase the percentage you save over time. Or you can work on building other income streams to meet your needs.

You could look for a lucrative side hustle or even start your own business. And don’t forget to pay down any existing debt. Creating alternative income sources is another strategy for securing your financial independence.

Take control of your financial future

Deciding how to start saving for retirement may not feel like a priority right now. But if you wait too long, you’ll miss out on the power of compound annual growth.

Instead, think of an IRA or 401(k) as a monthly expense and remind yourself that you’re setting aside savings for Future You.

Even though you may spend less now, you’ll have more money in the future. As a result, you’ll feel empowered to retire when you’re ready and maintain the lifestyle you want.

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