The average American has about $50K in retirement savings at age 65. Combined with Social Security benefits, that’s about two years of expenses once you retire. By some accounts, it takes at least $1 million to have a comfortable retirement.
Don’t let the numbers scare you. With time, discipline, and smart planning, it’s totally possible to grow your retirement account. No matter where you are right now, there are three things you should do: start saving right now, max out your 401(k) and IRA, and adjust your lifestyle to prioritize savings.
Making intentional savings decisions and holding yourself accountable will help you grow your retirement savings. Let’s take a deeper dive into how following these three things will boost your retirement savings.
One of the best ways to increase your retirement savings is to simply start early – now is the time to start, no matter your age. It’s never too late to start saving for retirement. Of course, if you get an early start, you get the benefit of compound growth.
There is so much financial potential when you start saving early, because time grows your money faster than any hot stock or investment can. Time compounds your money’s growth; you earn money on your contributions, but you also earn money on the money your contributions earn.
It works like this: If you invest $10,000 in a retirement account this year and you earn 10%, at the end of the year, you have $11,000—your original $10,000 investment and $1,000 in earnings. The next year, if you earn 10%, you earn $1,000 on your $10,000 plus $100 on your $1,000 earnings from year one. In other words, if you didn’t save another cent in year two, you’d still earn $100 more because of your earnings in year one. That’s compound growth.
Obviously, you get better results the more time you have to save. If you put $1,000 in your retirement account today and earned 8% a year, the average of the S&P 500, you’d have over $10,000 in 30 years. If you saved $1,000 a year every year for 30 years, you’d have $125,000. If you saved $500 a month for 30 years, you’d have over $750,000 in your retirement account.
You can still take advantage of compound growth if you don’t have 30 years to retirement, but you’ll have to be more disciplined with your savings. If you’re 45 now and plan to retire in 20 years, you’d need to set aside about $1,300 a month to get that same $750,000 at retirement.
Starting early is without a doubt the easiest way to build a sizeable retirement nest egg, but you can still accumulate a nice account balance if you buckle down and save as much as you can right now.
Max out your 401(k) and IRA contributions
Most employers offer a company match for 401(k) contributions; the average is nearly 6%. In other words, you earn 100% right off the bat on the first 6% of your salary (or whatever percentage your employer contributes). That kind of return is impossible to beat, even if you’re lucky enough to invest in the hottest new stock. Make sure you’re contributing the max to your 401(k) account, so you don’t miss that free money.
Even if you save in a 401(k), you can still invest in an IRA, either a traditional or Roth, depending on your income. With a traditional IRA, you contribute pre-tax dollars and pay income tax on your withdrawals in retirement. With a Roth IRA, your contributions aren’t tax deductible, but you don’t pay income tax on withdrawals.
Another often overlooked retirement savings vehicle is the health savings account. If you’re eligible for an HSA, you probably already know you can contribute pre-tax dollars to an investment account which also grows tax-free and use the money to pay qualified health expenses without paying income tax on your withdrawals.
But you don’t have to spend the money in your HSA; your contributions roll over indefinitely. And once you turn 65, you can use the money in your account for anything—not just Medicare premiums and other health expenses. After age 65, you pay no income tax on your HSA withdrawals, regardless of how you use the money.
Make small sacrifices
No one likes to hear the word “sacrifice,” but you’d be surprised how much money you can save by making small changes in your spending habits. You don’t have to make drastic changes to your lifestyle but downsizing a bit and eliminating small expenses can make a huge difference in your savings account balance.
For instance, if you’re still living in your huge family home after your kids have married and moved away, it might be smart to sell and move into a smaller, less expensive place. If you’re used to leasing a new car every three years, buying a sensible used car can save thousands of dollars you can use to boost your retirement savings.
And when it comes to little changes, making your own coffee in a to-go cup each day and packing your lunch every morning saves hundreds each month on Starbucks and eating out. Other small changes, like cutting the cord on your enormous cable bill and using less expensive streaming services, price-shopping your insurance coverage, and taking advantage of last-minute travel deals and off-season discounts yields hundreds or even thousands of dollars a year for retirement savings. Even better? You’ll develop frugal habits that will stretch your income in retirement.
The bottom line
Boosting your retirement savings isn’t easy, especially if you’re getting a late start. But the good news is that you can begin building a solid nest egg no matter how old you are. It all comes down to being smart and disciplined. Start saving now, no matter your age. Max out tax-advantaged contributions to your retirement plan, IRA, and HSA. And always look for ways to economize on your living expenses to build good habits for living on a fixed income when you retire.