Most Americans aren't saving enough for retirement. The average 401(k) balance for Americans 65 and older is reportedly $232,710, and that's going to fall short for many Americans in their golden years.
Fortunately, there are a handful of relatively simple strategies that most people can implement to quickly improve their savings rate and get their retirement plan on track.
People aren't saving enough
Amassing $232,710 of assets is impressive, but it might not be enough to fund the retirement of your dreams. The 4% rule guides that retirees can safely withdraw 4% of their invested assets annually without exhausting their retirement savings. Using that formula, the average 401(k) for those over 64 would produce about $775 of monthly income the first year of retirement. Using the current average Social Security benefit, you'd get another $1,800 per month. Many people can also take distributions from an IRA or investment account to supplement cash flow.
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Even with those extra resources, your retirement income might fall short of what you want. The following three strategies are powerful and straightforward ways to get more into your retirement fund.
1. Create a budget
The most consequential step that many families overlook is having a measurable budget. Disorganization is a common feature in financial plans, and it's costly. Surveys suggest that roughly half of Americans don't know how much they should be saving, and the average savings rate is far below the 15% to 20% benchmark that financial planners recommend.
Of course, low income prevents some households from saving enough. However, many families struggle to build retirement savings despite having ample financial resources. A formal budgeting process can be transformative in these cases. A sound, comprehensive financial plan that increases your savings rate should allow you to increase your 401(k) contributions.
Creating a budget shows you exactly how much cash flows through your accounts every month -- and where it goes. The process illuminates the balance of spending on basic needs versus discretionary lifestyle purchases.
Calculate your monthly savings goal by multiplying your pre-tax earned income by 20%. By measuring your spending habits, you can work backward to determine which costs prevent you from attaining that goal. Budgeting apps can assist your spending analysis and help you track your progress.
Organization is a great way to relieve financial stress. People might feel less uncertainty about the impact of a purchase if it's aligned with their spending allotment.
2. Save automatically
Checking accounts are designed for spending, and they are the destination of most paychecks. That approach encourages us to spend first and save second, and people generally wind up doing too little of the latter.
That problem can be mitigated by ensuring that a portion of your income goes directly to savings. The easiest way for most people to do this is to enroll in a 401(k) or another employer-sponsored retirement plan. These automatically contribute a fraction of each paycheck to a retirement account.
Some people can take advantage of direct deposit, too. If your employer allows you to split paychecks into multiple accounts, you can direct a small portion of each payment to a savings account. As cash accumulates in that savings account, it can be redirected to an IRA or brokerage account for asset growth and retirement savings.
This strategy imposes discipline to save before spending, and it prevents hard-earned income from touching a bank account that's designed for spending.
3. Take full advantage of retirement contribution advantages
If your employer offers a 401(k), it likely offers a contribution match. The cap on the amount that an employer will contribute varies from plan to plan, but you can generally expect a match on all or some of each dollar directed to a 401(k), up to somewhere between 4% and 6% of your total salary.
If your retirement account contributions are too low to get the full offered match, then you are leaving money on the table.
Americans also have opportunities to increase their tax-deferred retirement contributions just before retirement. There are catch-up contributions allowed for people age 50 or older. The IRS code permits an additional $7,500 to flow into employer-sponsored retirement plans. Annual IRA catch-up contributions are limited to $1,000. If you're behind on savings as you approach retirement, and you've got the money, catch-up contributions can help you close the gap.
Increased 401(k) contributions come with tax and liquidity ramifications, but the inadequacy of retirement savings indicates that many households should shift their financial planning priorities.
It's not always easy to save 20% of your income. The above strategies should help you get the most out of your retirement accounts and retain more of your income.
