How to get your retirement savings on track

What are the benefits of saving for retirement?

Being able to retire, of course! If you don’t save enough for retirement, you’ll need to rely on Social Security—which could face decreased benefits by 2034—or keep working to earn money.

There are several other reasons to start saving now.

Tax benefits—Employer-sponsored retirement plans, such as 401(k)s, allow you to save your money pretax, reducing your taxable income now. You then pay taxes on your savings—including investment gains and losses—when you take money out in retirement. Some plans also offer a Roth 401(k) option, which works the opposite—your savings are taxed now, but the entire amount is tax free when you withdraw it later if you meet certain conditions.   

Employer match—Some companies will contribute to your retirement plan when you do, helping increase your retirement savings at no cost to you. 

Ease of use—Retirement plans offered through work make saving easy. Once you sign up, your savings are taken directly from your paycheck and automatically invested in the investments of your choice. You also have access to many tools and resources to help you plan for retirement.

Investment selection—Professionals regularly monitor the investments you can choose from in your retirement plan—and their job is to offer investments with employees’ best interests in mind.

Compound interest—Albert Einstein once said, “Compound interest is the eighth wonder of the world.” Time is your biggest asset when it comes to retirement savings. The longer you invest, the more time your money has to build on itself. It’s like a snowball rolling down a hill—the longer it rolls, the bigger it gets. That’s compound interest. See below how your account balance can grow over time if you make $40,000 annually, save 8% of your money, and earn a 5% rate of return annually on your investments.

The power of compound interest

The longer you save, the more time your money has to grow

How can you save money for retirement?

Your employer-sponsored retirement plan allows you to:

• Save up to $20,500 per year; people age 50 and over can save an additional $6,500 (2022 limits)
• Receive employer matching contributions, if available
• Save on a pretax basis, regardless of your annual income
• Make Roth 401(k) contributions—if your plan offers them—regardless of your annual income 

Individual retirement accounts are alternative options outside of work, but their annual savings limits are less, don’t have the opportunity for a match, and have income limits to qualify for tax benefits. They do, however, offer more investment options.

How much should you save for retirement?

To help you get started, take your current budget and make adjustments for your retirement lifestyle. Maybe your mortgage payment decreases to $0 if you pay it off and plan to stay in your house, or your travel and leisure spending increases if you plan to vacation more often. 

Create an account with the U.S. Social Security Administration on their website, so you can estimate your expected Social Security income when you retire. See how it’ll change depending on when you start receiving benefits. 

Subtract your Social Security income from your expenses and you’ll get an idea of what your monthly shortfall is. Multiply that by the number of years you expect to live in retirement, and that’s approximately how much you’ll need to save to afford the lifestyle you want. 

How can you fit saving for retirement into your finances?

Start putting some cash away for retirement today with a few helpful tips.

• Budget for it—Review your current budget and see if you can find some cash you could put to better use. Question your spending today and see if you can cut back in any areas to save more for tomorrow. 
• Build an emergency savings account—Create an emergency savings account, determine a goal to work toward, and set your money aside for emergencies. If you lose your job or have a medical emergency, you won't have to worry about the cost on top of the stress you’ll experience.
• Automate saving—Create a schedule to save regularly, and automate if you choose. This routine of saving the same dollar amount describes a concept called dollar cost averaging—a powerful tool to help build retirement savings.

Start saving more today for a better tomorrow

If you’re not already saving, start now. If you’re already saving, see if you can save more. Here’s a quick checklist to help get organized:

• Understand how your employer-sponsored plan works, if you have one—make sure you know if there’s a company match, how much it is (and save enough to get the whole match!), what the investment options are, and whether you have the option to save in a Roth account.
• Calculate how much money you’ll need in retirement and how much you need to save.
• Review your budget to find ways to save more today for retirement.

If you don’t prioritize saving for tomorrow now, you may end up having to work to generate income longer than you’d like to.