Putting away enough for retirement is one of the biggest financial challenges you may face in your life. According to Harris Nydick, an investment advisor and co-author of the book, “Common Financial Sense,” most people are not saving enough.
“Unfortunately, very few people are saving money on their own and very few people are putting enough away in their 401(k),” he says. According to a survey by Bankrate, 20% of Americans save nothing for retirement, and 40% of Americans have only $10,000 or less saved for retirement.
Nydick says many people have a “deer in the headlights” response to starting a retirement savings plan, and that stops them from saving. But if you have access to a 401(k) plan, which puts pre-tax money from your paycheck in a long-term investment account, here are four steps to grow your nest egg.
Decide how much you will need in retirement
The first step in saving enough money for retirement is figuring how how much you’re going to need once you retire. Nydick says looking at how much it costs you to live now will help you make an estimate for the future.
Nydick says a good starting point is assuming you’ll spend 75%-85% of your working income when you retire. So if you make $100,000 a year while working, you should expect to spend $75,000-$85,000 per year in retirement.
But those are averages and don’t account for different stages of your retirement life.
“The first stage is when you’re out trying to complete your bucket list, doing a lot of traveling and activities—the first five, six or seven years in retirement you’re actually spending more money than you were making before,” Nydick says.
After that, you’ll spend much less as you settle into a more comfortable routine. In the final stage, your expenses may increase to pay for medical care and other expenses, he says.
Determine what you can afford to save
Now that you know how much you’ll spend, you need to determine how much you can save.
“The largest determinant of your success and how much you’re going to have is how much you put in in the first place,” Nydick says.
Look at your expenses each month—rent, utilities, other fixed and discretionary expenses—and then look at what’s left. The ideal percentage is to put 15% of your salary into a retirement fund, but Nydick says many people can’t start with that. Instead, start with a number you can afford and increase a percentage point per year until you reach that ideal number, he says.
Nydick recommends getting into the habit of paying yourself first so you’re always adding to the retirement pot. “If people were to pay themselves first and think in terms of taking care of their future, they would surely find enough money to put away,” he says.
Figure out how to build your fund
Your tactic for building your 401(k) will vary based on the stage of life you’re in, Nydick says.
“When you’re young, you want more money in stocks because you’ve got the gift of time and the gift of compounding, so you have an opportunity to have your money grow,” he says.
But stocks tend to be riskier investments, and people who are closer to retirement may want investments with a higher degree of certainty, he says.
Nydick says many people choose target date funds to build their 401(k). Target date funds are a collection of different investments which become more conservative once the funds are closer to retirement and are typically a mix of stocks, bonds, and money market funds.
Realize that saving a little is better than nothing
The bottom line: save something!
“If you feel you absolutely have no money at all, here’s how we create money: this week you save one dollar. Next week you save one more dollar,” Nydick says. “By the end of the 52nd week, you’ve actually saved between $1,300-$1,400 over the year.
Then you can invest at a reasonable rate of return and quickly see your money grow.
“It’s it really is never too late because your dollar saved today is a dollar you have tomorrow,” he says. “People can still save more than they thought possible.”
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