Retirement Savings and How to Make Time Work for You

One of the longest-standing pieces of financial advice is just as true today: Time is your most important ally when it comes to acquiring the nest egg you need to retire.

By starting early and saving regularly, earnings on your savings may grow to the point where they are large enough to support you. The key is allowing enough time for your savings to accumulate, or compound. When you start saving makes a substantial difference in the timing of financial indepen­dence for retirement.

A special report released last fall by the Stanford Center on Longevity shows that, unfor­tu­nately, Americans are less finan­cially prepared to retire than we have been in the past. The report listed a couple key findings:¹

• Of the workers who save in a work-based plan, most members of each age cohort are not meeting targeted retirement savings goals even under the most optimistic assump­tions, which considers both employee and employer contributions.
• Younger generations—both Gen X and millennial groups—are lagging behind their targeted goals more than older generations.

The rule of thumb is you need to replace at least 70% of your tradi­tional income to maintain your standard of living in retirement. Here is how that looks for a variety of salary levels:

			Monthly Contri­bution Needed With
Salary	Estimated Income Needed From Savings (70%)	Savings Target	20 Year To Reach Target	25 Years To Reach Target	30 Years To Reach Target
			(% OF SALARY)	(% OF SALARY)	(% OF SALARY)
$50,000	$35,000	$777,778	$1,480 (36%)	$955 (23%)	$635 (15%)
$60,000	$42,000	$933,333	$1,785 (36%)	$1,145 (23%)	$765 (15%)
$75,000	$52,500	$1,166,667	$2,230 (36%)	$1,435 (23%)	$955 (15%)
$100,000	$70,000	$1,555,556	$2,970 (36%)	$1,910 (23%)	$1,270 (15%)
$110,000	$77,000	$1,711,111	$3,270 (36%)	$2,100 (23%)	$1,395 (15%)
$125,000	$87,500	$1,944,444	$3,715 (36%)	$2,395 (23%)	$1,585 (15%)

The Stanford report concluded that Americans planning to retire at age 65 need to put aside 10 to 17% of their income for retirement if they start saving as early as age 25. If they do not start saving until age 35, however, they need to contribute 15 to 20% of their income to retirement accounts.

In other words, waiting 10 years to start saving (and begin the compounding effect) could require doubling the amount of savings required to reach the same goal. We need to teach younger gener­a­tions the disci­pline of saving money on a regular basis as early as possible. Saving at least 10% of their income is a good place to start.

For those who need to work toward closing the retirement savings gap, the first step is simply to increase savings. Here are five simple ways to do that:

Increase contributions to your employer-sponsored retirement plan.

Workers with a 401(k), 403(b), or thrift savings plan could increase their contri­bu­tions by 1%. This may not sound like much, but it can make a signif­icant difference over time.

For example, the median household income in the United States was $74,580 in 2022.³ So a 1% increase in savings would amount to an additional $745 per year in contri­bu­tions. Compounded over a 30-year career, that amount makes a noticeable difference in retirement income.

Save the tax refund.

The IRS reported that the average tax refund for the 2023 tax year was $2,753.⁴ This amount could be used to fund nearly half of the maximum annual Roth IRA contri­bution of $7,000.

Adjust tax withholding.

Adjust your tax withholding to get your refund now, in each paycheck. An average worker who gets paid every other week can decrease their tax withholding by $106 per payment based on the average tax refund listed above. Saving money every two weeks instead of as a lump sum at the end of the year can increase your nest egg by several thousand dollars over 20 years.

Bank the bonus or raise.

You can use pay increases to automat­i­cally increase your retirement savings. If you contribute to an employer plan, consider deferring the amount of a bonus or raise to that account. You will not see gains immedi­ately, but you will notice them year after year as the account accelerates.

Reduce your monthly household expenses.

Eat out less, take your lunch to work, cut the cable and cell phone bills, shop your insurance for lower rates. Budget experts say drinking water instead of soda and iced tea can save you $30 per month, and it is better for your health. For more ideas, see LifeHack’s 30 Ways to Cut Your Monthly Expenses.

The second step to closing the retirement savings gap is to ensure those savings are growing properly.

Many workers are nervous about investing in stocks. Even setting volatility aside, most people do not feel comfortable choosing invest­ments. Target-date funds were created to address this issue, and they have become one of the most popular choices for retirement savers.

Target-date funds allow workers to choose a single investment that corre­sponds to their year of retirement. The worker gets a mix of stocks and bonds appro­priate for their age without the need to construct the portfolio. Critics say they are not person­alized enough and might lead people to become complacent about investing.

The reality is that all invest­ments have short­comings. All the fund really needs to accom­plish is do a better job of investing than the worker would be able to do on their own.

It is time for Americans to put compounding to work. Saving more and investing better can help close the retirement gap. Most people know they need to save more and start sooner. The challenge is to bump up retirement savings on the priority list.

Rick’s Tips:

• Researchers have deter­mined a 25-year-old needs to save 10 to 17% annually to replace 70% of their salary income at age 65.
• One way to increase savings is to raise the amount of your salary you put into an employer-sponsored retirement plan.
• Better investing may also help retirement savings grow over time.

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Origi­nally Posted: September 19, 2019