Basics of Retirement Savings

Building wealth takes time. To give yourself the best chance of accumulating enough assets to fund your retirement, start saving today, save consistently throughout your working years, and let your savings grow until you retire. Start saving in a 401(k) plan if you have one available to you. This is an easy way to make sure you are consistently saving each pay period. If you are already saving in a 401(k) plan, consider increasing that amount each year as you earn more or pay off debt. In addition to helping you save consistently over a long period, most 401(k) plans incentivize employees with employer matching contributions to supplement your savings. Plus, as you’re working to build your savings, they’ll be working for you. Through the process of compounding interest, your account will grow exponentially as your interest earns interest!

Another way to ensure that your savings continue growing over time is to choose investments that carry some degree of risk for a portion of your savings because they also carry a greater chance for higher returns. To help hedge against the risk of investment loss, diversify your investment selections, so you have several types of investments and asset classes with different levels of risk and return.

To develop your retirement savings strategy, first set a saving goal. To estimate how much money you need to save, consider an online retirement calculator. These tools can help you estimate what your 401(k) balance will be at retirement, based on your current contribution rate, plus any employer matching dollars. This is an important step in determining whether you’re on track to reach your goals or if you need to save more to achieve them. Many people have a goal of saving $1 million dollars for retirement.

Let’s look at some examples of how much you’d have to save to accumulate $1 million in a 401(k).

Assume that:

• Ellie is 25 years old and has landed her first professional job.
• She makes $40,000 per year and estimates that she’ll receive a 3% salary increase each year until she retires.

If she saves 10% of her income each year in her employer’s 401(k) plan until she’s age 67, she could have $1,111,897 in her 401(k) for retirement (assuming 3% annual inflation and a 6% annual rate of return). Her retirement savings could be even higher if her employer makes matching contributions to her 401(k) account, or if her income surpasses that 3% increase.

Let’s assume Ellie’s co-worker, Tyler:

• Doesn’t start saving for retirement until he’s 35.
• He’s earning $50,000 per year when he starts saving,

Tyler would have to save 16% of his salary every year until age 67 to just break the $1 million mark ($1,065,241) by the time he retires (assuming 3% salary increases, 3% annual inflation, and a 6% annual rate of return).