Most people think of retirement as a reward for a lifetime of hard work -- a time to pursue passions; travel; or simply sit back, relax, and smell the roses. Unfortunately, few will enjoy the type of retirement they dream about, because over 40% of Americans have less than $10,000 stashed away for their later years, including the 14% without any retirement savings. Because Social Security income is limited and healthcare costs in retirement are soaring, millions of Americans are at risk of financial insecurity in retirement. To avoid retiring broke, here are three steps you can take now:

  • Begin budgeting.
  • Automate your retirement savings.
  • Supersize your Social Security benefit.

1. Make the most of what you have

Most Americans hate budgeting, but it provides a blueprint for financial success, enabling you to spot pain points in your expenses while reducing impulse spending.

A man in a shirt and tie dreaming of money.

Image source: Getty Images.

At a minimum, track every dollar in and out of your household for three months, then look for opportunities to repurpose spending to savings. Have you shopped around for car or home insurance lately? Are you paying for subscriptions to services that aren't being used anymore or that overlap with other services you use?

Negotiating insurance rates can save you hundreds of dollars or more per year, and even removing small expenses can add up over time. For example, cutting $100 per month in unnecessary spending and investing that money in a retirement account, such as an employer-sponsored 401(k) earning 7% annually, results in nearly $240,000 in retirement savings over a 40-year career.

2. Put your savings on cruise control

Employer-sponsored retirement plans are common, but over 30% of workers don't participate in them, including almost 50% of employees younger than 34. That's a big mistake.

Contributions to traditional workplace retirement plans, including 401(k) plans, aren't subject to federal income taxes until money is withdrawn in retirement. Thanks to compound interest, those contributions can really add up, so it's smart to contribute as much as possible. For example, a person earning $50,000 annually who contributes 5% of that income and earns an average 7% return annually could have a nest egg worth almost $500,000 after 40 years. Contribute 15% per year instead, and that account could be worth nearly $1.5 million.

A bar chart showing increasing retirement account values associated with increasingly higher contribution rates.

Assumes a hypothetical 7% annual return. 

If you're not contributing to a retirement plan or your contribution rate is low, contributing 10% to 15% of your income to such a plan may seem daunting. Don't fret. Many employers offer an escalation feature in their retirement plan that automatically increases your contribution rate by a fixed percentage every year until you reach your goal. Automatically increasing your contribution rate by 1 or 2 percentage points annually will put you on track for an envy-inspiring account balance without busting your budget. 

3. Maximize Social Security

Inadequate savings force retirees to rely heavily on Social Security in retirement, and that's a problem because Social Security alone isn't likely to pay the bills. The typical retired household spends about $45,000 annually, but Social Security only pays the average retiree $1,420 per month. Worse, retirees' costs are increasing faster than inflation because of soaring healthcare expenses. Because Medicare doesn't cover everything, the average couple retiring this year will spend $285,000 out of pocket on healthcare in retirement, according to Fidelity Investments. And that doesn't include long-term care.

To close the gap, take these steps to supersize your Social Security:

  • Work at least 35 years at a job subject to payroll taxes.
  • Seek opportunities to increase your wages, including raises and a side gig. 

Social Security income is based on your highest 35 years of inflation-adjusted income. If you don't work at least 35 years, it uses zeros in its calculation, reducing your benefit amount. If delaying retirement will replace zeros or lower-earning years in your calculation, then consider staying in the workforce for as long as possible. 

Also, Social Security taxes are paid on income up to $132,900 in 2019. If you're earning less than that, then lobbying for a raise or changing jobs could be smart. Not only will a higher paycheck now free up more money to contribute to retirement savings, but it will also increase the size of your Social Security check later on.