The path to retirement appears pretty straightforward. We get a great job, budget our money, save for the future, invest wisely, and retire comfortably, on our own terms.
But, like most things in life, the straight and narrow path rarely remains straight and narrow. Unexpected expenses and life events arise all the time, which can throw our retirement plans for a loop. Starting a family, paying for college, or dealing with unexpected medical costs are just a few of a countless number of ways your retirement plans can change at the drop of a hat.
Now add in the fact that Americans are among the worst savers when compared to developed nations. Whereas residents of France and Germany are saving 15.9% and 9.6%, respectively, the April 2016 personal savings rate in the U.S., according to the St. Louis Federal Reserve, is a paltry 5.4%. Amazingly, this 5.4% personal savings rate is a vast improvement over the 1.9% to 3.9% savings rate for the average household between Sept. 2004 and Aug. 2008. Unfortunately, with the U.S. economy being so consumption-dependent, Americans have a "buy first, save later" mentality, and it's hurting their chances of hitting their retirement goals.
According to a survey by Wells Fargo that conducted by Harris Poll two years ago, the median middle-class household has just $20,000 socked away for retirement. One of the main drags on this is the 34% of households surveyed that hadn't put a single dime away for retirement. Yet, with a little bit of effort and financial discipline, the average American could find their nest egg on better footing than they've ever imagined.
An extra 1% in savings can go a long way
Let's look at an example of what the average American household is potentially looking at in retirement based on the $53,657 the typical American family earned in 2014 according to the U.S. Census Bureau. For this exercise, we'll utilize Bankrate's retirement goals calculator, with the follow parameters:
- 45 years to accumulate savings (basically assuming you begin at age 20 and end at age 65).
- $0 initial investment (we're starting from scratch).
- Rate of return is 7% (the historical average of the stock market).
- Contributions are made monthly and compound daily.
- Periodic contribution is $241 (This is 5.4% of $53,657, divided by 12).
The result is that a monthly contribution of $241, or 5.4% of the average household's savings, over the course of 45 years at a 7% rate of return, would yield $919,905 upon retirement.
Now let's look at the same example, but make one small change. Instead of the average American family saving 5.4% annually, let's assume they could save 1% extra, or 6.4% annually, over the course of 45 years. One percent doesn't sound like a whole lot, but when compounded over many years it can add up quickly.
Using the same parameters as above, save for a 6.4% savings rate and therefore a $286 per-month contribution, our fictitious middle-class family would enter retirement with $1,091,672. That's an added $171,767 simply by saving an extra 1% of what you've earned over the long run. If you stretch this example over 50 years, which is more than feasible with life expectancies on the rise, the difference expands to around $247,000 extra. This small change can make a big difference in retirement.
Here's how to save that extra 1%
So how do you squeeze an extra 1% out of your expenses? Here are a few good ideas to consider implementing.
The easiest way to save extra money in order to enrich your retirement is to smooth and polish the edges on your household budget. According to Gallup as of 2013, only a third (32%) of American households were keeping a detailed budget. This is a big missed opportunity, since it's nearly impossible to understand your cash flow without a detailed monthly budget.
The good news is a detailed monthly budget is pretty easy to come by these days thanks to online software. Budgeting software can take care of most of the grunt work (i.e., math), and it can even help you lay out a plan to sock away money if you have a predetermined figure in mind. Of course, your resolve and regular follow-ups are what make a budget work. Three tips in particular can help you stick to your budgeting goals.
First, consider surrounding yourself with like-minded people. This means you can't be the only one in your household living on a budget. If you're living on a budget, everyone under the roof, kids included, should be playing their role, too. If you live alone, consider joining an investment group or chatroom with people who have similar goals.
Secondly, consider automatically depositing what you save into an investment account on a weekly or monthly basis. Automatic deposits should work to hold you accountable for your saving habits, and more importantly, they'll ensure you don't spend what you've saved on something silly. Plus, if the money is coming out automatically, you have no excuse not to invest it.
Finally, make your goals "SMART." This acronym stands for Specific, Measurable, Achievable, Realistic, and Time-bound. The more specific, realistic, and achievable you make your savings goals, the easier it'll be to measure your progress within a given timeframe (i.e., on a monthly basis).
Another good way to save extra money is by ensuring that you minimize your tax liability during retirement. While tax-deferred retirement tools such as 401(k)s or Traditional IRAs can do the trick, you'll wind up paying federal income tax once you begin making withdrawals during retirement. A smarter choice would be to consider a Roth IRA, which allows your money to grow tax-free over the lifetime of your account. If you don't have to pay a cent in taxes, compared to, say, paying 10% or 15% effective income tax, you can put substantially more in your pocket come retirement -- think six figures!
Over time, this extra 1% could make a mammoth difference in your financial well-being. What can you do to save an extra 1%? Share your thoughts below.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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