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The vast majority of Americans share one common goal: to retire at a time of their choosing, and to be financially comfortable once they retire. Unfortunately, this is a goal that's proving to be out of reach for far too many people.

As we look around, we can see study after study implying that Americans simply aren't saving enough of their hard-earned money for retirement, or they aren't investing what they've saved in the right assets.

Americans have a retirement problem

One of the more appalling studies on Americans' anemic savings habits comes courtesy of GOBankingRates, which in March released the results of its retirement savings survey. In its study we learned that 56% of Americans surveyed had $10,000 or less saved for retirement, including one-in-three with absolutely nothing. On the other end of the spectrum, just 13% had more than $300,000 put aside for retirement. As a whole, the U.S. personal savings rate in May, per the St. Louis Federal Reserve, was just 5.3%, which is well below what you'll find in most developed countries.

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Image source: Getty Images.

Yet even when Americans are saving, they may be choosing the wrong type of asset to invest in. According to a Bankrate Money Pulse survey conducted last year, 52% of Americans didn't have any of their money invested in stocks. Mind you, the stock market has historically returned about 7% per year, dividend reinvestment included, which is well above the long-term average rate of inflation. Investors simply don't trust the stock market after its 50%+ swoon during the Great Recession.

The concern is that avoiding the stock market could be costing Americans the chance to build real wealth. Sure, investors want something as close to guaranteed income as they can get after the stock market took them for a wild ride more than seven years ago. However, near-guaranteed income in the form of Treasury bonds or bank CDs comes with anemic yields that in basically all cases do not surpass inflation. Although you're earning money on a nominal basis, it's very likely that your purchasing power is dwindling if you're buying interest-based assets in today's environment.

What people need to understand is that the stock market is more than likely their best source to build real wealth, and time is the most important cog to make that happen. The earlier you begin saving, the more time and compounding can do their work and get you on the path to retirement.

You'll need to save this much annually to become a millionaire

To demonstrate the importance of time and saving early and often, I figured we'd look at how much you'd need to save on an annual basis to become a millionaire by the time you hit 65 years old, the upper-end of the traditional retirement age range.

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For our example I've made a few assumptions to keep the calculations as simple as possible. Using Bankrate's investment calculator I've assumed $0 initial investment, a 7% rate of return, a contribution frequency of once a year, and a compound frequency of once-yearly. We're also assuming that all taxes will be deferred, so keep in mind that tax implications aren't reflected in the eventual $1 million.

With these criteria in mind, here's how much you'd have to save annually to reach $1 million by age 65.

  • Age 20: $3,500 annually
  • Age 25: $5,010 annually
  • Age 30: $7,234 annually
  • Age 35: $10,587 annually
  • Age 40: $15,811 annually
  • Age 45: $24,394 annually
  • Age 50: $39,795 annually
  • Age 55: $72,378 annually
  • Age 60: $173,891 annually

As you can see from the above, your investing leverage disappears quickly if you begin saving and investing for retirement five, or even 10, years after you initially planned. Unfortunately, the "I'll save later" attitude is commonplace in the United States.

Based on the data, waiting just five years means having to save an extra $1,510 annually, or 43%, to reach $1 million. Begin at age 30 and you'll have to save more than double what you initially needed on an annual basis at age 20 to reach $1 million. If you haven't begun saving until your late 40s or early 50s, you could wind up having to part with a huge chunk of your annual income just trying to play catch-up, and there's no telling what sort of bull run you may have missed in the stock market.

This data above demonstrates just how important time and compounding are to Americans looking to hit their retirement goals.

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Image source: Getty Images.

Make use of automatic transfers and tax-advantaged tools

The best way to ensure that you remain on track for retirement, regardless of age, is to hold yourself accountable savings-wise, as well as make use of tax-advantaged tools.

Only a third of American households in a 2013 Gallup poll admitted to keeping monthly budgets; and if you aren't sticking to a budget, it can be very difficult to understand your cash flow and optimize your ability to save. One of the easiest motivators is to automatically transfer money from your checking or savings account to an investment account on a weekly, bi-weekly, or monthly basis. Doing so will hold you accountable for your spending habits, and encourage you to continue saving and investing for the future.

Even more importantly, Americans should be taking advantage of the various tax-advantaged retirement tools at their disposal. The Traditional IRA and employer-sponsored 401(k) allow your nest egg to grow on a tax-deferred basis, and are funded with before-tax money, thus helping lower your current-year taxable income. A 401(k) can be particularly lucrative if your company offers to match a certain percentage of your contributions.

Of course, my personal favorite retirement tool is the Roth IRA. A Roth IRA offers no upfront tax deductions, but it gives an even greater gift to investors. All investment gains earned within a Roth IRA are free of taxation for the life of the account. Furthermore, there are no age requirements dictating when people can or can't contribute, and no minimum distribution requirements, meaning you can let your money continue to grow if you'd like. It's by far the most flexible and savings-packed retirement tool available.

The only person accountable for your retirement is you, so make the best of it by saving early and investing often.

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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