Just 54% of Americans in the civilian workforce were participating in a retirement plan of any type as of March 2017, according to the Bureau of Labor Statistics.
With close to half the civilian population lacking access to private pension coverage and almost 40% of workers indicating neither they nor their spouse have saved any cash for retirement, there is a serious retirement crisis brewing in the United States.
You cannot live on Social Security alone, so you could find yourself facing a personal retirement crisis if you're one of the millions who haven't started saving. The good news is, it doesn't have to be complicated to get a savings plan working for you. Just follow these five simple steps to start saving for retirement right now.
1. Open a tax-advantaged account or ask for your 401(k) paperwork at work
If you have access to a 401(k) at work, getting started investing is easy. Around 45% of workplaces automatically enroll employees in 401(k) accounts, so first check with your employer to see if you already have an account open. If you don't, talk to your human resources department about participating. You'll need to fill out some simple paperwork, but the process should be straightforward.
If you don't have access to a 401(k) at work, open a traditional or a Roth IRA. A traditional IRA allows you to invest with pre-tax money and a Roth allows you to make tax-free withdrawals during retirement but you invest with after-tax dollars. If you think you'll be taxed at a lower rate in retirement than your current rate, a traditional IRA is usually the best choice.
There are a huge number of financial institutions where you can open an IRA online easily, with some of your best options being Ally Invest, which offers self-directed accounts with no minimum balance or a managed portfolio for just a 0.30% annual advisory fee; Stash, which offers the opportunity to build a portfolio of exchange-traded funds; and Betterment, which allows you to entrust your investments to a robo-advisor.
You'll need to be ready to input your Social Security number and other basic information when you open an account. You'll also have to provide your bank information if you want to fund your IRA electronically. The process should not take more than five to 10 minutes.
2. Determine what percentage of your income you want to save
Once you've opened your account, it's time to decide how much to contribute. The maximum you can contribute to a 401(k) is $18,500 in 2018 if you're younger than 50. Maximum IRA contributions are $5,500. Those 50 or older can add $6,000 more to a 401(k) and $1,000 more to an IRA. As long as you keep your contributions below these amounts, it's up to you how much to transfer to 401(k) or IRAs.
While the old rule of thumb for retirement investing was to set aside 10% of your income, longer lifespans and projected rates of return below historic averages mean you now need to save around 15% to 22% of your income to have enough for your golden years.
Saving 15% of your income may sound impossible, but there are ways to increase your retirement savings. Retirement supersavers who contribute the maximum to their 401(k) each year tend to drive older cars, live in cheaper housing, work longer, and take fewer vacations. If you're not ready to make drastic lifestyles changes, there are simpler steps you can take like allocating your raises to investing, cutting unnecessary expenses, and making a budget.
3. Automate your investments
Now that you've decided how much to save, tell HR to transfer that amount automatically from your paycheck. The money will be gone before you have a chance to spend it, and you won't have to make the responsible choice every month.
If you don't have a 401(k), you can still set up automated transfers through your bank or brokerage firm. You're much less likely to skip a month of contributing if you have an automatic transfer set up that you'd have to cancel.
4. Research your investment options
You need to put that money you've invested to work for you. If you've opened your account with a robo-advisor or are using a managed investment service, you may have little to do other than provide information about your age, retirement goals, and the amount of risk you're comfortable taking. But if you're invested in a 401(k) or have a self-directed IRA, you'll have to make decisions about what assets to buy.
The No. 1 rule is not to invest in anything you don't understand, so no matter what type of account you have, it's important to take the time to research your investment options.
If you're invested in a 401(k), you may have a limited array of investments available and must choose from among options your plan offers. If you're invested in an IRA, you'll have many more choices.
In either type of account, you need to invest at least some of your money in the stock market to earn large-enough returns to build a reasonable nest egg. Exchange-traded funds and mutual funds are both good options for investors without the knowledge or patience to play the market. As you compare ETFs and mutual funds, pay attention to fees, types of assets invested in, analyst ratings, and past performance to make sure the investment is a good one.
5. Decide on and implement an investment strategy
You don't want to let emotions rule your investments, as this could cause major mistakes like buying assets that are in a bubble. Rather than investing at random, have a specific plan for handling your portfolio.
The most basic fundamentals of your plan should include diversifying investments and managing risk appropriately. For example, you can subtract your age from 110 to find the percentage of your portfolio to put into stocks -- a 20-year-old would be 90% invested in stocks -- and can diversify by buying funds or ETFs that provide exposure to different asset classes.
For example, a diversified portfolio could be built with just four ETF investments: the Vanguard S&P 500 ETF, the Schwab U.S. Aggregate Bond ETF, the Vanguard FTSE All-World ex-US ETF, and the Vanguard REIT ETF. Collectively, these investments would give you exposure to the U.S. market, to bonds, to foreign markets, and to real estate investments.
There are also plenty of other investment strategies you could adopt as your own, from value investing or growth investing to dividend investing. It's up to you how simple or complicated of a strategy you want to pursue, but the key is to have some kind of plan and stick with it.
Don't wait to get started
Now that you know how to start investing for retirement right now, you have no more excuses. Take action today to invest for your future. If you invest early, becoming a millionaire even on an average salary is doable -- but the longer you wait, the more challenging it will be to retire rich.