Are you on track to retire with a good-sized nest egg? If you think you are, you're in the minority -- a report from the NY Federal Reserve revealed that just 40% of Americans think they're on track for retirement. 

If you don't feel like you're on the path to financial security as a senior, that's a frightening position to be in. The good news is that you don't have to continue to flounder when it comes to planning for the future. Just take these five steps to build the retirement nest egg you need and boost your confidence about your golden years. 

Clock sitting next to coins and a jar labeled retirement

Image source: Getty Images.

1. Set a retirement savings goal

It's really hard to be on track for retirement if you don't know your destination. That's why the first step is to set a savings goal. How do you do that?

  • Figure out how much income you'll need during retirement: You could do this by making a sample retirement budget if you're getting close to retiring. Or just base your estimate on the idea that you'll need around 100% of your pre-retirement income. 
  • Figure out your sources of income: You'll have Social Security benefits coming in, and can find out what they'll be worth by visiting mySocialSecurity. To be on the safe side, estimate your benefits based on retiring at 62, because you may not be able to retire later. You may also have a pension or money from other sources, such as rental properties or alimony. 
  • Decide how much you'll need your investments to produce: Social Security, your pension, and other sources of income probably won't be sufficient to support you. You'll need a nest egg you can draw from. Find out how much income your investments must provide by subtracting the income you'll have from the amount you'll need. If you estimated you'd need $70,000 annually and Social Security will provide $35,000, you need your investments to produce $35,000. 
  • Determine how big your nest egg should be to produce your desired income: There are different ways to do this, but one of the best is to use a percentage-based rule. Experts used to believe you could withdraw 4% annually from investment accounts and not run out of money -- so to produce $35,000, you'd need $875,000. However, based on projected future returns, there's a good chance you'll run out of cash if you use the 4% rule. You may want to be more cautious and estimate you can withdraw just 3.5% per year. That would mean you'd need a nest egg of around $1 million to produce $35,000. 

This should help you get a clear idea of how much money you'll need. But if you don't want to go through this entire exercise, use a retirement income calculator or guess how big your nest egg must be by multiplying your final salary by 10 -- so if you make $70,000, you'll need $700,000. 

2. Open a tax-advantaged retirement savings account

Once you know how much money you'll need, it's time to start working on saving the necessary amount. The easiest way to do that is to invest in a tax-advantaged account that provides tax breaks for retirement investing. 

If you have a 401(k) at work, investing in your 401(k) is the simplest way to start saving for retirement. If you don't, open a traditional or Roth IRA at any brokerage institution. A traditional IRA allows you to take your tax break up front and invest with pre-tax dollars, while a Roth IRA requires you to invest with after-tax funds but lets you make withdrawals tax free.

You can read this guide to a traditional vs. Roth IRA to help you decide which kind of account is right for you. 

3. Figure out how much to save each month to hit your goal

Once you've got your account open, it's time to figure out how much you need to save each month to grow your desired nest egg. You can use a simple calculator to estimate how much to save. 

You'll need to make some assumptions about how your investments will perform. The amount you'll likely earn on investments will vary depending on how risk tolerant you are. If you're willing to invest more in stocks compared to safer investments such as bonds, you have more potential for bigger gains -- but you also take a bigger risk. 

To err on the side of caution, it's best to be conservative when you estimate your returns. If you estimate you'll earn 7% annually, your goal is to save $1 million -- and you have 30 years to do it, you'd need to save around $820 monthly. 

4. Automate your contributions to your retirement account

Now, the hard part -- investing the funds you need to hit your monthly savings goal. 

To make this process easier, automate contributions to your retirement account. Set up a transfer of funds directly from your paycheck to your 401(k) or IRA before you ever get a chance to spend the cash. Treat the contribution as a required bill that has to be paid, and pay it before you use your money. 

If you aren't sure you'll have enough cash, make a budget that prioritizes savings. Work with the numbers and cut spending on unnecessary things. If you're still coming up way short, consider doing something drastic such as downgrading to a cheaper car, getting a roommate, or taking on a side gig. 

For many people, it's hard to hit savings goals when they first start saving. Do your best to achieve it, but if you truly can't, set aside as much as you can. Then, when you get a raise, automatically increase contributions by the amount of your raise so you never get used to having the extra cash. 

5. Invest in a diversified portfolio

Finally, invest your funds so you can earn the expected returns necessary to hit your goal.

There are a number of model portfolios you can use to take the right level of risk and ensure your investments are diversified.

By investing in a wide range of different investments -- whether you pick many individual companies to buy stock in or buy several ETFs or mutual funds -- you limit potential losses and maximize the chances your investments will perform as expected. 

Now you can be on track to save for retirement

If you follow these simple steps, you can join the minority of Americans able to say they're on track for retirement.

You'll feel more secure about your future, and you'll be able to enjoy your golden years with ample cash in the bank when your time to retire arrives. 

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