When you're juggling multiple financial priorities, saving for retirement is usually an afterthought. After all, if you don't pay your mortgage, you're in for a heap of trouble. But if you put off saving for retirement, you won't see any immediate consequences.
Although the world won't come crashing down if you don't save for retirement right now, you will feel the pain as you get older. Roughly half of baby boomers don't have anything saved for retirement, according to a recent report from the Insured Retirement Institute, and when asked what age they plan to retire, a third of boomers said they expect to postpone retirement until past age 70 -- or possibly never retire at all.
The closer you get to retirement age, the harder it is to catch up on your savings. Depending on how much you need to get by every month in retirement, you could need upwards of $1 million to last the rest of your life. Unless you win the lottery, it's nearly impossible to save that much in a relatively short period of time.
While saving for the future isn't easy, there is a simple trick that can help you save more: Build retirement contributions into your budget.
Keeping retirement top of mind
It's easy to shove retirement to the bottom of your financial priority list, especially if you don't have much to save. You tell yourself you'll make up for it when you get that raise or pay off your car loan, but let's face it: There will always be hurdles, and if you don't start saving now, there's a chance you never will.
But if you prioritize saving for retirement just as you do your mortgage payments, electric bill, car loans, etc., you're forcing yourself to save at least a little each month. Don't think of retirement saving as something you'll do if you have spare cash at the end of the month. Instead, think of it as a bill that absolutely has to be paid every single month. You may need to cut back in other areas to find money to put toward retirement, but it will be worth the extra effort.
Because of compound interest, it's much easier to see significant gains by saving a little at a time earlier on than waiting a few years (or decades) and having to save loads more to catch up.
For example, say you're 30 years old with nothing saved for retirement, but you just started saving $150 per month. If you're earning a 7% annual rate of return on your investments, you'd have roughly $250,000 saved by age 65. However, if you'd waited until age 40 to begin saving, you'd need to more than double your monthly savings to accumulate that same amount by age 65.
How to build retirement into your budget
It's one thing to know you have to budget for retirement saving, but it's another to actually do it. If you have a 401(k) through your employer, often the easiest way to force yourself to save more is to set up automatic transfers straight from your paycheck. When the money never reaches your bank account, it may not sting quite so much to set it aside for retirement.
Even if you don't have a 401(k), many other types of retirement accounts allow automatic transfers on a weekly or monthly basis. If saving $100 per month sounds daunting, break it down to a more manageable $25 per week. This "set it and forget it" approach can work wonders, as you won't need to actively remember to put money toward retirement on a regular basis.
With automatic deposits, you also won't have the option to stop saving when you don't feel like it. (Or, at least, it will take a little bit of effort to reconfigure the transfer settings within your retirement account.) If you're manually transferring money to your retirement fund, it's easy to skip a month if you're short on cash or find something else you'd rather spend your money on. With automatic transfers, you're forcing yourself to set that money aside for retirement whether you want to or not. It may be painful in the short term, but you'll reap the rewards later.
When you save a set amount every month, it's also easier to see how your savings will likely stack up over time. Play around with a compound interest calculator to see how much you can accumulate over the years if you were to adjust your savings each month. Of course, no calculator is foolproof, so these potential future earnings are simply estimates. But they can give you a ballpark idea of how far a little extra money every month can go.
If you can't save much now, it's still better to save what you can and make cuts where possible. Start with a solid foundation by creating a thorough budget of all your monthly expenses, then see if there are any areas where you're overspending. If so, trim the fat and allocate that money to the retirement category of your budget.
Saving for retirement is a chore, but when it becomes part of your financial lifestyle, it's not quite so challenging. Start thinking about retirement saving as simply another expense you have to cover every month, and you'll thank yourself later.