If you're already contributing money to an IRA or 401(k) plan, you're doing your part to secure your retirement. But are you saving enough? If you're years away from leaving the workforce, it's hard to know. After all, how are you supposed to anticipate what your living expenses will look like two, three, or four decades from now?
Still, as a general rule, your goal should be to set aside enough money so you wind up retiring with 10 times your ending salary. And to do that, you may need to boost your savings rate beyond what it is today.
IRAs currently max out at $6,000 a year for workers under 50, while 401(k)s top out at $19,500. These limits will also remain in effect in 2021. Hitting the maximum contribution for either account could prove challenging unless you're a super-high earner with incredible self-control.
What if you were to push yourself to save just an extra $100 a month on top of what you're already saving? You may be surprised at what a difference it can make.
What can an extra $100 a month do for you over time?
If you were to sock away an extra $100 a month over the next 40 years, you'd have an additional $48,000 at your disposal for retirement, assuming those funds generate no return at all. That's a nice chunk of money, but it's not earth-shattering.
But here's the thing -- when you save that extra $100 a month, you also get an opportunity to invest it. That makes all the difference. Let's get back to our example. You pledge to sock away that additional $100 a month for 40 years. During that time, you invest your savings heavily in stocks. Your retirement plan generates an average annual 7% return, which is a few percentage points below the stock market's average.
All told, you'll end up about $240,000 wealthier when you factor in compounded investment growth. Now that's a big difference.
If you can't max out your retirement plan, you should, at the very least, see if you can push yourself to fork over an additional $100 on a monthly basis beyond what you're saving today. You may have to make some sacrifices to get there, whether it's dining out less frequently or taking a more modest vacation every year. If you really can't bear to give up any of the things you love, pick up a side job and use the proceeds to boost your savings rate. It doesn't matter how you eke out that extra $100 a month. If you're willing to make the effort, you'll be well-rewarded with a more robust nest egg later in life.
Remember, retirement may end up being more expensive than you'd think, especially given the way senior healthcare costs keep rising. If you want to enjoy your golden years without financial concerns holding you back, boost your savings rate today. It'll really go a long way.