Saving for retirement can be challenging, and if you're falling behind, you're not alone. As of 2020, the median 401(k) account balance is around $25,000, according to a report from Vanguard.
If money is tight, it can be tough to catch up on your retirement savings. However, there are ways to get your savings back on track even if you can't afford to save much. Here are three strategies that can help you save more with little to no effort.
1. Take advantage of employer matching contributions
Employer matching contributions are essentially free money. You simply save in your 401(k), and your employer will match those savings up to a certain percentage of your salary. If you're not saving enough to earn the full match, you're leaving free money on the table.
Sometimes boosting your own savings slightly can have an enormous impact on your overall savings. Say, for example, you're earning $50,000 per year and your employer will match your contributions up to 3% of your salary, or $1,500 per year.
Assuming you're earning an 8% annual rate of return on your investments, here's roughly what your total savings would look like if you were saving $1,000 per year (and earning a $1,000 match) versus saving $1,500 per year (and earning the full $1,500 match).
|Number of Years||Total Savings When Contributing $1,000 per Year||Total Savings When Contributing $1,500 per Year|
In other words, boosting your savings by $500 per year (or just $42 per month) and earning an extra $500 per year from your employer can result in an extra $258,000 over the course of your career.
2. Set up automatic contributions
With automatic contributions, you're saving a set amount of money each week or month. The advantage of this strategy is that you never need to remember to save, and you're able to save consistently without even thinking about it.
Consistency is key when saving for retirement, and it's sometimes more important than how much you're able to save. Saving $100 per month will amount to more than saving $1,000 once a year, for instance, even if it feels like you're not saving as much.
If you're investing in a 401(k), you may be able to transfer a portion of each paycheck directly to your retirement account. This can make it even easier to save, because when the money doesn't reach your bank account in the first place, you can't spend it before you save it. If you're saving in an IRA, you can set up automatic contributions from your bank account to your retirement fund on the schedule you choose.
3. Make sure you're investing aggressively enough
Finding money to save for retirement is only half the battle. It's equally important to make sure your investments are working hard enough for you.
If you're investing too conservatively, your money won't grow as much. Bonds and other conservative investments do carry less risk than stocks, but it will be significantly harder to reach your savings goals.
For example, say you have a goal of saving $500,000 by retirement age, and you have 30 years left to save. If you were to invest more aggressively earning a 10% annual return on your investments, you'd need to save just over $250 per month. But if you were to invest conservatively only earning a 5% annual return, you'd need to save around $650 per month to reach your goal.
This isn't to say that you should throw your life savings behind risky investments. There are still ways to invest aggressively and limit your risk, such as investing in index funds. By making sure at least a portion of your portfolio is allocated toward stocks, you can watch your savings grow faster.
It's not easy saving for retirement, but there are steps you can take to make the most of your money. With these three strategies, you can give your savings a boost and become better prepared for retirement.