If you want financial security as a senior, it won't come from Social Security alone. You have to set retirement goals and stick to them so you can build a generous nest egg. Unfortunately, sometimes that can be easier said than done.
To help you out and maximize your chances of success, we've asked three Motley Fool retirement experts for some hacks that can help you crush your goals and get on the sure path to a successful retirement. Here's what they are.
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Start saving early
Maurie Backman: Maybe your goal is to retire with $1 million. Or maybe you're hoping you'll close out your career with 10 times your ending salary banked. Either way, amassing a large sum of money takes work, and the easiest way to go about it is to start socking funds away from an early age.
Imagine you start working full-time at age 22 and you want to retire at age 67, which is full retirement age for Social Security purposes if you were born in 1960 or later. If you manage to stash just $200 a month in a retirement plan and you invest that money for an average annual 8% return, which is a reasonable assumption with a stock-heavy portfolio, then in 45 years' time, you'll end up accumulating $927,000.
Now here's the interesting part -- to end up with $927,000, you'll only need to part with $108,000 of your own money in our example. That's a $819,000 gain. Part of the reason for that gain is wise investments -- going heavy on stocks is a good choice if you're saving for a long-term goal. But another part of the reason for that gain is time. By giving yourself 45 years to capitalize on compounded returns, you're setting yourself up for a nice, secure retirement.
Of course, this is just a single example. The point, however, is to illustrate that saving from an early age could work wonders for your retirement nest egg. If your goal is to retire with enough money to lead a comfortable lifestyle, then start carving out money for your IRA or 401(k) as soon as you have a steady paycheck coming in. It'll be worth it in the long run.
Max out your employer 401(k) match
Katie Brockman: If you have access to matching 401(k) contributions through your employer, it's wise to take full advantage of them -- they can help you save more than you think.
Generally, your employer will match your 401(k) contributions up to a certain percentage of your salary. The average match is around 3.5% of an employee's wages, according to the U.S Bureau of Labor Statistics.
Say, for example, you're earning $50,000 per year and your employer will match 3.5% of that, or $1,750 per year.
Let's also say you're currently contributing $1,000 per year to your 401(k), and your employer is matching that amount. In other words, you're investing a total of $2,000 per year when you could potentially be investing $3,500 per year if you were contributing enough to earn the full match.
Assuming you're earning a modest 7% annual rate of return on your investments, here's approximately how much you'd have saved over time if you were saving $2,000 per year versus $3,500 per year:
| Number of Years | Total Savings When Investing $2,000 per Year | Total Savings When Investing $3,500 per Year |
|---|---|---|
| 5 | $12,000 | $20,000 |
| 10 | $28,000 | $48,000 |
| 20 | $82,000 | $144,000 |
| 30 | $189,000 | $331,000 |
| 40 | $400,000 | $700,000 |
Data source: Author's calculations.
In this scenario, by contributing an extra $750 per year (which comes out to around $63 per month) and earning an additional $750 per year from your employer, you can boost your lifetime savings by around $300,000.
One other thing to keep in mind is that because the amount you receive in matching contributions is typically a percentage of your salary, you'll receive more from your employer as your salary increases. By consistently maxing out your employer match as you receive raises and bonuses, your total savings will skyrocket over time.
Automate your retirement investments
Christy Bieber: Most people want to start saving early and aspire to max out their employer match. But actually following through on investing for the future is a lot harder than planning to invest.
Unfortunately, life often gets in the way and money you hoped to invest for retirement ends up spent on other things. The best way to make sure that doesn't happen is to not give yourself a choice. You want to take the effort out of investing by automating the process.
It's pretty easy to do this with a 401(k). You just sign up with your employer to have contributions taken out of your paychecks before you receive the money. But you can, and should, also do this with other retirement investing accounts such as an IRA or health savings account.
You should also aim high with your automated contributions. Make up a budget that allows you to save 10% to 15% of your income for retirement and set up automatic contributions for that amount. If it turns out you really can't live on what's left over, aim to increase your income or try other spending cuts before inching your contribution back a bit to a more comfortable level. Then work up as quickly as you can, upping your contributions a little at a time.
The reality is, most people stick with the status quo and it's a lot easier to set up your retirement account contributions once than to force yourself to contribute each month or each year. If you've made the process of investing for your future automatic, you'll never miss a contribution or fall short of your goals unless you take the affirmative step to do so.
