Most people aren't building enough wealth to meet their retirement goals, but there's a way to fix that issue. Professional financial planners know the savings benchmarks that typically translate to success, so you can check your progress against those guidelines. If you're not on track to have 6x your annual income in a retirement account, consider these strategies to catch back up.
1. Set goals
There's no reliable way to build assets without saving your income, and setting a measurable goal is an important step to meeting your saving requirement. Most financial planners recommend that you retain at least 15% of your annual household income, and some professionals recommend as high as 20%.
That's not something that every family can achieve, but it's nearly impossible to build a large enough retirement account without approaching those levels. If you're already behind, then you'll need to save an even higher percentage of your income to get back on track.
Image source: Getty Images.
There are a number of tactics that you can explore to improve your savings rate, but the first step is creating a plan. If you have a target in mind, you can create a budget, identify opportunities to cut costs, and periodically measure your progress toward that goal. A quantified, systematic approach is more likely to succeed than a vague, disorganized plan.
2. Track your progress
It's also important to keep score. Once you've committed to a budget, review your progress on a monthly and quarterly basis. Financial plans rarely pan out the exact way that people anticipate, and there's an element of trial and error inherent in the process.
Periodically analyze your retirement accounts to determine how much cash has been contributed relative to your income. If there's not enough flowing into your accounts, then you have a chance to assess the portions of your plan that aren't working and adjust accordingly. If you're not inclined to set up your own spreadsheets, there are a number of budget tracking apps provided by banks and third parties that can be really helpful for tracking your personal cash flows.
3. Get your full 401(k) match
Many employee benefit plans will match your contributions to a retirement account, up to a certain limit. This is a great way to increase your savings rate. If you're not already taking full advantage of this perk, it might be wise to invest every dollar from your paycheck that your employer is willing to provide.
The amount that your employer will match and the proportion of every dollar matched vary from plan. Make sure that you're familiar with the specifics of your 401(k) benefits to set expectations.
4. Automate saving
Some people benefit enormously from a system that automates saving and enforces discipline. Most people's paychecks go straight to their checking accounts so they can pay bills and provide for their households. If there's any cash leftover at the end of the month, these funds might get moved over to a savings or investment account. That's a bit backward from a planning perspective. Checking accounts are designed to make spending easier, and many people sabotage themselves by mixing their savings with their spending dollars in a single account.
Consider setting up a system where a small portion of every paycheck goes straight to a separate bank account earmarked for savings that you'll only access in case of emergencies. If your employer allows you to split direct deposit into multiple accounts, then it's easy to just send 5% of each paycheck to savings. Otherwise, you have to commit to doing this manually each month.
Even a small change here can drastically change your savings rate. It removes any decision making, stress, or remorse over spending from your checking account, because you'll know that you have your bases covered up front. As that cash accumulates over time, you can invest those assets with an IRA or brokerage account to deliver growth.
5. Eliminate high-interest debt
Interest payments are one of the biggest threats to savings rates for Americans. Secured loans, such as mortgages and auto loans, typically don't carry high enough interest rates to discourage investing. However, credit cards should almost always be prioritized over investments.
Long-term investment returns are unlikely to offset the 15% to 23% interest commonly charged on credit card balances. For every dollar that you're putting into an investment account, you're likely losing money by not eliminating any rolling balances. Sometimes it's OK to take one step back in order to take two steps forward.
Keeping a healthy household balance sheet will maximize your savings rate, allowing you to invest more for retirement.
6. Take advantage of catch-up contributions
The IRS places contribution limits on IRAs, Roths, 401(k)s, and other retirement investment accounts. If you're 50 or older, there are exceptions that allow you to contribute even more each year. Most employer-sponsored accounts allow an extra $7,500 of annual contributions, while IRAs permit an additional $1,000. The IRA catch-up applies to each spouse in eligible households.
Catch-up provisions don't necessarily make it easier to save, but they can reduce your taxable income for tax-deferred accounts, such as a traditional 401(k) or IRA. That keeps a portion of your earnings away from the government and keeps it under your control to invest for returns.
