Face it, some people have much bigger retirement savings than you. How can you remedy that and join the ranks of turbocharged savers?
Try mimicking key steps in the formula that makes those savers into "super savers," as they're nicknamed by Principal Financial Group.
The steps are practical and easy. "Mindset is the most important aspect," said Sri Reddy, senior vice president, retirement and income solutions at Principal Financial Group. "Becoming a super saver is doable because you don't have to change all of your savings habits overnight."
Retirement Savings Winners, Also-Rans
The payoff is dramatic. Twenty-two percent of U.S. adults of all ages have retirement savings of $200,000 or more, according to Northwestern Mutual. Yet 29% have less than $75,000 in retirement savings.
Which group do you think will enjoy retirement more?
A lot of those saving laggards are younger workers who have not had time to build up big balances. Other laggards are old enough and have had enough time to accumulate more retirement savings. They just haven't figured out how to save more.
Take members of Generation Z. Now, they are up to 25 years old. Last year, only 8% of them were "super savers." That's the group that Principal Financial says achieved one of two goals. Either they kicked in at least $17,550 to their 401(k) account, which was 90% of that year's 401(k) contribution cap of $19,500. Or they socked away 15% or more of their pay, including any company match.
What's the alternative to saving enough when you're young? If you don't make sure your retirement savings grow fast enough while you're still working, you'll pay for it with a lower standard of living in retirement, unless some rich uncle or the lottery comes to your rescue.
IBD'S TAKE: Once you are saving enough, make sure your retirement savings earn a top-notch rate of return by sharpening your mutual fund selection skills.
Retirement Savings: How To Step It Up
Reddy suggests four steps that are especially helpful for younger workers who want to boost their retirement savings.
- Start early. "It maximizes the power of compound earnings over time," Reddy said.
Here's a simple illustration. Suppose you save $100 per month in an IRA, where your portfolio earns 6.5% a year for 10 years. After a decade, your account will be worth just shy of $17,000, according to the compound interest calculator at the calculatorsite.com.
Now see what happens if you start five years earlier. After a total of 15 years, your balance would be $30,519. The five year head start — giving you 50% additional time — results in not just a 50% gain in money but in an 80% gain.
And after a total of 20 years, your retirement savings balance would be $49,308. So 100% extra time leads to a 191% gain in your balance.
That's the power of compounding. "The person who starts saving five years earlier has a far greater probability of success saving than someone who starts later," Reddy said.
- Build up. Even if you start saving small amounts, increase your savings by modest amounts.
Workman recommends increasing your savings rate by 1% a year until you are saving 10% to 15% of your income. "We suggest people contribute 10% every year plus whatever your employer matches" in a 401(k) plan, she said.
Suppose you're earning $70,000 a year at work and you save 3% of that. Suppose your employer diverts your savings once a month into a 401(k) account. And let's say that your investments earn 6.5% a year, compounded monthly. Your balance after one year would be $2,175.
Look what happens if you increase your rate of retirement savings by 1 percentage point a year. In the second year, your savings for those 12 months would total $2,896. In the third year, your total savings for the year would amount to $3,630.
By the eighth year, your savings rate would be 10%. Savings for that year would come to $7,247. As each year's total continues to compound, your grand total would reach $45,136.
Without the 1 percentage point boost in savings rate each year? Your total with ongoing compounding would be $22,077.
Boosting your contribution rate by 1 percentage point a year becomes easier if you apply any bonuses and pay raises toward that. And that should be very doable for many workers. This year, 92% of employers are giving pay raises. Only 67% did so in 2020, according to Payscale's 2022 Compensation Best Practices Report.
And 44% of companies plan pay hikes of 3% or better. Those pay raises are 13% bigger vs. pay raises six years ago. "Setting aside part of any pay raise you get makes it easier to save more," Reddy said. It's the best of both worlds. "Your paycheck is bigger. So is the amount you're saving for retirement."
- Make a budget. If you want to understand how much you can afford to kick in to your retirement accounts, crunch the numbers.
"Making a budget enables you to identify spending that is necessary and which spending is discretionary," Reddy said. "That helps you decide which spending you can cut so you can divert that money into retirement savings. It also helps you figure out how much extra income if any you have that you can put in savings."
How To Cut Spending
- Cut spending. One of the most effective ways to do that is by paying off credit cards that charge you a high interest rate.
Credit card interest rates average 16.77% now, according to creditcards.com. The most costly cash back cards charge 26.21% on average. If you get rid of a credit card that's charging you 26% a year, that's like having an investment that pays you 23% instead.
What additional ways can you cut spending? The four most common tactics cited by super savers are to drive an older vehicle rather than buy a new car, own a modest home, cut travel and forgo a housecleaner, according to a survey by Principal.
Additional tactics include putting off home improvement projects as well as purchases of fun new technology, clothes and takeout food.
"Save and live within your means," Reddy said. But don't make so many sacrifices for the sake of saving that you're miserable. Find a balance between retirement savings and lifestyle spending that works for you. "Don't scrimp and save every penny so you're going through life not enjoying yourself," Reddy said. "If you don't know how to spend and enjoy within your means, that's not good either."
