In recent weeks, a couple of surveys have probed how Americans are faring in their efforts to save for retirement. One of the data points that jumps out reveals how Americans are struggling to save at a time when inflation rates are above average.
A survey by the American Association of Retired Persons (AARP) found that 70% of Americans are worried about prices rising faster than their income. Additionally, more Americans are using more debt to make ends meet and carrying higher credit-card balances.
The recent Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI) said the number-one worry, with 83% either concerned or very concerned, is the increasing cost of living making it harder to save for retirement.
If you’re paying more to live now, how can you save money for later? That is a huge challenge, but here are two simple but effective retirement hacks that could help solve that problem.
1. Pay yourself
You have to prioritize paying for housing, college, daycare, utilities, food, healthcare, and entertainment, among other expenses, or you can’t live your life. However, just as you carve out funds to pay for those things, you can prioritize paying yourself — even if it’s only $25 per week or $100 a month.
Make it a priority to set a certain amount aside regularly for retirement. That might mean forgoing that cup of coffee or bagel on the way to work, getting rid of a streaming service or subscription you never use, or cutting back on some other small expenses every week. It may not sound like much, but if you opened an IRA or put that into a relatively safe investment, like an exchange-traded fund that tracks the S&P 500, you would be surprised at how much you accumulate over time.
Consider this. If you are 40 years old with 25 years left before retirement and you invested $100 per month in an S&P 500 ETF, you would have about $123,000 by age 65. That’s based on a 10% annual rate of return, the historical average of the S&P 500, and no initial investment. It takes discipline and patience, but it can be done without too much disruption by making it a priority to pay yourself.
2. Get your full company match
You might be surprised at how many people don’t get all the free money they could have coming to them in their employer-sponsored plan or 401(k). A survey conducted by CNBC last fall found that some 40% of workers who have access to a 401(k) plan at work don’t contribute at all, while only one-quarter contribute enough to get the full company match. That is just leaving free money on the table.
Recent analysis shows that the average company has a match of between 4% and 6%, meaning they will give you up to that percentage of your pay per year toward retirement, but only if you contribute at least that much yourself. Thus, if the policy is a 4% match, they will give you 4% of your salary toward your plan if you contribute at least 4% of your pay.
Consider the difference over time of not getting the full match. If you are age 40 and make $50,000 per year and contribute just 2% if your salary to your 401(k), you would have about $316,000 at retirement at age 65. This is assuming a 10% annual return from your plan and a 2% annual raise.
If you just bumped that up to a 4% contribution, you would get the full 4% company match, or about $32,000 more from your company over time invested in your account beyond the money that you put in. In addition to the power of compounding, you would have about $632,000 at age 65 — twice as much as you would have if you only contributed 2% of your annual pay.
The difference between contributing 2% and 4% of your $50,000 salary per year is about $1,000 per year. This comes out to about $19 per week or $76 per month more that would come out of your paycheck to go into your 401(k). It is probably not something you would even notice, and you would learn to live with this short-term loss. In fact, when you get a raise, you won’t even notice it at all, but over the long run, you will certainly notice it in savings.
If you don’t have access to a company retirement plan or 401(k), saving becomes more difficult, but there is legislation in the works that could help on that front. That aside, we’ll do a separate story in the near future on saving for retirement without a 401(k) plan.
