If you haven’t been saving for retirement, you’re not alone. A new survey sheds light on just how much Americans struggle to stash away money for their golden years.
According to the Employee Benefit Research Institute (EBRI), one in four workers (24%) confessed they and their spouse have less than $1,000 saved for retirement. About 50% said they had saved less than $25,000.
While it’s difficult to predict exactly how much money an individual will need for retirement, it’s safe to say you’ll come up short with just $1,000. According to this simple retirement calculator, a 30-year-old making $50,000 a year will need to save around $675,000 if they want to retire at 65 and maintain their current lifestyle.
The EBRI Confidence Survey also found that 3 in 10 workers feel mentally or emotionally stressed when they start thinking about retirement. This stress leads to a lack of confidence and even worse, avoiding the topic all together.
It’s no surprise that planning for the future can cause anxiety. Even so, the sooner you take action towards building a nest egg, the better. Here are some tips to get you on the path to saving for retirement.
If your employer offers a 401(k)….
This is a no-brainer: Opt in and make monthly contributions to an employer’s 401(k) plan. This is an easy way to stash away pre-tax money for the future, and you won’t really know it’s gone because it’s deducted directly from your paycheck. In some cases, your employer will even match your contributions, usually up to 3% to 6% of your salary. For instance, your employer may match 100% of your contributions up to 4% of your salary. So, if you make $50,000 and contribute $2,000 a year to your 401(k), your employer will also contribute $2,000, which is essentially free money!
Robert Schmansky, CFP and founder of Clear Financial Advisors, says it’s important to start with the basics and read the “summary description” of your plan to make sure you know where your money is going and how you can manage it.
“This document lays out the rules for contributions and how matching works,” Schmansky told Yahoo Finance. “You really want to sit down and read this before you use the plan so you understand your options for contributions and withdrawal.”
If your employer doesn’t offer a 401(k)…
Open a Roth IRA
A Roth IRA is an individual retirement account you fund with after-tax money – and future withdrawals are tax-free. For young workers or those with a lower annual income, a Roth IRA can be a great option because you’re allowed to take out your contributions (but not the earnings) at anytime without penalty.
“It can be a second emergency account, but by putting it in a Roth IRA, it creates a mental barrier so you only dip into it when necessary,” Schmansky says.
If you have young children and are concerned with saving for money for college vs. saving for your retirement, a Roth IRA can address both issues. By using this fund, you can grow your money with interest, and spend it on anything, including education. If your child decides not to attend college you can use the money for your retirement. This may be a more desirable option than a 529 savings plan, which lets you save money for college tax-free. With a 529, you’ll get hit with tax penalties if you spend the money on something other than expenses related to education.
In 2017, you can contribute up to $5,500 to a Roth IRA, or $6,500 if you’re 50 or older, but there are income limits for those amounts. Allowed contribution amounts get lower if modified adjusted gross income is more than $186,000 for married couples filing jointly, or $118,000 for singles.
Open a traditional IRA
“If you struggle with making Roth IRA contributions because you’re paying the taxes today, you can save with an IRA and get a tax break,” says Schmansky.
A traditional IRA allows you to make contributions and defer paying taxes until you withdraw them. This option is especially enticing to someone who knows they will be in a lower tax bracket when it comes time to retrieve the money, because they’ll be taxed at a lower rate.
In 2017, the maximum annual contribution was $5,500 for a single person or head of household That number jumps up to $6,500 if you’re over 50.
Tips to save
In a 2016 survey by the Transamerica Center for Retirement Studies, 3 in 5 retirees said they had to retire later than they planned because they couldn’t afford to stop working. Additionally, 76% said they wished they would have saved more on a consistent basis. Learn from their mistakes and start addressing your financial situation now to make your life less stressful 30 or 40 years down the road.
Focusing solely on the amount of money you’ll need for retirement would stress anyone out. Instead, look at your budget and find a manageable amount of money you can set aside on a consistent basis. “Try to set aside 5% of your paycheck every month, and then increase that number by 1% every year,” says Schmansky.
If 5% is too much, start with 3% or even 2%. The goal is to put away money you won’t really miss.
Make it automatic
Most money managers, like Vanguard or TD Ameritrade, allow users to set up automatic investments for their Roth IRA and IRA accounts. If you set up a monthly deposit, you’ll barely miss the money, and your savings will start piling up before you know it.
Brittany is a reporter at Yahoo Finance.