Whether your dream retirement involves traveling the world or simply enjoying the comforts of home, you'll need a plan for making it come true. When you have a savings shortfall, however, that can take some of the shine off your golden years.
Consider this: 73 percent of American workers say they're saving for retirement, but 47 percent have less than $50,000 tucked away for the future.1 Participation in employer-sponsored retirement plans grew by 19 between 2011 and 2016, but the average contribution rate increased by just seven percent.2
Source: 2016 Employee Financial Wellness Survey, PwC
Among those earning between $40,000 and $59,000 annually, which encompasses the national median household income of $56,516, just over a third contribute 10 percent or more to their respective plans.2,3 The average 401(k) balance, as of 2015? Just over $96,000.4
If you've got your sights set on stashing away $1 million or more for retirement but you haven't made as much progress as you like, don't start panicking yet. There's something you can do to reach your goal: increase your savings rate.
Why Your Savings Rate Matters
When you're investing for retirement, whether it's through an employer's plan or an individual retirement account, it's tempting to focus solely on returns. The problem is that it's easy to develop a case of tunnel vision and lose sight of your larger goal. If you're constantly watching the market, you're going to get frustrated when you don't realize the kind of performance you're seeking because stocks are in a down cycle.
What you should be focused on, instead, is what you can control - and that's how much money you're funneling into your various retirement accounts. Here's an example to illustrate just how powerful your savings rate can be.
Let's assume you're 30 years old and earning $50,000 a year. You enroll in your employer's 401(k) and contribute six percent of your income annually. Your employer offers a 50 percent match up to the first six percent of your salary. If you continue saving at that same rate until age 65 and earn a seven percent annual return, your investments would be worth approximately $645,000.5
Not too shabby, but let's see how the numbers pan out if you move your savings rate up to 10 percent. Even if your salary remains the same for your entire career, that four percent hike in your savings rate would increase your total 401(k) value to more than $932,000. Bump it up to 15 percent and you'll have a cool $1.3 million waiting for you once you retire.5
Creating a larger nest egg is particularly important when you factor in how inflation can eat away at your earnings. According to a 2016 report from LIMRA, a two percent annual inflation rate could siphon away nearly $74,000 in earnings from your retirement savings over a 20-year period.6
Source: Even When Inflation Is Low, It's Higher for Retirees, LIMRA
As you can see, the effect is compounded as inflation climbs. Having more money set aside for retirement can help to cushion the blow that inflation may deal to your portfolio.
Raising Your Savings Rate
If you've got the cash to spare, accelerating your savings rate is something that's better done sooner rather than later. If, however, you need to keep more money in your paycheck because you're paying down student loan debt or saving for a down payment on a home, making a smaller shift can still have a big impact.
A relatively easy way to ratchet up your savings rate is to take advantage of step-up contributions to your employer's retirement plan, if that's an option. That way, you can increase your savings rate gradually year over year. If you typically get an annual raise, you can match your step-up contributions to that amount and essentially save more without noticing a difference in your take-home pay.
If you're able to max out the annual contributions to your 401(k), an Individual Retirement Account (IRA) offers an opportunity to save even more. Though not designed specifically for retirement, Health Savings Accounts (NYSE:HSA) are yet another tax-advantaged way to save for those expensive medical bills you may face as you get older.
The bottom line? Creating a brighter retirement outlook may be easier than you think.
1 PwC. "2016 Employee Financial Wellness Survey." April, 2016.
2 Wells Fargo. "Driving Plan Health - 2016." June, 2016.
3 U.S. Census Bureau. "Income, Poverty and Health Insurance Coverage in the United States: 2015." September 13, 2016.
4 Vanguard. "How America Saves 2016." June, 2016.
5 Bankrate. "401k Calculator." January, 2017.
6 LIMRA. "Even When Inflation Is Low, It's Higher for Retirees." April 19, 2016.