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Do you know how much you’ll need to be able to retire? According to a recent study, about 65% of American workers believe they will need $500,000 or more to live comfortably in retirement.(1) Knowing that, you might assume that most Americans are working on building a nest egg. But that’s not quite the story.
According to our Ramsey Research, half of Baby Boomers have less than $10,000 saved for retirement.(2) And that’s the generation that has had the longest to save! It’s no wonder that 56% of working Americans lose sleep thinking about retirement.(3) When it comes to retirement savings, most people are way behind and they know it.
If you want to have options in your golden years, most agree that you need a sizable nest egg. But let’s face it, saving for retirement is hard work, and it doesn’t happen overnight.
But here’s the great news: you’ve got two powerful tools when it comes to building your retirement savings. Curious about what they are? Let’s dig in.
Build Your Nest Egg With These Two Tools
Building a nest egg takes time and work, but it’s not complicated. All it takes is harnessing your two most powerful wealth-building tools: your income and compound growth.
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Here’s how those two strategies create a winning game plan for your retirement savings.
#1: Leverage Your Income
The first key to building a nest egg is pretty obvious: You’ve got to actually save. If you never set aside any money for your future, you won’t find it magically waiting on you the day you retire.
It’s easier said than done though, right? We get it. Setting aside part of your income for the future is tough, especially when your budget feels jam-packed as it is. That’s why it’s so important to get out of debt and have a fully-funded emergency fund before you start investing.
Getting rid of your debt frees up your budget to save for the future. And when you’ve got 3–6 months of expenses saved, you don’t have to steal from your retirement to pay for an unexpected roof leak or car repair.
How much should you save for retirement?
We recommend saving 15% of your income toward retirement. If your workplace offers a match on your 401(k) contributions, that’s the place to start!
Once you’ve invested up to the match in your 401(k), invest the remaining percentage of your retirement savings in a Roth IRA. A financial advisor can help you choose good growth stock mutual funds and keep your retirement portfolios diversified.
#2: Harness the Power of Compound Growth
When it comes to your retirement savings, don’t underestimate the power of time. The earlier you start investing, the longer your money has to grow. That’s right, we’re talking about compound growth!
Consider Jen and Amber. They both know the importance of saving for retirement, but they take two different paths to get there.
- Jen gets a jump on her retirement fund as soon as she becomes eligible to open a 401(k) account at her first job. She starts throwing $3,000 a year toward retirement at age 24. On her 35th birthday, she decides she’s saved enough and doesn’t put another penny toward retirement from then on. She has invested $33,000 of her own cash over the course of 11 years.
- Amber waits until she’s more established to start her retirement savings. By the time she’s 35, she has bought her first home and finally feels ready to focus on the future. She stockpiles $3,000 a year in her 401(k) and keeps that pace up until she turns 65. Thirty-one years of investing brings Amber’s out-of-pocket total to $93,000.
After the retirement party dust settles, Jen and Amber stack their nest eggs up against each other. Let’s assume both of their nest eggs grew at the historical average return rate of the S&P 500 over the life of the investment. Who do you think comes out on top? The results may surprise you.
Crazy as it may seem, Amber shelled out three times more money than Jen—yet retired with only half the retirement fund. How did Jen end up with nearly $1.2 million, while Amber barely broke $600,000?
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It all comes down to the power of compound interest.
Both Jen and Amber invested in growth stock mutual funds that earned the market average. But Jen gave her money more time to grow—and that made all the difference in the size of their nest eggs. With compound interest, time really does equal money!
Getting a Late Start on Your Retirement Savings?
This example is clear proof that opportunity doesn’t wait. Every day you put off saving for retirement, you lose the chance to earn free money.
But all’s not lost if you’re out of your 20s and still haven’t started investing. That’s because compound interest isn’t the only tool you’ve got. How much you invest matters just as much!
Let’s say you’re 40 years old with no retirement savings. Can you still retire a millionaire? Absolutely! You’ll just have to contribute more cash to get there. If you invested around $650 a month, you could have just over $1 million in retirement. It’s not too late to get started!
Start Building Your Nest Egg Today!
Building a nest egg isn’t rocket science. You just need to harness your most powerful tools: your income and compound growth. Of course, the sooner you start saving, the quicker you’ll reach your goal—with less money out of your pocket.
If you’re not sure what it will take to hit your retirement target, ask an investing pro you trust to show you your options. Not only will a pro help you understand your investments, but they can also help you build a retirement plan you feel good about.No wonder our Ramsey Research found that those who work with a financial advisor are nearly twice as likely as those who don’t to say they are very confident they’ll have enough money to retire.(4) An investing pro can help you plan for a brighter future, no matter your starting point.
So what are you waiting for? Kick-start your retirement savings today.
Find an investing pro!