Often it’s the little things in life that can make the biggest difference. That’s true when it comes to saving for retirement. Putting just 1% more into a tax-advantaged retirement account like a 401(k), 403(b), or traditional IRA could make a noticeable difference in your lifestyle in retirement.
“The retirement savings mountain might appear imposing from a distance, but the climb isn’t as steep as it looks,” says Jeanne Thompson, senior vice president of retirement insights at Fidelity. “Small steps can turn into big strides.”
While 1% is a small percentage of your annual earnings, after 20 or 30 years it can make a big difference in your account balance when you retire. That’s because the longer you give your money a chance to grow, the better. And it works no matter how old you are—or how far off retirement is.
Let’s look at some examples.
*Approximation based on a 1%, 3%, or 5% increase in contribution. Continued employment from current age to retirement age, 67. We assume you are exactly your current age (in whole number of years) and will retire on your birthday at your retirement age. Number of years of savings equals retirement age minus current age. Nominal investment growth rate is assumed to be 5.5%. Hypothetical nominal salary growth rate is assumed to be 4% (2.5% inflation + 1.5% real salary growth rate). All accumulated retirement savings amounts are shown in future (nominal) dollars. Your own plan account may earn more or less than this example and income taxes will be due when you withdraw from your account. Investing in this manner does not ensure a profit or guarantee against a loss in declining markets. Investing involves risk, including the risk of loss
See your numbers.
Want to create an example like the ones shown above to see what a difference even a 1% increase can make for you? Use our interactive "See how a small change can make a BIG DIFFERENCE."
Consider small steps.
As you can see in our examples—and probably in your own too—small weekly amounts like $12, $14, and $16 can make a noticeable difference in your savings. So how do you find the money? We won’t say skip the latte if you really, really need it, but there are probably places in your spending that may be easy to cut. Are you paying for cable and cell phone services you aren’t using? Maybe you can consider negotiating a lower rate. Do you eat out a lot? Even skipping one restaurant meal could save you $16 or more. And the beauty of 401(k) contributions is that they come right out of your paycheck, so you may not even miss the spending money.
If a one-time bump-up isn’t ideal now, consider aiming to increase contributions each year. For instance, if your 401(k) lets you set automatic increases every year, consider signing up.
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Consider saving 15%.
We ran the numbers and determined that aiming to save 15% of income toward retirement annually —which includes any matching contributions an employer may make to a workplace retirement account like a 401(k) or 403(b)—can help ensure that a person will be able to live his or her current lifestyle in retirement.
Not saving that much? Don’t fret. Few people get there overnight. Think of planning for retirement as a journey. The key is to save as much as you can now and try to increase savings over time.
“Starting early, saving regularly, and increasing the amount you save as your income increases may allow you to do some of the things you have always dreamed of in retirement,” says Thompson.
Don’t have a 401(k)?
You may be self-employed or unemployed, or maybe your employer doesn’t offer a 401(k). But you can save in a tax-advantaged account like an IRA. There are several types of IRAs.
If you are already contributing to an IRA, chances are you can contribute more. The average contribution to a Fidelity IRA in 2016 was a little more than $4,000—despite the $5,500 limit for those under age 50 and the $6,500 limit for those age 50 or older. Saving $50 more a month, or $600 a year, can make a real difference.
See how you’re doing.
We made it easy to see how you are doing when it comes to saving for retirement. Answer six simple questions to get The Fidelity Retirement ScoreSM. It’s like a credit score for retirement. Whatever your score, you can take some simple, clear steps to stay on track or improve it.
Go for it.
Challenge yourself to save a little more. Whether it’s a 1%, 3%, or even 5% increase, the extra money saved today could make a big difference in helping achieve the retirement you envision. Think about it this way: Do you want to be worrying about money in retirement?
This article is also published on Fidelity Viewpoints.