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The state of retirement savings among workers in the United States is sobering. According to a research study by Northwestern Mutual, 21% of Americans have no retirement savings at all and 33% of Baby Boomers have $25,000 or less saved.

How much will I need to retire comfortably?

The answer to this question differs greatly between individuals. There are numerous retirement calculators available online (a few examples: AARP, T. Rowe Price, CNN, Charles Schwab) for you to estimate how much retirement savings you may need, but for a complete analysis of your needs consult a financial advisor.

That said, there are some general principles you may want to consider to arrive at an estimate for your retirement nest egg. The most common rule of thumb is that you will need about 80% of your annual pre-retirement income per year to fund all of your needs after leaving the workforce. However, there is a range depending on your income. Once again these are general guidelines, and your specific needs could be lower or higher depending on how you envision spending your retirement years.

Source: Fidelity Financial Solutions

For example, an individual earning $50,000 in income prior to retirement might expect to need $40,000 annually in retirement if they were to abide by the 80% income replacement ratio. To fund a retirement of 25 years, that individual would need a nest egg of at least $1 million. That is a substantial contrast to the current state of retirement savings among Americans.

How to build a nest egg for a comfortable retirement

Reaching $1 million in savings may seem impossible, but with the right strategy and commitment it may be an achievable goal.

  1. >Budget and save

Nothing makes saving for the future more difficult than spending an entire paycheck on the present. If you don’t know where your money is going, it can be difficult to set enough aside to build a nest egg.

Create a monthly budget covering both your necessities and non-essentials to get a true picture of all your expenses. Then decide what you can minimize in order to free up money for your retirement accounts. Budgeting doesn’t mean frugality, but it may mean cutting some things to save more for investing and unplanned expenses.

Many people increase their lifestyle when their pay increases. Instead of spending your entire raise on “keeping up with the Joneses”, look at it as an extra opportunity to save more for retirement – if you’re diligently investing 15% of your income (more on that below), that means 15% of pay increases would be invested as well.

  1. Abide by the 15% Rule

Another common rule of thumb is that workers should be saving 15% of their pretax income annually from age 25 to 67 in order to retire with a large enough nest egg. The key is to start as early as you can in order to let compounding work in your favor for as long as possible. For someone starting to save at age 30 or 35, their annual savings rate jumps to 18% and 23%, respectively. These are ideal scenarios but often life’s unforeseen financial burdens get in the way of saving at least 15% per year, that’s why it’s important to save more when you can to help bridge the gap of more difficult years.

  1. Contribute to 401(k)s and IRAs

Most Americans opt to invest their retirement savings into employer-sponsored 401(k) plans, individual retirement accounts (IRAs) or both. 401(k)s are offered by employers and funded by pre-tax contributions taken out of your paycheck, decreasing your taxable income; earnings accrue on a deferred tax basis, meaning you don’t have to pay taxes until you withdraw the funds in retirement.

IRAs are retirement accounts set up by individuals and can be funded with eligible income. With traditional IRAs, contributions are tax deductible and earnings are tax-deferred until the time of withdrawal.

There are also variations on these two investment accounts that offer different tax benefits. With Roth 401(k)s and Roth IRAs, contributions are made with money on which taxes have been paid and earnings can grow tax-free, meaning you will not pay taxes on your withdrawals in retirement.

  1. Set up automatic contributions for your plans

For many, it’s harder to miss money from your account when it is automatically deducted from your paycheck. Also, consider setting up automatic annual increases to your savings percentage. An increase of 1% per year is something you may not feel, but over the long run it may make a significant difference in the size of your nest egg.

  1. Take advantage of employer matching

The majority of employers offering 401(k) plans offer a company match for contributions up to a certain percentage. Contribute enough to your 401(k) to maximize that amount, it’s like “free money” being offered by your employer. These matches can help you get to the 15% recommended annual savings. For example, if your employer offers a 5% dollar-per-dollar match, that means you will have to contribute just 10% of your income to meet the 15% rule.

  1. Play catch-up

When life doesn’t go according to plan and your retirement savings are a bit lack-luster, you may want to buckle down and play catch-up to make up for lost time. This can come down to increasing contributions to your retirement accounts. After age 50 your maximum contributions increase for both 401(k)s and IRAs (traditional and Roth). For 2022, the contribution limit for 401(k)s is $27,000 ($20,500 base + $6,500 of allowed catch-up); for IRAs it’s $7,000 ($6,000 base + $1,000 of allowed catch-up).

  1. Max out your contributions

If you reach a point where you have extra money to invest, your first go-to may be maximizing the contributions to your 401(k) or IRA. See contribution limits above.

  1. Adjust your investments

Ideal and recommended asset allocations vary by an investor’s age and time left until retirement – the younger you are, the more risk your portfolio can potentially tolerate. Audit your investments at least once a year to make sure your mix of stocks, bonds, alternatives and cash make sense for your goals and risk tolerance.

For those who might feel intimidated by the prospect of choosing investments and allocating correctly, many retirement plan administrators offer the option of target date funds. These funds provide a mix of investments based on your expected retirement date and automatically adjust allocations with time (from more risk to less). Similarly, target risk funds allow you to choose the level of risk you feel comfortable with and fund managers allocate across assets accordingly. As always, consulting with a financial advisor can help you balance your portfolio to suit your individual needs.

To Wrap It Up

If you have one takeaway, let it be that building a nest egg that will provide for your retirement goals may not be impossible or all that complicated. It comes down to saving enough for long enough. The sooner you start saving the faster you have the potential to build your nest egg with less money out of your pocket.

The guidelines laid out here are generalized and you should always work with an investment professional to help you create your own retirement plan that you feel confident in.

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