Yahoo Finance Can’t Afford a 10% Contribution to Your 401(k)? 3 Ways Experts Say You Can Get There
It hasn’t been easy lately to save for retirement. A confluence of factors — including inflation, soaring rates and the resumption of student loans — has made it particularly difficult for many Americans to put money aside for their golden years.
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What’s more, an eye-popping 61% of U.S. consumers say they live paycheck-to-paycheck, according to a LendingClub survey. Against that backdrop, it’s not surprising that not having enough money for retirement is a top financial stressor for 34% of Americans, according to the new Fidelity Investments’ study, 2024 New Year’s Financial Resolutions.
Yet, personal finance expert and New York Times bestselling author Suze Orman recently argued in a LinkedIn post that you need to contribute at least 10% to your workplace retirement plan.
“If your contribution rate is lower, you need to change it right now. Saving 3% or 5% of your salary each year is not going to build the savings you need to retire comfortably,” she wrote.
But reaching that goal is not feasible for everyone. And even knowing how to find the right percentage to contribute toward your retirement can be especially tricky when your salary and living expenses are already tight.
“When you’re barely making ends meet, saving for retirement might seem out of reach,” said Jeff Rose, CFP and founder of GoodFinancialCents. “The trick is to start very small. Even saving 1% or 2% of your income can get the ball rolling. It’s more about building the habit of saving than the amount at first. As you get used to saving a little, you can slowly increase the amount.”
Here’s a look at the three things our experts say will help you reach a 10% contribution.
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Start Small and Remember the Power of Compound Interest
Unfortunately, living paycheck to paycheck is the reality for many Americans today, thanks to the rising cost of living, stagnant wages and a lack of financial literacy, said Steve Sexton, CEO of Sexton Advisory Group.
Yet, Sexton also noted that there are usually some changes one can make in their budget to allow for contributions to retirement.
“Remember even if your contributions are small, the power of compound interest means you don’t have to set aside a lot to see a big impact down the line,” he said.
Several experts echoed the sentiment, saying that given the recent inflation and jumps in interest rates for many Americans, the percentages have to be abandoned in favor of making it from one day or week to the next.
Peter C. Earle, a senior economist with the American Institute for Economic Research, added, “At that point, it may be $20 this week, $5 the next, and so on. It’s good to put something aside, however small, even during periods of growing financial fragility — such as is being seen right now.”
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Create a Realistic Budget
According to Sexton, one of the more important things you should do is create a realistic and sustainable budget by going through all your expenses and determining what is essential versus what is nonessential.
Then, eliminate expenses that you don’t need. While this looks different for everyone, examples of nonessential spending can include gym memberships or subscriptions you don’t use, frequently dining out or late-night impulse purchases on Amazon.
“Being accurate in your assessment is important; in fact, guestimating will likely result [in] overlooking funds that can be reallocated to your retirement funds,” continued Sexton. “Also consider renegotiating certain bills, like internet, car insurance or phone bills — or switching to a more cost-effective provider. This budgetary assessment should hopefully free up some funds for you to start allocating to your retirement funds ASAP.”
Employer Match
Another important step is that if you have access to a 401(k) via your employer, determine whether your employer offers 401(k) matching.
“If so, it’s worth setting money aside for your retirement fund now that they will match – otherwise, you’re leaving free money on the table,” said Sexton, adding that the earlier you start saving for retirement, the more gains you’ll see in the long run.
How To Find the Right Percentage To Contribute When Your Salary and Living Expenses Are Already Tight?
The magic number is contributing 10% of your salary to your retirement funds, but if that’s not possible, it’s ok to start small.
In fact, Sexton said that more important than getting hung up on the right percentage to contribute more is simply getting started and building momentum.
“If 10% isn’t in the cards for you, know that even 3-5% can make an impact via compound interest,” he noted. “The key is to find a realistic and sustainable number that you can consistently keep up, and hopefully down the line, increase.”
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This article originally appeared on GOBankingRates.com: Can’t Afford a 10% Contribution to Your 401(k)? 3 Ways Experts Say You Can Get There
