One of the most common questions people have about getting their finances in order is how to possibly save enough for retirement when the numbers are so overwhelming. Life is expensive, and putting away 10 percent of your salary per year seems painful at best and impossible at worst.
But it doesn’t have to be that way. Instead of fretting over the 10 percent rule, think of it this way: You can start small and increase your savings by one percent each year. Do that, and you’ll still have a decently sized nest egg by the time you’re ready to retire.
Ten percent is scary. One percent is manageable. It’s enough to make a difference over time, but small enough that you won’t feel the sting too much year-to-year, assuming you stick to the plan.
Here’s how it breaks down, as detailed by Andrea Coombes at NerdWallet.
Let’s say you start by investing six percent of your salary in a retirement fund when you’re 22 (yes, it might hurt, but you have to make some sacrifices) and earning $40,000 per year. If you continued to put away that percentage over the ensuing decades, you’d have just over half a million dollars stashed by the time you’re 67. But if you increase it by one percent each year, you’ll end up with $1.4 million, assuming six percent annual returns and you stop increasing your savings rate once you hit 20 percent. And that’s not counting salary increases, which you’ll presumably receive, or an employer match.
That’s a big difference, and you’ll only experience a difference of one percent each year. (Interestingly, this piece from the Wall Street Journal suggests you might not even need to increase all the way to 20 percent. “If contributions to 401(k) plans start at six percent and rise to 15 percent of pay over time, middle-income employees could reach nine times final pay in savings by retirement.”)
If you’re older than that and haven’t started saving yet, well, it’s not too late. Yes, it will be a bigger commitment—you’ll need to start at a higher savings rate to make up for lost time, say at 10, 12 or 15 percent instead of six percent. But once you’re comfortable, increase your savings rate by one percent. If you haven’t started at all, put aside one percent of your salary this month. Increase it to two percent next month. Build it slowly, and you’ll get to where you want to be.
