Ways to Keep Your Nest Egg Growing

06/16/2010 11:29 am EST


Liz Pulliam Weston

Personal Finance Columnist, MSN Money

Liz Pulliam Weston, contributor to MSN Money, says Americans are behind the curve on retirement saving, but a few easy steps can help get people back on track.

Unless something changes, big chunks of Americans are going to be in a world of hurt when they can no longer work.

And it wouldn't take that much effort for most people to dramatically improve their odds of having enough money in their final years.

Fewer than one in five workers is on track to retire comfortably, according to a recent Hewitt Associates analysis of more than two million workers at 84 large US companies. Most won't be able to maintain their current standards of living, and many will have to cut spending dramatically, the study indicated.

Late retirement (at age 67) dramatically improves the chances of having enough money, thanks to more years of saving, increased Social Security benefits, and a shorter retirement period. Late retirees would have 98% of the money needed [for retirement], Hewitt found.

Working longer isn't the only solution, however. Hewitt found that most workers could accumulate almost all the money they needed simply by boosting their retirement contributions by one percentage point every year for five years.

That's right: Go from 5% to 6% this year, from 6% to 7% next year and so on. That one act would more than double the percentage of people on track to have enough (from 18% to 36%), Hewitt said, and get an additional third within spitting distance of their goals.

Here's what you need to do:

  • Make retirement savings a priority. Don't put it off in favor of other goals, even paying off debt. If you want a comfortable retirement, you need to start early and save consistently, or save aggressively if you got a late start. Hewitt says a 25-year-old employee who makes $30,000 can get there by contributing 11% of pay, assuming an employer match of 5%. If she waits until age 40 to start, she needs to save an average 17% a year.
  • Start somewhere. Anything is better than nothing, even if you can't contribute as much as you should right now.
  • Ramp up your savings over time. Commit half of any raise you get to your 401k or other retirement plan. If you aren't getting raises or want to contribute more, review your spending for places to cut.
  • Leave the money alone. Cashing in your retirement funds is foolish, and the younger you are, the worse the damage you can do. It's not just that you would lose one-quarter or one-half of the money to taxes and penalties; you would lose all the future tax-deferred returns. Figure a $1,000 withdrawal in your 30s would cost you at least $10,000 in future retirement income. In your 20s, the toll would be more than $20,000. If you want to have a decent retirement, keep your mitts off the money until you get there.

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