Why you should prioritize saving for retirement

No matter what age you are, if you’re not currently saving for retirement, try to start today. With today’s bills demanding so much of your attention, saving for longer-term goals like retirement can seem like an impossible task. But starting to save and invest for retirement now could turn out to be the best financial decision you’ll ever make.

Even if you can manage to set aside just a few dollars per paycheck for retirement, the sooner you start, the more time your money will have to grow through the compounding of investment earnings. Compounding happens when your investment earnings attract more earnings, creating a snowball effect that makes your savings grow more rapidly. The effect gets magnified when taxes are deferred on earnings, which is what happens in a typical workplace retirement plan (such as a 401(k), 403(b) or 457 plan) or an IRA.

Meet Marco and Kris. They each save $45,000 in their 401(k) over 20 years: $1,500 annually in years 1 through 10 and $3,000 annually in years 11 through 20. Marco contributes between ages 45 and 65. Kris contributes between 25 and 45; she then stops contributing but leaves her savings invested.

Here’s how much of a nest egg Marco and Kris would each accumulate by age 65, assuming they earn a constant average annual return of 6%. Both scenarios assume that contributions to savings are made at the end of each year and that no taxes are withheld from investment earnings.

	Total cash outlay	Accumulated savings at 65
Marco contributes between 45 and 65	$45,000	$75,000
Kris contributes between 25 and 45 and then stops but leaves her savings invested	$45,000	$240,000

Kris ends up with $165,000 more savings than Marco. The reason: Her money gets 20 additional years of compounded growth. Getting an earlier start on saving and investing pays off significantly for Kris.

The numbers for Kris and Marco don’t account for 401(k) plan matching contributions from their respective employers.

How to make retirement savings a habit

• Start with your workplace retirement plan. You can “pay yourself first” by saving through automatic contributions taken directly from your pay each payroll period and deposited into your retirement plan account.
• If your employer matches a percentage of your contributions to your retirement plan, try to contribute at least enough to get the full match. Otherwise, you’re leaving free money on the table.
• Consider signing up for auto-escalation if your plan offers this feature. Auto-escalation lets you authorize your employer to increase your plan contribution rate automatically each year by a set increment, typically 1%. You may hardly notice the impact on your day-to-day finances.
• Plan to increase your plan contribution rate every time you get a raise.
• Review your monthly bills to identify expenses that could be reduced or eliminated to free up money for retirement savings. A household budget can serve as a blueprint for balancing competing needs to make ends meet today and build retirement security for tomorrow.
• If you get a large tax refund, you can reduce your withholding by submitting a newly completed W-4 form to your HR department. Less withholding could mean more money for retirement savings.
• Once you’re taking full advantage of an employer match, think about contributing as much additional pay as you can to your retirement plan, up to the annual limit. You can also explore using a traditional or Roth IRA to supplement your plan savings.

EY Navigate™ can help

Your EY Navigate website and app feature many resources to help you with budgeting or other measures that will enable you to prioritize saving for retirement. For more personalized guidance, call your EY Navigate financial planner.