This story is part of the CNBC Make It’s One-Minute Money Hacks series, which provides simple, straightforward tips and tricks to help you understand your finances and control your money.
Saving for retirement can be overwhelming. Experts recommend striving to achieve huge goals, such as constantly saving 15% of your paycheck to take home and getting away with a total of ten times your maximum salary by 65.
But if you can’t now devote 15% of your earnings to retirement savings, that’s not bad. The important thing is to start saving what you can, as soon as you can.
Getting started early is key because it will allow you to take advantage of compound interest, which is when you get interest for both the amount of capital and the accrued interest.
If you invest $ 100 and earn 5% interest, you will have $ 105 at the end of the year. With a simple interest, you will continue to earn 5% of that $ 100 each year.
But with compound interest, you make money based on the total amount of your account, not just your contribution. That means you’ll now earn 5% of $ 105, and so on.
Let’s see how this works with your retirement savings. Suppose you earn $ 50,000 a year. If you contribute 5% of your pre-tax salary to the year and get a 6% rate of return, roughly the market average, you save almost $ 15,000 in 5 years.
After 10 years, that $ 15,000 will grow to $ 34,000, and in 20 years, you’ll have almost $ 97,000 left.
If you want to eliminate the recommended 15% of your income, a trick is to increase your contribution each year by such a small amount that you don’t even feel it.
Suppose you increase your contributions to 6% of your salary, only 1% more. After five years, you would have more than $ 17,000 saved, a difference of $ 2,000. In ten years, you would have about $ 41,000 withdrawn and after 20, almost $ 116,000 saved.
If you continue to increase your contributions by 1% at the same time, you will increase to the recommended 15%. Most providers allow you to set up your contributions to increase automatically, so they will increase automatically each year. You can also choose to manually increase your contributions each time you get an increase.
And you may not have to contribute 15% yourself. Many employers offer a dollar-for-dollar item on your 401 (k) contributions up to a certain limit.
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