If you haven’t started putting away money for your nest egg yet, you’re not alone. According to a 2014 report from the Employee Benefit Research Institute, nearly 40% of workers have less than $1,000 saved for retirement.
Getting your savings plan on track can seem daunting, especially if you can’t afford to set aside a lot of cash at once.
Before you’re tempted to just forget about saving at all, you shouldn’t underestimate the power of small steps. Even if $100 a month is all you’re able to save, you might be surprised at how it adds up in the long run if you know where to put it.
Start with your employer’s retirement plan
If you’re eligible to participate in a 401(k) at work you’re essentially passing up the chance to score some free money if you’re not contributing to the plan. Most employers offer a company match on every dollar you save, up to a certain amount. For example, if your employer matches 50 cents for each dollar you put in, contributing $100 a month would add up to an extra $600 in savings annually.
Running the numbers can give you an idea of just how that seemingly small amount is worth. If you start saving $100 a month at the age of 35 and you keep saving that amount for the next 30 years, you’d have around $250,000 assuming a 7% rate of growth. If your employer matches 50 percent of your contributions, your balance swells to nearly $360,000. Not too shabby for what’s roughly the equivalent of a couple of lunches out each week.
Aside from cashing in on the employer match, you’re also generating some tax benefits by saving in your 401(k). If you have your $100 monthly contribution deducted directly from your pre-tax earnings, you’re effectively reducing the amount of your income that’s subject to tax. Depending on what tax bracket you normally fall into and how your deductions add up, deferring that little bit of money each month could reduce your tax bill or result in a larger refund.
Open an IRA
If your employer doesn’t offer a retirement plan, that doesn’t mean you don’t have any options for saving. An Individual Retirement Account or IRA can fill the gap and you’ll still be able to take advantage of some tax breaks.
A traditional IRA offers the tax benefit up front, in the form of a deduction when you file. As long as you (and your spouse if you’re married) are not covered by a plan at work, you can deduct the full amount you save, regardless of how much money you make. If you’re married but your spouse is covered by an employer’s plan, the full deduction is phased out when your combined gross adjusted income hits $183,000.