The Typical 401(k) Saver Isn't Contributing Nearly Enough. Are You?

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Saving for retirement doesn't come easily for most people. It means making a major sacrifice now for an event that won't happen for years or even decades, and that requires a tremendous amount of discipline. Perhaps that's why typical 401(k) balances are appallingly low: The median 401(k) balance for 2016 was $24,713, according to a recent Vanguard study.

Having such a low balance in your retirement savings accounts likely means dooming yourself to a cash-strapped retirement -- but it may not too late to turn things around, even if you normally struggle to save money.

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Retirement is expensive

People are living longer on average, which is great -- except when it comes to your finances. Because people are living longer, that means their retirement savings have to last longer. The average cost of retirement is $738,400, according to a Merrill Lynch study.

Healthcare expenses make up a big portion of that $738,400. Yes, retirees have access to Medicare coverage, but that won't be enough to pay all your medical expenses. For example, Medicare won't even cover most long-term care expenses, which can easily become the lion's share of your healthcare expenses during retirement. That same Merrill Lynch study found that having $259,000 saved for medical expenses gives a retired married couple a 90% shot at covering all their medical bills.

How the heck do I save that much?

If, like many Americans, you're living paycheck to paycheck, then saving hundreds of thousands of dollars for retirement may seem like a pipe dream. Fortunately, retirement savers have two big advantages going for them: the years they have left to save money and the ample returns that the right investments can generate over that time frame.

You've probably heard more than once that the sooner you start saving for retirement, the better. That's partly because spreading your contributions out over many years means you won't have to save as much in any given year. The math is simple: If you want to save $300,000, doing it over 10 years requires saving $30,000 per year, but doing it over 40 years only takes saving $7,500 per year -- a much more achievable goal.

The other thing early savers have going for them is the miracle of compound interest. Large-company stocks have historically produced an average annual return of about 10%. Let's say you have $10,000 invested in stocks and you earn that average of 10% per year. After 10 years, your $10,000 will have turned into $25,937, more than doubling your money without any more contributions from you. After 20 years, that $10,000 will have become $67,275. And after 30 years, $10,000 invested in stocks would turn into $174,494.

As you can see, you don't actually need to save $738,400 to have that much money by the time you retire. You just need to save enough to generate the returns that will get you to that total.

Finding ways to save for retirement

Carving out room in your budget for retirement savings means either increasing your income or decreasing your expenses. The easiest way to start is to go over all your monthly expenses and find ones you can get rid of painlessly, saving yourself a few dollars every month that can then go into your IRA or 401(k). Going through this process for all your expenses can save you a remarkable amount of money without depriving you of a thing.

If that's not enough to free up sufficient retirement savings, you may need to make some short-term sacrifices like skipping some nights on the town or downgrading your expensive cable package. You can also try to boost your income by asking your boss for a raise, picking up a part-time job, or monetizing a hobby.

It's important to make sure that whatever money you free up goes into your retirement savings accounts immediately. Otherwise, all that extra money will likely just disappear into a whole new set of expenses. You can protect your retirement contributions by setting up an automatic transfer to sweep the money into your IRA the second you get paid. If you have a 401(k), paying yourself first is even easier. Just ask your HR department to set your contribution level to the appropriate amount, and the money will come out of your wages before you even get your check.

Whether you're saving for retirement for the first time or trying to save more, the trick is to start small. Bump your contribution level by just 1% or 2% (for 401(k) owners) or set aside a few extra dollars per month (for IRA owners). After a month or two, increase your contributions by another little bit. Before you know it, your retirement savings will have reached levels you'd never have thought possible -- and without destroying your budget or reducing you to a monk-like lifestyle. At the very least, you'll have a lot less to worry about, because you'll be doing everything you can to build a nest egg that will last you all through retirement.

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