Four things to do now to save for retirement

The statistics about retirement savings paint an uncomfortable picture of people’s finances.

A major study by the Federal Reserve showed that 60% of Americans don’t know whether they’re on track to save enough for retirement. The most-quoted rule of thumb is that folks will need at least $1 million saved before they hang up their hats and stroll into their golden years, but the average American hits retirement with roughly a quarter of that socked away.

And in the UK and across Europe, things aren’t much rosier.

The good news is, whether you have time on your side or you think it’s running out fast, there’s plenty you can do to improve your future income.

1) Start as soon as you feasibly can.

You know the old saying, the best time to invest is 30 years ago – the second-best time is now. The sooner you get going, the more time you’ll have to let compounding (reinvesting your profits to make more money) work its magic – and the less money you’ll actually need to invest to reach your goal.

Let’s take the following – very simplified – example.

Jill starts saving $200 each month into a retirement account at her first job at age 22. By the time she retires at age 66, she’ll have put away $105,600 in total but will have built a pot worth $384,822. In other words, she will have gained $279,222 (assuming a modest, 5% return net of charges).

Jack, however, has other priorities when he starts work and opts out of retirement saving until he reaches the age of 40. He knows he’s starting late, so he puts in $400 a month. By the time he reaches age 66, he’s paid in a total of $124,800 but only has $256,366 to show for it – with a less impressive gain of $131,566. In the end, Jill socked away less than Jack but still ended up with a much bigger pot.

2) Don’t forget how valuable tax relief is.

Any suggestion to start saving early will be cold comfort to those who feel they need to make up for lost time. But it’s never too late to boost your savings. While it takes years to really get the benefit of compounding on your investments, the hit of tax relief is instant.

Tax relief is often misunderstood, but its impact shouldn’t be overlooked. It effectively means that the government incentivizes you to save for your future by refunding the tax you would have paid on that money, had you used it for some other purpose.

The rules vary from country to country but, generally, the more you pay into your retirement savings, the more benefit you’ll get from the government.

3) Think about consolidating your accounts.

If you’ve built up a collection of old workplace retirement accounts that you’re no longer paying into, there may be an argument for merging them into a new one.

Keeping everything in one place will make it much easier to keep track of your retirement savings, but it could also reduce your costs. While lots of funds have fees that appear small, they can run into the thousands of dollars over time – and take a hefty chunk out of your returns over the years.

Transferring and uniting them is usually a relatively straightforward process: but you’ll need to be mindful of any exit charges that might apply and make sure you don’t lose out on any other benefits, such as guaranteed annuity rates or a lower retirement age.

4) Review your investments.

It’s also a good idea to review how your money is invested and the amount of risk you’re taking – if you’re being unnecessarily cautious, that could limit your money’s ability to grow, especially if you’ve got some time before you retire. That doesn’t mean taking a high-risk approach: you just want to find a sensible mix that works for you.

It also makes sense to check how much you are paying in fees overall – not just for your platform, but also for the funds you’re holding.

Some active funds deliver stellar performance, but many don’t beat or even match the performance of the benchmark they are linked to. And it’s hard to pinpoint those that will outperform.

You could potentially cut your costs substantially by opting for a lower-cost passive fund without taking a hit on performance.