Around 55% of Americans say they're behind on saving for retirement, a recent Bankrate survey found.
In many ways, that makes sense. A comfortable retirement can seem like a hopeless goal when you look at commonly recommended savings guidelines. Financial firm Fidelity recommends saving at least the equivalent of your salary by 30, three times your salary by 40, six times by 50, eight times by 60 and 10 times by 67.
But many Americans aren't meeting those milestones. Those between 25 and 34 have median 401(k) balances of just over $14,000, per a report by investment firm Vanguard.
That number doesn't include other types of investments or cash savings, but it's still nowhere near Fidelity's recommendation for people in their thirties. Those earning $15 an hour would need roughly $30,000 to meet the recommended goal.
If you're behind, it's OK. Here's why the stress of seemingly falling short doesn't have to be overwhelming, according to financial planners.
Why retirement guidelines don't apply to everyone, especially younger people
While a rule of thumb for savings goals can be helpful, it's not a one-size-fits-all plan for every type of saver, especially those just getting started.
There are many understandable reasons why someone may fall behind on saving for retirement, such as those still in school for a profession that will eventually pay well or those who only recently started their career.
While many experts recommend socking away 10% to 15% of your income for retirement throughout your career, it may be easier to catch up later since most people tend to earn 50% more in their 40s, compared with their early 20s. For some, inheritance can provide a cushion too.
"Someone who's not on track with savings can catch up later on," says Beata Dragovics, a certified financial planner in Boston. She's had clients who didn't start seriously saving until their 40s who are now on track to comfortably retire.
Of course, the closer you are to retirement, the more you'll have to save each month to catch up since you'll have less time to grow your investments.
That's why you should still try to save what you can while you're young, even if it's a small amount, says Jeremy Finger, a CFP in Myrtle Beach, South Carolina.
"Every little bit helps, especially if you have years of compound interest working for you," he says. "If you can't save 20%, save 10%. Can't save 10%? Save 5%."
And as your income grows, it's important to avoid letting "lifestyle creep" get ahead of savings, as people tend to spend more money as they earn more money, says Finger.
How to get your savings back on track
If you want to catch up on saving for retirement, you'll first need a well-defined goal. This would answer questions like:
- When do you expect to retire?
- What will your yearly expenses be when you retire?
- How much money will you need to retire comfortably?
To get a basic idea of how much you need, a retirement savings calculator is a good place to start. But of course, not all expenses are alike, and everyone has their own idea of what a comfortable retirement means.
This is why consulting with a financial planner can help, since they'll work with you to establish a retirement goal or refine the one you have. It's possible you'll need to save more than you think, or even push back retirement by a few years, but at least you'll have a clear idea of what your retirement will look like.
Financial planners can also help you choose a retirement account that will maximize your savings. If your employer offers it, one smart option is a tax-sheltered 401(k) plan with employer matching, which is when your employer matches your contributions up to a certain amount. It's basically free money.
If you don't have a 401(k), you can go with an individual retirement account (IRA), which can also help grow your money tax-free until you withdraw it later in life.
Another option is a Roth account, either an IRA or a 401(k). These accounts use post-tax dollars, so you aren't charged taxes when you withdraw the money later. They are usually recommended for people who expect to be in a lower tax bracket now than when they retire. Many people choose both Roth and non-Roth accounts.
Keep in mind that both IRAs and 401(k) plans come with annual contribution limits, while Roth IRAs also have income limits. These are important to consider when deciding which accounts may be right for you.
Whatever you go with, Dragovics says to "save as much as possible," especially in workplace retirement accounts that offer employer matching contributions. Since life is full of unexpected expenses, you can never have too much money put away for retirement, she says.
And if you can, Dragovics suggests trying to increase your savings every year, even if just by 1%.
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