Building a retirement fund—which we will define as saving enough money to pay your bills when you are no longer working—can seem like a daunting challenge. Taking a practical approach that focuses on what you can do today will help you tackle the challenge one step at a time.

Key Takeaways

  • Building a successful retirement plan is a long-term process requiring commitment and discipline.
  • Your primary goals should be increasing your income and reducing your debts.
  • It’s not enough to save money; you need to invest it wisely.

Retirement Fund Theory vs. Reality

Regardless of your current age or income, the recipe for a successful retirement fund has a simple formula: Set a goal, commit to it, and repeat. One common approach encourages would-be investors to participate in their employer-sponsored retirement savings plan. Another suggests entering personal information into a retirement planning calculator in order to project how much money will be needed in order to fund retirement.

While both ideas are great in theory, reality can come crashing down quickly. Consider, for example, that about 40% of all workers in the U.S. don’t have access to an employer-sponsored savings plan, according to 2018 figures from the U.S. Bureau of Labor Statistics. That, of course, leaves 60% who do, but only 71% of workers with access to a plan choose to participate in it, and only 42% of all American workers are saving in one.

Also, the enormous dollar amounts that most people see when they use a retirement planning calculator can be disheartening. A savings goal of a million or more dollars can seem unreachable to younger workers with low incomes, high debts, and nothing in the bank. “Thinking in terms of the total amount of money you will need in retirement is daunting. But I believe if you break it down into small steps, it is much easier to swallow,” says Shane P. Larson, CFP, a senior associate financial planner for Mainspring Wealth Advisors, which has five offices in Washington state.

Given these realities, let’s start with a difficult scenario—one most of us find ourselves in early in our careers—and lay out a practical plan for building a retirement fund. Under this scenario, we’ll assume that you:

  • Do not have an employer-sponsored savings plan and a high-paying job
  • Do have a high debt burden from college loans, a car payment, and rent or a mortgage, in addition to living expenses


The number of American workers who are saving in an employer-sponsored retirement plan as of 2018.

Set a Goal, Commit, Repeat

Several goals can be set in this scenario. The first is to start saving. Even if it’s just a few dollars a week, open up a bank account and deposit the money. While a bank account isn’t the best investment vehicle in the world, it is a great way to start to make saving a habit. Remember, building a retirement fund is a long-term journey—and, as the saying goes, even a journey of a thousand miles starts with a single step.

Once you’ve set and committed to the goal of saving, the next goals are clear: increase your income and reduce your debts. Achieving the first objective will help you achieve the second one. To increase your income, you can either take a second job or get a better-paying job than the one you currently have. Although it may take time and effort to increase your income, it will help you stick to your plan if you keep in mind that this is a long-term effort. Set a goal of getting a better job (or a second job), then commit time to a dedicated job search.

Once you’ve achieved your goal, your newfound income will enable you to reduce your debts. Then you will be able to tuck more money into your retirement fund. Putting together a budget can help you with this process. It’s a great way to make sure your money is being used wisely. Remember that the earlier you start, the more time your savings have to increase through what experts call “the magic of compound interest.”

“The power of compound interest is the eighth wonder of the world. Having a long-term mindset with compound interest as your ally will allow you to turn a small, consistent savings rate into a comfortable retirement,” says Mark Hebner, founder and president of Index Fund Advisors, Inc. in Irvine, Calif., and author of Index Funds: The 12-Step Recovery Program for Active Investors.

The power of compound interest is crucial to successful retirement planning.

Don’t Just Save, Invest

Once you’ve increased your income and your savings, you should have enough money saved up to trade in your bank account for an individual retirement account (IRA). At this stage, you are transitioning from saving money to investing money.

The Internal Revenue Service (IRS) establishes the annual limit as to how much a person can contribute to an IRA. For 2020 and 2021, individuals under age 50 can save $6,000 per year in an IRA. If you're over the age of 50, you can add a catch-up contribution of $1,000 for 2020 and 2021 for a total of $7,000 per year.

You can, of course, start with a much smaller amount. An IRA is different from a regular investment account; you need to open one with a firm that handles IRAs.

If you don’t know much about investing, think of it as a way to put your money to work earning more money. From a practical standpoint, you can start by putting your money into a mutual fund, as it is one of the easiest methods of investing for beginners.

Just choose either an index fund that replicates a major U.S. stock market index, such as the S&P 500, or an actively managed fund that invests in blue-chip stocks. To get focused, set a goal of learning more about investing and commit to that goal. Start by checking out Investopedia's introduction to investing to pick up the basics and get the terminology down. Let topics that catch your attention help you to determine the next subject that you would like to learn about.

Again, this is a long-term endeavor. Don’t try to absorb everything all at once. Just start reading, commit to doing it regularly, and stick to it. As you learn more, take time to teach yourself about mutual fund fees and make sure you aren’t reducing your returns by paying more than you need to.

Get Yourself a 401(k)

Once you master the art of budgeting and start investing, you’ll probably want more money to increase both your standard of living and the amount you invest. Another job search can help you to achieve these goals. This time, look for a job that offers a 401(k) plan with an employer that matches your contributions. Invest enough to get the full company match. Over time, as you get raises and promotions, increase your contribution rate to the maximum allowable amount.

“Working for a company with a 401(k) is one thing. Working for a company that offers matching contributions is another. 401(k) matching is where you can really see your funds grow—and fast,” says David N. Waldrop, CFP, president of Bridgeview Capital Advisors, Inc., in El Dorado Hills, Calif.

The IRS has established annual contribution limits for 401(k)s. For 2020 and 2021, the maximum contribution to a 401(k)—as an employee—is $19,500. If you are over the age of 50, catch-up contributions totaling $6,500 per year for both 2020 and 2021 are also allowed.

As an example, let's say you earn $50,000 per year, and your employer is willing to match 5% of your salary as long as you also contribute a minimum of 5%. As a result, your minimum contribution would be $2,500 (5% of $50,000), and your employer would deposit $2,500 annually into your 401(k). The employer match is free money as long as you invest in yourself and save for your retirement. The annual match has the potential to increase your savings rate dramatically because the matching contributions get invested, and the interest and earnings on that money get compounded over the years along with your contributions.

The Bottom Line

Retirement planning is a long-term endeavor. Think of a marathon rather than a sprint. It will take most people a lifetime of effort to build a solid retirement fund. “Preparing for retirement is more about persistence and less about brilliance,” says Craig L. Israelsen, Ph.D., investment portfolio designer of 7Twelve Portfolio in Springville, Utah. “When thinking about getting ready for retirement, think Crock-Pot—not microwave.”

Commit to the effort and continue bettering your position by reducing your debts, improving your income, and increasing your education (among other activities). While the early years will be a challenge, with every passing year, the progress that you have made will become more evident.