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.

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, 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. (See 5 Apps & Calculators for Retirement Planning to learn more.)

While both ideas are great in theory, reality can come crashing in quickly. Consider, for example, that only about half of all workers in the U.S. have access to an employer-sponsored savings plan, according to a report from the Schwartz Center for Economic Policy Analysis at the New School for Social Research in New York City. What’s more, nearly 70% of the working-age population (25-64) in the U.S. did not participate in an employer-sponsored retirement plan because their employer did not offer one, they did not choose to participate or they were not working, notes the report, entitled “Are U.S. Workers Ready for Retirement?” 

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 financial planner Shane P. Larson, CFP®, owner of S.P. Larson Financial Planning, LLC, in Seattle, Wash.

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 you do not have a high-paying job. We’ll also operate on the premise that you have a high debt burden from college loans, a car payment and rent or a mortgage, in addition to living expenses.

Set a Goal, Commit, Repeat

There are several goals that 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. For more on the types of accounts you can open, see Demystification of Bank Accounts.

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. So 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. To get started, take a look at The Beauty of Budgeting. 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, Index Fund Advisors, Inc., Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.” (Also see Understanding Compound Interest.)

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.

If you don’t know much about investing, think of it as a way to put your money to work earning more money. See Basic Investment Objectives to learn more about the topic. From a practical standpoint, you can start off by putting your money into a mutual fund, as it is one of the easiest methods of investing for beginners. Our Mutual Fund Basics Tutorial can help you learn about these investment vehicles. 

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. (See also Passively Managed vs. Actively Managed Mutual Funds: Which Is Better?To get focused, set a goal of learning more about investing and commit to that goal. Check out one or more of these tutorials to get started. Pick one and begin reading. 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 on a regular basis 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 (see Stop Paying High Mutual Fund Fees and 3 Mutual Funds with the Lowest Expense Ratios).

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. To learn more about these, see The Basics of a 401(K) Retirement Plan.

“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 Bottom Line

Retirement planning is a long-term endeavor. Think “marathon” rather than 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 to continuously bettering your position by, among other activities, reducing your debts, improving your income and increasing your education. While the early years will be a challenge, with every passing year the progress that you have made will become more evident. For more insight into retirement savings, see Retirement Tutorials.