THE BLOG

Reduce Your Spending and Save More. Now.

02/13/2015 05:16 pm ET | Updated Apr 15, 2015

Here's some good news. Fidelity Investments recently reported that the number of 401(k) millionaires on their books has doubled over the past two years. Specifically, they went from 34,920 accounts with million-dollar balances to, as of the end of 2014, 72,379 accounts with seven-figure balances. That's wonderful for those folks.

The bad news is that those diligent savers are the exceptions.

According to a recently released report from the Center for American Progress (CAP), millions of Americans are nowhere near having enough money for a comfortable retirement, and they will be forced to lower their standard of living, perhaps drastically, once they stop working.

The report contains this eye-opening statistic: 31 percent of Americans reported having no retirement savings at all. No 401(k) plan, no pension plan, no IRA and no bank account directly targeted for their retirement. But even for those who have saved, the report shows that, after excluding households that had saved nothing, the median account balance of near-retirement households was $104,000. That portends a meager standard of living in retirement.

The CAP report echoes a similar recent survey by financial services organization TIAA-CREF. In their study, the alarming news was that the saved-nothing-at-all segment Americans is increasing: 29 percent now versus 21 percent at the start of 2014.

Clearly, the situation is worse today than it has been for previous generations. Part of the blame rests with the fact that only 65 percent of private-sector workers had access to a retirement plan through their jobs, and alarmingly, only 48 percent participate in one when it's available.

Apparently the urge to spend now has overtaken the willingness to save for later. Blame it on more sophisticated advertising, peer pressure, a lack of financial literacy - whatever the cause, the situation is dire.

As a result of the paltry savings rate, millions of Americans will likely have to rely on others for financial support - family, charities, and government programs. This is not a good development, and it's especially serious if you are one of those savings-less folks.

What to do?

First, save, and then save some more. Seriously. And unless you know that you are well into the top 1%, that advice applies to you regardless of your age or your current job situation.

A penny saved is a penny earned may or may not have been said by Benjamin Franklin, but the message is dead on correct. Money spent on an expensive meal, a designer bag, or a car that is more for your ego than the practical side of your brain, is money that is gone forever. It's money that cannot grow for you, money that cannot compound over time.

The Magic of Compounding

As you may have heard, the power of compounding is a miraculous thing. However, it's only miraculous if you give it time to work for you. Let's look at a $10,000 nest egg earning 8% per year (that's within the long-term annualized rate of return for the U.S. stock markets). Your $10,000 becomes $20,000 in just over ten years. Ten years later that $20,000 is $40,000. And so on.

Next, if your place of employment offers a 401(k) plan, use it. And use it to its maximum, especially if it has any sort of matching component. The phrase "leaving money on the table" directly applies to people who don't take the company's money. It's free money.

If you have no retirement plan at work, open an Individual Retirement Account immediately, and fund your IRA to the maximum allowed. There are different types of IRAs -- traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. A quick internet search will tell you the pros, cons and specs of each type.

The step after that is to have a plan. Figure out where you are on the road to your retirement by making an inventory of all your assets and all your liabilities. Now, during tax season, is the perfect time to do this. Sketch out at least a rudimentary budget, one that shows how much income you earn, how much you typically spend in a month, and how much you can save.

That last number, the amount you can sock away, is the most important one for your long-term security. Look at it. Can you contribute more to your nest egg?

Once you decide on an amount for saving, stick to it. If possible, use the old technique of paying yourself first. When you sit down to pay your bills, write the first check to your nest egg.

That works.