It's not easy to prepare for one's financial needs 40 years into the future, and yet a retirement plan is supposed to help workers do just that. But how can employees get into this mindset, especially as they're first starting out?
Some experts estimate that workers will need approximately $1 million to retire comfortably, with the average couple needing $315,000 for healthcare expenses alone. And while everyone's necessary nest egg will vary depending on what standard of living they wish to maintain, saving enough money to live on after 65 is a daunting task for just about every American — especially as social security funds dwindle and the cost of living continues to skyrocket.
Still, with enough foresight, guidance and discipline, retirement is possible, underlines Anthony Bunnell, head of retirement for Morgan Stanley at Work, a workplace financial solutions company. It starts with putting money away in the right account and letting it grow.
Read more: Retirement's race problem: How employers can bridge the gap
"It was Einstein that said the eighth wonder of the world is the power of compound interest," he says. "A lot of people just sock money away in a savings account and don't see the impact taxes have on dragging down that balance each year. So take advantage of tax-deferred accounts whenever possible."
A tax-deferred account, such as 401(k), is an investment account that allows Americans to postpone paying income taxes on the money there until it's withdrawn. This means savings can grow each year with the help of compound interest, given that the employee is investing the same amount each year.
"If you have $100 and it grows to $110 in a taxable account, you would get taxed on the growth of that money," says Bunnell. "In a tax-deferred account, that $10 would be compounded and $110 would grow next year."
Read more: As boomers hit retirement, is long-term care insurance a must-have benefit?
Using this concept, if that $110 earns 6% interest, it will grow to $127 the next year, despite the individual's contribution of just $10. In the long-term, contributing less than 10% of an annual income of $50,000 to a retirement account each year can equate to saving over $200,000 in 20 years, as a typical 401(k) generates an average annual return of 5% to 8% interest, depending on the market.
But to make this math work, there's some basic education employees need to learn. Bunnell and Edward Gottfried, director of product for finance management platform Betterment at Work, break down the first steps to retirement, demystifying different savings accounts workers can use to their advantage, regardless of their employer.