1 in 3 Retired Americans Has Less Money Than What They Need. Do This to Avoid That Fate

There are certain misconceptions about retirement that tend to lead people to struggle financially. One is that it's possible to retire and thrive on Social Security benefits alone. In reality, those benefits only replace about 40% of the typical earner's pre-retirement wages. And while many people do find that their expenses drop during retirement, they don't necessarily drop by 60%.

And speaking of expenses, another big retirement myth is that you can live cheaply as a senior once you don't have a job to go to. In reality, many of your general living expenses are likely to stay the same whether you have a job or not.

You might spend less money on gas, for example, if you're not commuting to an office daily. But you still have to pay to maintain and insure your car, so you'll need to make sure you have a retirement income that supports that. And you might end up spending more money on leisure since you'll have lots of free time on your hands.

In a recent MassMutual survey, 29% of retired Americans said they have less savings than they need. If you want to avoid that fate, it's important to be realistic about what your retirement expenses might look like. But it's also important to start saving and investing money for retirement at an early age.

An easy way to build up a large nest egg

The nice thing about IRAs and 401(k)s is that they offer tax incentives in the course of saving for retirement. Traditional IRAs and 401(k)s offer tax-deferred gains on investments, while Roth IRAs and 401(k)s offer tax-free gains. This makes it even easier to grow a lot of wealth in a retirement plan over time.

What you have to do, though, is give yourself that time. And you can do that by beginning to fund your retirement plan at an early age.

Over the past 50 years, the stock market has delivered an average annual 10% return to investors, as measured by the performance of the S&P 500 index. If you invest heavily in stocks, you might easily enjoy a similar return.

So let's say you begin socking away just $200 a month for retirement at age 27 with the goal of retiring at 67. Even if you're unable to increase your monthly contributions, with a 10% return, you'll be looking at retiring with over $1 million.

But watch what happens when you wait until age 37 to start saving and investing. Assuming the same monthly contribution and return, you're looking at a balance of only $395,000 when you give up those 10 years of contributions and gains.

Of course, $395,000 is a nice nest egg in its own right. And it's more than many retirees have available. But which would you rather do -- retire with a little less than $400,000, or a little over $1 million?

Don't set yourself up to struggle

Many people who end up struggling financially in retirement don't have much in the way of savings. So if you make an effort to build a decent-sized nest egg, you might end up just fine.

But if you want to avoid financial stress in retirement, it pays to start socking money away for it from an early age. Doing so could make it so you're able to spend more freely at a time in your life when you're really not in the position to pinch pennies.