Small retirement plan contributions can really add up over time.
The average American today has $88,400 saved for retirement, says Northwestern Mutual. That’s not a ton of money, but that sum also isn’t all that alarming because it encompasses savers of all ages.
On the other hand, it’s a bit more troubling that the typical baby boomer today only has a $120,300 nest egg. Many boomers are on the cusp of retirement or have already wrapped up their careers. And while $120,300 isn’t pocket change, it’s not a lot of savings for what could be a 20-year retirement or longer.
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That’s why you might want to aim higher for your retirement savings. The tricky thing is that there’s no single savings target that guarantees long-term financial security. However, Fidelity recommends retiring with 10 times your final salary saved, so that’s one benchmark you can look at.
Meanwhile, the Bureau of Labor Statistics puts median weekly wages of Americans 65 and older at $1,055, which, over the course of a 50-week working year, is $52,750. So if you’re earning a similar wage and were to retire with $500,000, you would conceivably be in pretty decent shape, since that’s roughly 10 times your income.
Now you might assume that amassing $500,000 in savings in your lifetime is a tall order. But you might be surprised by how little money it takes to build a nest egg that size.
If you have $250 a month to spare, you can retire with $500,000
You might assume that to get to a $500,000 nest egg, you have to give up a third of your paycheck every month. But that’s definitely not the case. You can get away with saving as little as $250 a month and still wind up with a sizable IRA or 401(k). But to pull that off, you need to do two things:
- Save over a long period of time.
- Invest your savings in stocks.
The $500,000 calculation above makes two assumptions: that you’re saving over a 35-year period, and that your portfolio is generating an average annual 8% return, which is a bit below the stock market’s average.
If your savings window is shorter, you might need to make larger monthly contributions to get to $500,000. And if you’re not willing to take the risk inherent in owning stocks and want to stick with conservative investments that deliver a much more modest return, then that, too, might warrant higher monthly contributions. Otherwise, $250 a month is your magic number.
And that $250 might not have to entirely come out of your paycheck. If you have access to a 401(k) plan through your job, your employer could be willing to kick in some of that money in the form of a matching contribution.
Run your own numbers based on your personal savings goal
If you earn a median wage, you might be happy with a $500,000 retirement nest egg. If you’re a higher earner, you might want to target a larger nest egg to maintain your standard of living.
Your best move is to use some retirement planning calculators or enlist the help of a financial advisor to come up with a savings target that meets your needs. From there, you can crunch the numbers to see what monthly contribution is required based on your anticipated return on investment and savings window.
But either way, if you’re starting off fairly young, don’t assume that the sum of money you’ll need to allocate to retirement each month will be enormous. You might find that you’re able to meet your savings goal by parting with just a tiny portion of your paycheck.