With the right strategy, you can beat the average.
Social media has made it even easier to snoop on our friends and neighbors and see what they’re up to — as in, “Oh, looks like Bob bought a new car,” or “Guess John’s doing well at work given that vacation to Greece.” It’s OK to be curious about how people are doing financially if it motivates you to up your game.
With that in mind, it may (or may not) surprise you to learn that the average 65-year-old has about $609,000 in retirement savings, according to the Federal Reserve. However, that number doesn’t tell the whole story.
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When you dig into the data further, you’ll see that the typical person that age has a median savings balance of $200,000. And when there’s a discrepancy like that, it usually means a smaller group of strong savers are probably pulling the average up, and that $200,000 is probably more indicative of what the typical 65-year-old actually has to work with.
But even if you go with that $609,000, it’s a nice amount of money in retirement savings, but it isn’t a ton. If you apply the famous 4% rule, a balance that size results in about $24,000 in annual income. That, plus Social Security, could make for a decent retirement if you’re a moderate earner who’s used to living on a modest income. But if you’ve managed to save $609,000, you may be a higher earner who’s used to living on more.
Either way, there’s a simple strategy you can employ to kick off retirement with well more than $609,000. But you do need to commit to it early on.
Simplify your portfolio and save for many years
There’s nothing wrong with retiring with $609,000 if you feel that’s a sum that will cover your expenses and allow you to spend your days doing the things you want. But if you’d like to do better, you’ll want to commit to building your nest egg from a young age and load up on S&P 500 index funds for a perpetually diversified portfolio. It’s really as simple as that.
The nice thing about investing in the S&P 500 is that you’re putting your money into the broad market, which not only makes the process easier, but also minimizes some of the risk of choosing stocks individually and hoping they outperform. But to be clear, you don’t have to limit yourself to S&P 500 index funds if you’d rather put a portfolio together yourself and have the skills to do so.
Either way, say you invest $400 a month in either S&P 500 index funds or a diversified collection of stocks you choose yourself. If you do this over 40 years and score an average annual 8% return, which is a bit below the market’s average, you’ll end up with $1.243 million. That’s twice the average retirement savings balance among 65-year-olds today. Make it $600 a month, and you’re looking at $1.865 million — about 3 times as much.
It doesn’t have to be complicated
Beating the average retirement savings balance among older Americans today doesn’t require you to be a stock-picking genius. You also don’t have to part with half of your paycheck.
Instead, contribute a modest amount to your 401(k) or IRA consistently, and invest in a wide mix of stocks or an index fund that does that for you. With any luck, you’ll end up extremely happy with your savings balance by the time your 65th birthday arrives.