Building a large enough nest egg to finance the kind of retirement you're hoping for is a task that takes decades. But one of the tricky parts of that marathon effort is figuring out what the finish line should be — how much money you should aim to have set aside. Ideally, your goal number would be based on a number of factors such as your end-of-career salary, your desired lifestyle in retirement, and the monthly expenses that will go along with it — but some of those things, we can't be sure about in advance.
The simpler approach is to set a simple numerical savings target, and work your way toward it. If that method appeals to you, it might help you to know that on average, Americans believe they'll need $1.7 million to retire, according to Schwab's 2019 401(k) Participant Survey.
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Now than might seem like a massive sum of money, and perhaps an unattainable one. But amassing $1.7 million in your lifetime may be more doable than you'd expect.
Start early, invest wisely
Building large amounts of wealth for retirement isn't something that only higher earners can do. If you're willing to make some modest sacrifices during your working years, you may be surprised at just how much much you can wind up with.
By "sacrifices," we're really talking about living below your means — not buying the most expensive house that your mortgage lender will allow, driving more economical cars (and replacing them less often), and splurging less on your vacations. If you build a degree of frugality into your budget so that there's money left over each month to route into your retirement investments, you should be able to amass some serious savings to carry you through your golden years.
There's another catch, though — you'll need to start investing early on in your career to give your nest egg time to grow. Check out the following table, which illustrates how much you might accumulate by setting aside $500 a month:
If You Start Investing $500 a Month at Age…
… You'll Have This Balance by Age 67 (Assuming an Annualized Return of 7%):
As you can see, it's possible to amass $1.7 million with a monthly $500 savings contribution over a 45-year period. But if you wait even five years later than that to start saving, you'll fall well short of that goal — though to be fair, a $1.2 million nest egg is nothing to scoff at. And if you wait until your 30s or 40s to start saving for retirement, you'll need to set aside far more than $500 a month to have a shot at $1.7 million.
Let's imagine you don't start building your nest egg until age 42, in fact, with the goal of retiring by 67, which is full retirement age for Social Security purposes. At that point, you'd need to sock away $2,250 a month to reach $1.7 million with an average annual 7% return on investment. And it's a lot harder to carve $2,250 a month out of your paychecks than it is $500.
Now, let's talk about that 7% annualized rate of return for a minute. The stock market has historically averaged around 9% annually, which means that if you invest your retirement savings primarily in stocks, with a small percentage of your portfolio in bonds (at least at first), and are careful to avoid paying excessive fees on your investments, you're likely to accrue 7% returns or higher, over the long term. If you play it too safe with your investments, however, you'll get lower returns, in which case, you'd need to contribute much more each month to have a shot at reaching the $1.7 million target.
In fact, if you were to start investing at 22, but split your allocation more evenly between stocks and bonds, and therefore manage only a 5% average annual return, you'd end up at 67 with just $958,000. Of course, "just" is a relative term — $958,000 is certainly a respectable nest egg.
Also worth considering: Just because Americans who have 401(k)s at Schwab on average view $1.7 million as a retirement savings number to aim for doesn't mean that it should be your goal. Nearly half of those surveyed think they'll need less than $1 million, for example. And depending on where and how they plan to live during those years, they may well be right.
But whatever your retirement savings goal, the sooner you start getting serious about it, the better, because the most effective — and least painful — way to hit your target is to start investing steadily while you're young, and let the power of time and compound growth do most of the heavy lifting.
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