Retirement is more expensive than ever, and there's a chance you may need to save well over $1 million to enjoy your senior years as comfortably as possible. In fact, the average worker expects to need approximately $1.9 million in retirement, according to a 2020 survey from Charles Schwab.
Saving $2 million by retirement age won't be easy, but it can be done — with the right investment strategy. Investing wisely (and consistently) is key to building a robust retirement fund, so it's important to start now. Here's how much you should aim to invest each month to save at least $2 million.
Understanding how your investments grow
The more time you have before retirement, the less you'll need to save each month to reach your goal. This is because compound interest allows your money to grow faster the longer it sits untouched in your retirement fund.
Think of compound interest like a snowball rolling down a hill. It takes time for the snowball to gain speed, but the longer it rolls down the hill, the faster it rolls and the larger it becomes. The same is true when you're investing. It will take years before you see significant growth, but after a few decades, your savings will start growing exponentially.
This is why it's so important to start saving early. If you put off investing because you don't think you have enough to save, you're missing out on your most valuable resource: time.
It's also important to understand that your investments will experience good years and bad years. The stock market is volatile at times, but investing is the best way to build long-term wealth. The key metric to consider is the average rate of return you experience over time.
You may earn incredibly high returns some years, while other years you may see losses. That's normal. Over time, the S&P 500 has experienced an average rate of return of around 10% per year. By remembering that the average return over time is the most important factor, it's easier to continue investing consistently even when the stock market is rocky.
How much should you save?
How much you need to invest each month will depend on your age and how many years you have left to save. If you're off to a late start or if you want to retire early, you'll need to invest more each month to reach your goal.
Let's say you're just starting to invest, so you have no retirement savings right now. Let's also assume you're earning a modest 7% average annual return on your investments. Again, this is an average over time, so most years you'll experience returns either above or below this number.
Here's approximately how much you'll need to invest each month depending on how many years you have left to save:
Number of Years Left to Save
Amount Saved Per Month
It's easy to feel overwhelmed looking at these numbers, especially if you're falling behind on your savings. But there are simple ways to dramatically boost your savings with little effort.
For example, if your employer offers matching contributions through your 401(k), that's free money that can potentially double your savings. In other words, you may only need to save a portion of your monthly goal yourself. The rest can come from your employer match.
Also, think about whether you can afford to push retirement back by a few years. Giving yourself even a year or two longer to save can be more effective than you may think, and it could potentially reduce your monthly savings goal by hundreds of dollars.
Finally, keep in mind that it's always better to start saving now than to delay. Not everyone can afford to save thousands of dollars per month, and that's OK. By saving as much as you can, you'll give yourself a better chance of being able to retire comfortably.
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