Saving for retirement is something you shouldn't neglect. Once you stop working, you may find that your living expenses cost more than anticipated. And you don't want to rely too heavily on Social Security, because not only will those benefits just replace a portion of your former paycheck, they might also be subject to cuts in the not-so-distant future.
But just how much money should you aim to save for retirement? According to Schwab, today's workers say they'll need to save an average of $1.7 million to manage their expenses during their senior years.
On the one hand, that's a $200,000 drop from last year's magic retirement number, which came in at $1.9 million. On the other hand, it's still a very large number. But it may be more attainable than you'd think.
Can you amass a $1.7 million nest egg?
An IRA or 401(k) plan worth $1.7 million might seem out of reach — until you crunch the numbers. If you invest your savings heavily in stocks, you might manage to generate an average annual 8% return in your IRA or 401(k), as that's a bit below the stock market's average. So if you give yourself a long enough savings window, you might actually end up with a cool $1.7 million — even if you can only part with a small portion of your income.
Let's imagine you get serious about retirement savings at age 25, and from there, you contribute $500 a month to your nest egg through age 67, which is full retirement age for Social Security for those born in 1960 or later. Assuming that 8% return and 42-year savings window, you'll actually be sitting on around $1.83 million — more than the $1.7 million workers think they'll need on average.
Do you really need a $1.7 million nest egg?
For some people, $1.7 million in savings will mean falling short of their retirement goals. For others, a nest egg worth $750,000 might more than suffice.
Rather than fixating on that $1.7 million target, spend some time thinking about what your retirement might look like. Do you plan to travel a lot and live in a larger city? If so, you might need several million dollars to pull off that lifestyle. But if you think you'll be content living in a small country home and enjoying local entertainment, then you may not need nearly as much money.
Ultimately, that $1.7 million savings number should really only register as a point of interest. It's on you to calculate your own magic number and then work toward hitting it over time.
Of course, if you do determine that $1.7 million is a savings target you should aim for, then you know what you have to do to get there — start socking money away from a fairly young age and invest aggressively to grow your nest egg. But don't assume you'll be doomed to a cash-strapped existence if retirement rolls around and you're shy of the $1.7 million Americans are convinced is the ideal savings number.
The $18,984 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $18,984 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.