You can pretty much bank on needing income outside of Social Security to live comfortably as a retiree. Those benefits will only replace about 40% of your pre-retirement earnings if you bring in an average wage. And chances are, you’re not looking to take a 60% pay cut in retirement when you’re worked hard all your life.
As such, it’s a good idea to save diligently for retirement so you have extra money to access once your career wraps up. But just how much should you be saving?
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In Northwestern Mutual’s most recent Planning & Progress Study, Americans felt they’d need $1.27 million on average for a comfortable retirement. But high net worth respondents — those with more than $1 million in investable assets — believe they’ll need $3 million to retire comfortably.
If you’re an average earner, a $3 million nest egg might seem unattainable. But you may be surprised at how doable it actually is.
When you start early and invest aggressively
In 2021, the average U.S. household income was $97,962. That’s not necessarily the same thing as the average per-person income, but it’s a starting point to work with. Meanwhile, the median U.S. income was $69,717.
Let’s say your income is closer to the median and you bring in an annual $70,000 salary. You might assume that a multi-million-dollar nest egg is out of reach. But actually, saving just 10% of your salary on a yearly basis could get you to $3 million.
For that to happen, though, you’ll need to do two things. You’ll have to start funding your nest egg from a young age, and you’ll need to invest aggressively — namely, by loading up on stocks in your portfolio.
Over the past 50 years, the stock market has delivered an average annual return of nearly 10%. So let’s be a bit conservative and assume that your IRA or 401(k) plan will deliver an average annual 8.5% return. If you invest $7,000 a year in that plan at 8.5% over a 45-year time frame, you’ll end up with a nest egg worth a little more than $3.15 million. And that’s all on a $70,000 annual salary.
It can be done
It’s easy to write off the idea of being able to retire with a lot of money when your paycheck is just average. But if you start funding an IRA or 401(k) as soon as you begin working and continue to do so consistently until retirement age arrives, you may be surprised at how much wealth you end up accumulating.
Of course, it’s far easier to amass a $3 million nest egg when you make $300,000 a year instead of $70,000. But at the end of the day, it really is a matter of choices and priorities.
You could earn a six-figure salary but blow all your money on expenses, so there’s none left over for your IRA or 401(k). Or you could retire a millionaire even if your salary never exceeds that of what a typical American earns. If retiring with wealth is important to you, and you’re willing to prioritize that goal, you may end up in a position where you’re able to enjoy your senior years quite a lot.
The $21,756 Social Security bonus most retirees completely overlook
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