When thinking about saving for retirement, you often hear the advice to aim for a hefty $1 million in your nest egg. This number has been repeated so frequently that many investors might start feeling inadequate if they fall short of it.
However, there’s no need to worry. In reality, only about 10% of Americans have managed to save $1 million or more for retirement. So, don’t consider yourself a failure if your retirement savings haven’t quite reached that seven-figure mark.
No matter your current financial situation, it’s crucial to strive to save and invest as much as possible. Having a larger account balance will undoubtedly contribute to a more comfortable retirement. Let’s dig into what the typical retirement savings look like for the average American, set personalized savings goals, and explore ways to boost the growth of your retirement funds.
Average Retirement Savings
While not everyone in the United States needs a $1 million nest egg for a comfortable retirement, it’s an unfortunate reality that most Americans are falling short of their retirement savings goals, whatever those goals may be. The Federal Reserve Survey of Consumer Finances keeps meticulous records of retirement savings data across different age groups in the United States.
Based on the survey‘s most recent data from 2019, here are the average retirement savings figures for older Americans:
- $426,000 for individuals aged 65 to 74
- $357,000 for individuals aged 75 and above
These numbers reveal that Americans of retirement age are quite far from reaching the $1 million mark in their retirement accounts. Moreover, it’s important to acknowledge that the truth behind these numbers may be even less encouraging.
While the average savings amount falls within the range of $350,000 to $425,000, the reality is that some Americans have amassed substantial savings, while others have next to nothing saved for retirement. This imbalance skews the reported averages and pushes them higher.
According to the same Federal Reserve study, the median amount saved by Americans paints a much less rosy picture:
- $134,000 for those aged 65 to 74
- $83,000 for those aged 75 and above
In essence, the financial wealth of a select few millionaires and multi-millionaires distorts the average figures, whereas the median values offer a more accurate representation of the retirement savings that typical Americans have accrued.
Determining Your Personal Retirement Savings Goal
Your personal financial situation is just that – personal. The amount of money you need for a comfortable retirement depends on various factors:
Cost of Living in Your Retirement Spot: Where you choose to retire affects how much money you’ll need in retirement. For example, retiring in Jackson, Mississippi, is more affordable than places like Los Angeles or New York City.
Your Desired Retirement Lifestyle: What you want to do during retirement matters. If your ideal retirement involves simple pleasures like reading on your porch rather than extravagant globetrotting, your financial needs will be lower.
Long-Term Goals vs. Immediate Desires: Your ability to prioritize long-term financial security over short-term desires impacts your retirement savings.
Investment Returns: The returns you earn from your investments play a role in determining how much you need to save.
Budgeting Skills: Sticking to a budget is crucial for achieving your retirement goals.
Social Security and Pensions: The size of your Social Security and pension payments also matter.
A simple way to estimate your retirement needs is to create a yearly budget and multiply it by your expected lifespan. For example, if you think you’ll need $50,000 per year, your savings goal might be $1.5 million.
However, this method doesn’t consider potential investment returns. If you expect an annual return of 6%, you might only need to save about $700,000 to generate a $50,000 income for 30 years.
Also, consider income sources like Social Security, which averages $1,837 per month. Depending on your work history and when you apply for benefits, you could receive more. Considering this, along with a 3% estimated annual cost-of-living increase, your required savings might be as low as $260,000.
Working Toward a $1 Million Retirement Fund
Planning for your retirement savings inevitably involves a degree of uncertainty, mainly because it’s difficult to predict how your financial situation will evolve over 30 years or more.
For example, a long-term average investment return of 6% may include years with negative returns, like -10% or -12%. These fluctuations can significantly impact your overall investment performance when you’re withdrawing funds each year. However, this shouldn’t discourage you from taking practical steps to improve your chances of success. Here are some crucial actions to consider:
Budget Wisely: Make an effort to create a precise budget to guide your financial planning.
Maximize Tax-Advantaged Accounts: Contribute as much as you can to tax-advantaged retirement accounts, especially when your employer matches your contributions.
Harness Compound Interest: Understand the power of compound interest. Saving $100 today instead of spending it could grow to $500 or more in your retirement account over time.
Invest Sensibly and Consistently: Make prudent and consistent investment decisions, particularly during market downturns.
Allocate a Significant Portion of Your Income: Aim to allocate at least 10% to 15% of your income toward your retirement savings.
Direct Windfall Income: Invest any unexpected income, such as tax refunds, salary increases, and year-end bonuses, into your retirement fund.
While these steps don’t guarantee that you’ll achieve a $1 million retirement fund by the time you retire, they will undoubtedly enhance your ability to maximize your savings and work toward that goal.
To wrap it up, there’s no need to stress about hitting a $1 million retirement savings target, since only about 10% of Americans reach it. Everyone’s financial situation is unique, so customize your retirement strategy based on where you live, your lifestyle preferences, and investment returns.
Start by budgeting wisely, making smart investment choices, and factoring in income sources like Social Security. While the future is uncertain, taking thoughtful actions can lead you toward a financially stable retirement.