Everyone dreams of being a millionaire, and if you're on track for your retirement savings goals, there's a good chance you'll get there. Unfortunately, most people are not.
Here's an overview of how behind Americans are at preparing for a comforable retirement: 21% of Americans have no retirement savings at all, according to a study by Northwestern Mutual. Millennials are particularly guilty of neglecting retirement savings, with two-thirds having nothing saved, according to the National Institute on Retirement Security. It's easy to fall into the trap of thinking there's plenty of time to make up your savings, but the reality is that your early retirement contributions matter a whole lot more than your later ones. Why? Read on.
Compound interest and your retirement savings
When you put money in your retirement account, it will grow over time, assuming you've made smart investments. At first, you'll just earn interest on the principal amount you contributed, but as time goes on, you'll start earning interest on your interest. This is what is known as compound interest,and it can make a big difference over time.
Image source: Getty Images.
To illustrate this point, consider a $5,000 annual investment begun at different points in a person's life. Let's assume that all of these investments earn an 8% annual return and that this person plans to retire at 65. Here's how much they would have if they contributed $5,000 per year starting at 25, 35, 45 and 55, rounded to the nearest thousand:
$5,000 Annual Contribution Starting Age | Total Contributed Funds by 65 | Account Value at 65 |
|---|
25 | $200,000 | $1,464,000 |
35 | $150,000 | $625,000 |
45 | $100,000 | $247,000 |
55 | $50,000 | $77,000 |
Data source: Fidelity 401k.com Contribution Calculator.
As you can see, the earlier you begin contributing, the more time compound interest has to grow your contributions. This means you can put in less of your own money and end up with a bigger nest egg in the end. If you wait to begin making retirement contributions, you're making your job much harder.
How much money do I need for retirement?
You may have heard that $1 million is the magic number for retirement savings, but it's not that simple. Everyone will need a different amount for retirement, depending on how long they live, what kind of lifestyle they hope to have and how much they will receive from Social Security. You may be able to get by on less than $1 million if you live frugally, but you may need much more than this if you live in a city or you plan to travel a lot in retirement.
If you haven't done so already, you should estimate living expenses in retirement and the length of your retirement. Average life expectancy in the U.S. is 78.6 years, but you may live longer or shorter than this. Subtract your estimated life expectancy from your preferred retirement age to figure out how many years of retirement savings you need. Once you have this information, you can plug it into a retirement calculator that will do the calculations for you, including factoring in inflation. Then, subtract what you expect to get from Social Security to figure out how much you need to save on your own.
As I mentioned above, $1 million is a somewhat arbitrary number, but you can use it as a starting point to figure out how much you should be saving per month. The table below shows how much you would need to contribute to your retirement accounts each month in order to retire at 65 with $1 million, assuming an 8% annual rate of return on your investments. If you determine you need more than $1 million for retirement, you should make an effort to contribute more than this.
Starting Age | Monthly Savings Goal to Reach $1 Million by 65 |
|---|
25 | $286.45 |
35 | $670.98 |
45 | $1,697.73 |
55 | $5,466.09 |
Data source: InvestingAnswers Million Dollar Savings Calculator.
If you wait until you're in your 40s or 50s to start saving, you'll have a much tougher road ahead. It's worth noting that the 55-year-old saver wouldn't be able to reach their goals with 401(k)s and IRAs alone. They would have to save nearly $65,600 per year, and 401(k)s only allow a maximum contribution of $25,000 for adults 50 and up in 2019. IRAs only allow a maximum contribution of $7,000. So even if you could afford to save $65,600 per year, you would have to keep some of it in a savings account or put it in a non-tax-advantaged investment account.
How do I get started?
If your employer offers a 401(k), this is the best place to start saving for retirement, especially if your company matches your contributions. If your employer doesn't offer a 401(k), you can open an IRA on your own instead. However, you won't earn any matching contributions. You're allowed to contribute up to $19,000 to a 401(k) and $6,000 to an IRA in 2019.
Adults 50 and older are also allowed to make catch-up contributions of $6,000 to a 401(k) and $1,000 to an IRA, as mentioned above. If you put off retirement savings when you were younger and you're now worried about whether you'll have enough, it's a good idea to take advantage of catch-up contributions if you can afford to do so. You'll have to work a little harder, but it is still possible to reach your savings goal.
FAQs
Based on those assumptions, we estimate that saving 10x (times) your preretirement income by age 67, together with other steps, should help ensure that you have enough income to maintain your current lifestyle in retirement. That 10x goal may seem ambitious. But you have many years to get there.
How much to put in a 401k to be a millionaire? ›
How Long Will Becoming a 401(k) Millionaire Take? If you invested $23,000 into your 401(k) each year and earned a consistent 8% return each year, you'd achieve a plan balance of $1 million in slightly under 20 years. Note that this does not factor in a potential employer match.
How much do I need to invest to be a millionaire by retirement? ›
To become a millionaire by age 65, you'd need to save $3,000 each month. For many, this may not be realistic, but try to get as close to this number as you can. If you begin saving five years earlier, at age 45, you'll have a little more flexibility, but your budget will still be tight.
Is 52 too late to save for retirement? ›
If you didn't make saving for retirement a priority early in life, it's not too late to catch up. At age 50, you can start making extra contributions to your tax-sheltered retirement accounts (called catch-up contributions).
What is the $1000 a month rule for retirement? ›
According to the $1,000 per month rule, retirees can receive $1,000 per month if they withdraw 5% annually for every $240,000 they have set aside. For example, if you aim to take out $2,000 per month, you'll need to set aside $480,000. For $3,000 per month, you would need to save $720,000, and so on.
How long will $500,000 last in retirement? ›
You can retire at 50 with $500,000; however, it will require careful planning and budgeting. As the table above shows, if you have an annual income of either $20,000 or $30,000, you can expect your $500,000 to last for over 30 years. This means you will run out of retirement savings in your 80s.
How many Americans have $1000000 in their 401k? ›
The amount of retirement millionaires continues to grow, too: As of June 2024, the number of 401(k) accounts with balances of at least $1 million rose to 937,747, up more than 18%, from year-end 2023, and nearly 31% year over year. The average account balance for this group was $1,148,019 as of June 2024.
Can I retire at 55 with $1 million in 401k? ›
Long story short: It is possible to retire with $1 million at 55. However, $1 million may not be enough for most people. You'll need to create a customized financial plan based on your lifestyle goals if you want to try, though — there is no magic formula or a one-size-fits-all plan to do it.
How much money do you need to retire with $100,000 a year income? ›
To cut to the chase, if you want your interest to earn $50,000, $70,000 or $100,000 per year, you'll need to have approximately $1.25 million to $2.5 million in savings or retirement accounts. If you're aiming for somewhere in the middle, like $70,000, you'd want to have $1.75 million saved.
What net worth is considered rich in retirement? ›
To be considered wealthy at age 65 or older, you need a household net worth of $3.2 million, according to finance expert Geoffrey Schmidt, CPA, who used data from the 2019 Survey of Consumer Finances (SCF) to determine the household net worth needed at age 65 or older to determine the various percentiles of wealth in ...
4 Ways To Grow $100,000 Into $1 Million for Retirement Savings
- An S&P 500 index fund. An S&P 500 index fund isn't going to provide market-beating returns, but it will ensure that you don't fall behind the average. ...
- Growth stocks. ...
- Dividend stocks. ...
- Small-cap value stocks.
Retiring at 65 with $1 million is entirely possible. Suppose you need your retirement savings to last for 15 years. Using this figure, your $1 million would provide you with just over $66,000 annually. Should you need it to last a bit longer, say 25 years, you will have $40,000 a year to play with.
How long can $100,000 last in retirement? ›
Summary. If your annual spending amounts to $20,000, $100k will last you for five years. How much you need to retire depends on a number of factors, including retirement age, intended lifestyle, other income sources, and expected expenditures.
How much money do you need to retire with $200,000 a year income? ›
Considering an average annual return of 6% before taxes and the Federal Reserve's 2% inflation target, to guarantee $200,000 yearly (roughly $16,666 monthly) over 20 years, you'll need just over $2,844,000 in your retirement accounts.
What is the 10x income rule? ›
Enter the “10X rule” for retirement savings, a popular benchmark that simplifies the daunting task of retirement planning into a more tangible goal. This rule suggests that aiming to save at least 10 times your annual income by the time you reach retirement age is a prudent path to ensuring a comfortable retirement.
What is the 10x investment rule? ›
While it is true that angel investors (like our dragons) typically seek 10 times their money back over 3-5 years that isn't the source of the "10x rule". The 10x rule means that in order to gain market traction a product must be exponentially better. ie 10 x faster, 10x smaller, 10x cheaper, 10x more profitable.
