Once upon a time, when it came to retirement planning and retirement savings, Americans figured they had it made if they saved $1 million for their golden years.
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Now? 401(k) plan members tell Charles Schwab that, on average, they expect to need $1.9 million in retirement savings.
And that was before the annual U.S. rate of inflation hit an alarming 6.8% in November.
Retirement Savings: How To Save $2 Million
But is saving $1.9 million realistic? How hard is it really to put aside that much money for retirement?
Of course, it depends on several factors. How much time do you have before retirement? How fast will your investments grow along the way? And how much volatility can you stomach during the journey?
Let’s say your portfolio grows 7% a year on average in a 401(k) account, where it grows tax-deferred. That 7% is reasonable. It’s even a little conservative. The broad stock market has actually grown faster. It averaged 9.33% growth annually over the 20 years through Nov. 30, according to Morningstar Direct.
And let’s say that you plan to retire at age 72. That’s also conservative. Age 70 is when you become eligible for your maximum starting Social Security benefits. So the two-year delay alone after age 70 does not add anything to your starting benefit.
Let’s make one additional conservative assumption. Let’s say you’re aiming for an even $2 million by retirement. Let’s round up your goal from $1.9 million. After all, it’s good to save extra in case you outlive your own life expectancy, says Lisa Featherngil, national director, wealth planning for Comerica Bank.
Retirement Planning: Building Your Nest Egg
So where does that leave you? If you start work at 25, to build a $2 million nest egg by the time you reach 72, you have to sock away more than $5,677 per year, according to the investment goal calculator at buyupside.com.
It works out to a monthly savings amount of $453.31.
That’s definitely doable. The yearly savings of $5,677 would be merely 10% of a $56,770 annual salary. That’s not an pie-in-the-sky salary.
Retirement Planning Orthodoxy
But, wait. Financial advisors are virtually unanimous in recommending that you save 15%, not just 10%, of your pay for retirement. Aiming for 15% is retirement planning orthodoxy.
If that $5,677 represents 15% of your pay, your pay would be a more modest $37,847. Would someone earning that annual salary be willing to set aside $5,677 of it for retirement? Many would not.
But if we’re talking about saving inside a 401(k) plan, then 5 percentage points of that 15% could be coming from a company match or other employer contributions. And a 50% matching contribution is common.
So all you’ve got to pony up is 10%.
Retirement Planning Risk Taking
How hard would it be to build up $2 million in retirement savings if you start later than age 25? How much of an extra burden is that late start?
Well, if you don’t start to save until age 35, then you’ve got to sock away $11,658 a year, or more than $948 per month.
If that’s 10% of your pay, you would have to earn $116,580 a year.
That’s still doable, but harder than if you start saving at age 25.
Raising Your Retirement Savings Hurdle
If you delay the start of retirement saving until much later — let’s say age 45? Then you’re setting a stiff challenge for yourself.
You’d have to save more than $25,000 a year to build a retirement balance of $2 million.
That would work out to saving $2,078 per month.
That would be a lot for many workers. Then again, by age 45 your annual pay should be much higher than it was at age 25.
Planning Expert Weighs In On 401(k)
So, is it practical for U.S. workers to expect to amass $2 million in retirement savings? Yes, says financial advisor Tom Wheelwright, CEO of WealthAbility. Saving in a tax-deferred account like a 401(k) is a key step, he says.
“Getting to $2 million for retirement is fairly easy if you start early and very difficult if you start late,” said Wheelwright, author of the book Tax-Free Wealth. He also contributed to the “Rich Dad Success Stories” book.
Wheelwright added, “The reason it’s so important to start your retirement early is compound interest. Compounding means that every year, you not only earn interest on your principal, you also earn interest on the interest you earned the previous year.”
But if you start too late? “Once someone is 45 and trying to get to $2 million, the savings amount becomes too large,” said Morgan Christen, CEO of Spinnaker Investment Group. “They just will not try.”
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and active mutual fund managers who outperform the market by picking top-performing growth stocks.
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