Worried About Building an IRA on Average Earnings? Here's Some Reassuring News

In 2022, the average U.S. household had an income of $105,555. But the median U.S. household income in 2022 was only $74,580. And when you have a median that's well below the average, it's an indication that a greater number of Americans earn less than $105,555 than those who earn more.

If your goal is to build up a nice IRA balance in time for retirement, then you may be worried about your ability to do so if you only earn a typical wage. But here's some good news -- you can do quite well for yourself if you start funding your IRA at a young age and put that money to work by investing it savvily.

A robust IRA balance could be yours

You'll often hear that it's wise to sock away 15% to 20% of your income for retirement savings purposes. But if you're earning $75,000 a year, which is roughly the median U.S. household income, then that's probably not realistic. 

You need enough money to pay for housing, transportation, food, healthcare, and more. And there's only so much cutting back on spending you can do.

But while it may not be reasonable to save 15% to 20% of your income when you earn about $75,000 a year, saving 5% of your income may be far more doable. That would have you socking away $3,750 a year, or about $312 a month.

If you simply put that $312 a month into your IRA and let it sit in cash, then you may not be so happy with your balance as retirement nears. But if you invest that money in stocks, you might build more retirement wealth than you could've ever imagined.

Over the past 50 years, the stock market has rewarded investors with an average annual 10% return, as measured by the performance of the S&P 500 index. So let's say you manage to start saving $312 a month for retirement at age 27 and continue to do so until age 67, which happens to be full retirement age for Social Security. If your portfolio gives you that same 10% return, you'll end up with an IRA balance of about $1.66 million. Yes, you read that correctly!

Don't assume you're doomed to a cash-strapped retirement

Clearly, it's a lot easier to contribute a lot of money into an IRA when you earn $150,000 a year as opposed to half that amount. But you don't necessarily have to pump loads of money into your IRA to amass a large balance in time for retirement. All you need to do is contribute consistently over time and make sure you're investing your money in assets like stocks with a history of delivering strong returns.

To be clear, you probably won't make money on stocks in your portfolio every year. The market is apt to falter at some point. 

But the 10% return referred to above accounts for periods of strong market performance as well as recessions during which the stock market tanked. So if you commit to investing in stocks for many years, you might end up with a surprisingly high IRA balance in time for retirement -- even if you never manage to earn a six-figure wage.