One of the trickiest aspects of retirement planning is figuring out how much to save. If you're 32 years old, it's hard to know what your expenses will look like 35 years from now, which is when you may be retiring. And as such, it's hard to know how much savings to aim for.
Americans on a whole, however, seem to think that it'll take about $1.5 million in savings to attain a comfortable retirement, according to data from Northwestern Mutual. And while you don't necessarily have to use that number as your personal savings goals, you may decide to do so in the absence of having another benchmark in mind.
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You might also think that saving $1.5 million is pretty much impossible if you earn a typical wage. But you may be surprised at just how easy it is to get to that number.
The path to $1.5 million may be smoother than expected
If you're someone who earns a typical wage, you may have a harder time saving $1.5 million than someone earning $150,000 a year. But that doesn't mean it can't be done.
But what's a typical wage these days anyway? Well, the Bureau of Labor Statistics puts median weekly earnings at $1,145 during the fourth quarter of 2023. That's $59,540 a year if we multiply that figure by 52.
Experts say it's good to save 15% to 20% of your income for retirement. But on $59,000 a year and change, that may not be doable.
But what about saving 10%, or $5,954 a year? That's $496 per month. If you sock away that much money in a 401(k) or IRA over 40 years, you could end up with just over $1.5 million.
However, that ending balance makes one big assumption, and it's that you're generating an average annual 8% return in your retirement plan during that time. That return is few percentage points below the stock market's average, so it's a reasonable one for a stock-heavy portfolio. But if you play it too safe with your retirement investments, you might end up with less money.
Finding the funds to save
So we just proved that it's possible to retire with $1.5 million on an average income. But we sort of glossed over the fact that parting with almost $500 a month isn't an easy thing, didn't we?
Well, there are different steps you can take to free up that cash. One option is to join the gig economy and use your earnings for 401(k) or IRA contributions. Another, of course, is to live frugally and carve out room in your budget for retirement plan contributions every month. In fact, a good bet is to automate those contributions so that money hits your account before you get a chance to spend your paycheck.
Furthermore, if you have a 401(k), finding $500 a month for that plan may be easier than expected -- namely, because you may not have to come up with that entire $500 yourself. Many companies that offer 401(k)s give out matching contributions. So depending on your employer's policy, you may only have to contribute $250 a month from your own paycheck to reach the $500 mark, since your company might kick in the equivalent amount.
Think positively, but set yourself up for success
It may not be an easy thing to amass $1.5 million on an average salary. But clearly, it's possible.
Remember, though, you want to give yourself as long a savings window as possible for funding your nest egg. The numbers above work because you're contributing to a retirement plan over 40 years. You might manage to get to $1.5 million on an average wage in less time, but that could mean parting with a lot more money each month. So the sooner you get started, the better.
