Saving enough for retirement is an enormous challenge for today's workers. Many people estimate that their retirement costs will amount to $1 million or more. Meanwhile, their annual income doesn't permit them to defer much money -- if any -- to their 401(k) or IRA.
The good news is that you can use investments that will hopefully grow in value over time. And you might be surprised by how much you could wind up with, even saving just $100 per month. But whether that monthly sum is enough for retirement depends on the following three factors.
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1. Your investment rate of return
You could go from $0 to $1 million in less than 28 years by investing $100 per month if you earned a 20% average annual return during that period. The trouble is, that's not a realistic expectation. If you're banking on returns that high, you'll likely wind up disappointed and without enough to cover your retirement.
The S&P 500, the stock market index tracking 500 of the largest companies in the U.S. by market capitalization, had a compound annual growth rate of 6.5% from 1928 to 2022. That's a more reasonable rate to assume when estimating how much your investments will grow.
But while these market indexes and the stocks they're tracking tend to go up over time, this process isn't linear. For example, the S&P 500 had a total return of 28.50% in 2021 followed by a loss of 18.04% in 2022.
Ups and downs are normal, and losing some money in the short term doesn't mean you're a bad investor or that you've chosen the wrong stocks. If you're patient and wait it out, things will likely turn around.
2. How long your money stays invested
OK, assume you invest $100 per month and earn a 6.5% average annual return: You could still reach $1 million in savings, but you would need over 63 years to do it. If you started at 22, you would be 85 by the time you get to $1 million. And that might not be the retirement date you had in mind.
If you hope to retire sooner, you need to set aside more money each month. Even if you start with as little as $5 or $10 per month, begin as soon as you can -- the longer any money is invested, the more it will likely be worth by the time you need to withdraw it.
But you'll need to increase your contribution rate over time. When you get a raise, for example, set aside money for your retirement savings. And consider increasing your contributions by 1% of your salary annually if you're not saving as much as you want to.
3. How much money you get from other sources in retirement
You probably won't have to cover all of your retirement expenses on your own. There's Social Security, and the average retirement benefit as of June 2024 was $1,918 per month. That amounts to just over $23,000 annually.
Claiming this amount for 20 years adds up to over $460,000. If you estimated that retirement would cost you around $1 million, you'd now only have to cover $540,000 on your own (perhaps even more depending on taxes).
If you get a 401(k) match from your company, this is free money that could produce a five- or six-figure sum by retirement, depending on how regularly you claim the match, how much it's worth, and how you invest. And you may qualify for government benefits as well to help you cover some of your essential costs in retirement.
Even with these other sources, saving $100 per month likely won't be enough to cover all of your retirement expenses. It's a start, but check at least annually to see if you can afford to bump up your contributions.
