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Americans believe they’ll need at least $1.8 million to retire, an increase from last year’s magic number of $1.7 million. However, not very many are confident they’ll be able to get there. These are the two top-line takeaways from this year’s 401(k) Participant Study published by Charles Schwab, the annual study that tracks important retirement data and gauges American sentiment.
If you need help saving and planning for retirement, consider speaking with a financial advisor.
Survey participants in the Schwab study say they expect that they’ll need $1.8 million in savings before they can retire. Getting there by age 67 (the new official retirement age, per the Social Security Administration) will take a lot of work and saving. But it’s important to remember that you can do it, especially if you start early.
For example, let’s assume you take advantage of both a 401(k) and an IRA, allowing you to maximize the IRS contribution limits for each. Then let’s say you invest those assets entirely in an S&P 500 index fund, giving you the market’s long-term average return of 9.82% per year. With this investment profile, assuming you start with nothing, here’s how much you need to approximately save each month in order to reach around $1.8 million in your retirement savings by 67:
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Age 25: $242 per month ($1.8 million by age 67)
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Age 35: $646 per month ($1.79 million by age 67)
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Age 45: $1,940 per month ($1.79 million by age 67)
If you start saving for retirement at age 55, you’d need to contribute $6,600 a month, or $79,200 a year, to reach $1.8 million by age 67. But then you’d run into the aforementioned IRS contribution limits, which total $37,500 in 2023 even when accounting for catch-up contribution provisions. In turn, you’d have to make up the difference by investing in a standard taxable account, which doesn’t have the same tax advantages as its retirement account counterparts. This will likely result in a heftier tax bill when you’re retired and even beforehand.
We can’t overstate the value of time here. Even if you are nearing age 40, this is still something that you can reasonably accomplish with hard work and diligent savings. But by your mid-40s, you’ll need to save nearly $2,000 per month in order to reach the $1.8 million target. That may be unrealistic for many people.
But it’s also worth noting that the survey participants may be overestimating how much they’ll need.
This is a survey of retirement plan participants, not retirement advisors. A common rule of thumb is that you should have around 10 times your annual salary in retirement savings by age 67. Since the average American household earns around $71,000 per year, this means retirement will cost more like $710,000 in savings. That’s still a lot of money, but for many people, it’s a much more attainable goal than $1.8 million.
