There are guidelines out there for how much you should try to save for your retirement. Fidelity, for example, recommends having 10 times your ending salary saved by age 67.
But it’s harder to nail down a specific number for your individual retirement account (IRA) or 401(k) because there are so many variables involved. And while Americans seem to think that $1.46 million is the magic retirement savings number, according to a recent Northwestern Mutual survey, even that should be taken with a grain of salt.
Still, it’s pretty fair to say that if you’re an average earner, retiring with $2 million to your name puts you in a pretty sweet spot. And believe it or not, getting to $2 million may be easier than you’d think.
It’s all about the right strategy
If you wait until your 40s to start saving for retirement, you’re probably not going to have an easy time retiring with $2 million. But if you start saving at a much younger age, you may be surprised at how easy it becomes to build yourself a $2 million nest egg.
Saving for retirement isn’t enough, though. To get to $2 million, you’re going to need to do one more thing: Invest your savings.
Some people opt to keep their retirement savings largely in cash. Doing so might seem like a safer bet than putting your money into the stock market. But actually, if you play it too safe in your portfolio, you run the risk of not having enough money for your retirement. So that’s not an ideal situation.
You should know that the stock market’s average annual return over the past 50 years is 10%. But that’s just an average that takes strong years and weak years into account.
What it should tell you, though, is that if you invest your money for many years, there’s a good chance you’ll end up with a similar return, especially if you diversify your portfolio. You can do that by buying different stocks across a range of industries or by owning shares of an S&P 500 ETF (exchange-traded fund).
Here’s how you can reach $2 million
At this point, you’re probably thinking, “Sounds great — but how does this get me to $2 million?” So let’s run the numbers and see.
If you save $380 a month between the ages of 25 and 65, giving yourself a 40-year savings window in total, and your portfolio delivers a yearly 10% return during that time, you’ll end up with $2 million. If you can’t swing $380 a month but can do $275, you’ll get to $1.46 million, which is the aforementioned magic number. Either way, you’re in a good place.
Don’t delay
It’s not easy to carve out room in your budget for retirement plan contributions when you’re fairly young. But if you give yourself a long savings window to harness the power of the stock market, you stand to retire with a lot of money.
Getting back to our example above, let’s say you save $380 a month over 30 years instead of 40. At that same 10% return, you’re looking at a final balance of $750,000. That’s still a lot of money, no doubt. But losing out on those extra 10 years of returns is going to cost you $1.25 million.
To put it another way, 10 extra years of savings and an additional $45,600 in retirement plan contributions could spell the difference between retiring with $750,000 and retiring with $2 million. Hopefully, that motivates you to start saving immediately.
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