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Many people believe that the richest among us are flush with retirement savings – that wealthy Americans have millions stashed away. Not so. Instead of swimming Scrooge McDuck-style in piles of money, the most well-to-do families have relatively modest retirement savings, according to data from the Economic Policy Institute.
How modest? The top 1% of US families had $1.08 million or more saved for retirement as of 2013. I know this sounds like a lot of money because it is. But an American family with just an average income can get to that same level of savings with a little discipline, planning, and prudence.
Unfortunately, too many middle-income families aren’t yet on that path.
On average, households between the ages of 56 to 61 have about $163,000 saved for retirement. If we look at typical retirement withdrawal rates, this amount would spin off about $6,500 a year in income. Most folks are hoping to draw more from their investments each year.
It’s painfully clear that we Americans need to step up our savings game. Exactly how much you need to save for retirement is an individual question influenced by what you think you’ll spend in retirement and any sources of post-career income (rents, pensions, et cetera) that you may have beyond your investments. With that said, if you’re an average-earner looking to join the ranks of retirement millionaires, I have a general savings strategy for you.
The numbers are just estimates; they will change based on how long you have until retirement and how much you can afford to set aside each month. But I’ve found this to be a great guidepost for folks targeting a million-dollar nest egg.
Here’s how much you should put aside each month towards your retirement savings to get to $1 million, based on how long you have until you call it a career, and assuming a 7% average annual return:
- With 40 years of work to go, save $420 each month.
- With 30 years of work to go, save $885 each month.
- With 20 years of work to go, save $2,035 each month.
- With 15 years of work to go, save $3,320 each month.
Now, the 7% return rate is key for our estimates. Under our calculations, this average annual return would require only $420 invested monthly over a 40-year window to yield that $1 million nest egg. A more conservative portfolio (i.e., mostly bonds and just some stocks), would yield about 3%. This greatly influences our ending balance – pushing it down to around $380,000.
So, our 7% return is based on the assumption that investments will be part of a relatively stock-heavy portfolio. This is a reasonable notion when we think about folks who have at least ten years until they hit retirement. What’s more – the 7% average annual return is also a couple of points below the market’s average!
But many Americans don’t see a 7% return. Data show that the majority of Americans, no matter their age, are invested conservatively. They are shying away from stock-heavy portfolios in favor of less risky vehicles. By doing so, these investors are limiting their growth potential and reducing their chances of hitting the $1 million target.
My rule of thumb for portfolios is the 15/50 Stock Rule. It’s simple. If you believe you have more than 15 years left on this planet, your portfolio should consist of at least 50% stocks, with the remaining balance in bonds and cash. The goal is to strike a constant balance between risk and reward.
Bottom line: getting to $1 million in retirement savings isn’t just for the rich and famous. We regular folks can hit that benchmark, too. I know the above numbers are not small potatoes for middle-income families. And I realize that early savers have a much easier go of things – setting aside around $450 a month for 40 years is a lot more accessible than stashing over $3,000 a month for 15 years.
Still, the overarching point is that you don’t have to be a part of the top 1% of earners to create a nice retirement stash. What you do need to do is get started. If you have decades to go until retirement, all the better. If you’re counting the years, don’t let that deter you. Jump in the game and get to planning for your happy retirement. Stick to our numbers and the 15/50 Rule, and you’ll be off to a running start.