How much do you need to save for retirement? For most people, the initial answer is "As much as possible." While that knee-jerk response is suspiciously unspecific, it certainly makes sense. You arguably can't tuck away too much for retirement. The worst-case result of that is having more than you need, allowing you to give away any excess however you see fit.
For most ordinary investors, saving "too much" isn't going to be a problem. The worry is not saving enough.
One of the big keys to ensuring you're saving enough is setting a specific numeric goal, and then mathematically working your way backwards to a monthly investment that will allow you to reach that mark. Here's the number-crunching that will tell you how to amass a $1.46 million nest egg in a Roth IRA over the course of 35 years.
A not-so-hypothetical hypothetical
These numbers weren't randomly pulled out of a hat, by the way. They're relevant.
For instance, according to a 2024 survey performed by insurance and investment firm Northwestern Mutual, the average American thinks they'll need to save $1.46 million to secure a comfortable retirement. Given that this sum could reasonably generate on the order of $60,000 worth of reliable yearly investment income, this should be sufficient retirement income for most people when paired with whatever Social Security you're due.
As for the 35-year timeframe, that's a bit longer than most people typically work. But that's changing. Social Security's so-called full retirement age -- or FRA -- is now 67, giving people over 40 years' worth of adulthood to work before many of them will even be thinking about initiating benefits. People are also simply living longer, healthier lives, and choosing to remain in the workplace for personal productivity, if not for financial reasons. So collecting 35 years' worth of wages that can be used to fund an IRA is far from being unrealistic anymore.
What about a Roth IRA (as opposed to a traditional IRA)? Both would work, to be sure. Given the growing uncertainty of future income tax rates, though, there's a reason Roth IRAs are growing in popularity, even if they're still a minority of retirement accounts.
If some or none of these details apply to you, adjust accordingly. However, this is where most ordinary investors are during the early part of their wage-earning years, so this is a decent starting point for planning purposes.
The magic number
Here's the number: Contributing $400 per month into a Roth IRA and investing that money in an instrument matching the S&P 500's (SNPINDEX:^GSPC) average annual gain of 10% would leave you with just a little more than $1.5 million after 35 years.
Data source: Calculator.net. Chart by author.
Since this is a Roth account, not only has this growth been tax-free, any withdrawals from this IRA will also come out tax-free.
There's one important footnote to add here. That is, while $1.46 million is a reasonably healthy sum of money now, it won't necessarily be the small fortune then that it is today. Assuming just average inflation in the meantime, you'll actually want to amass nearly $4 million by then to have the same amount of buying power that $1.46 million provides right now.
On the other hand, this inflation also works in your favor. Regular pay raises will allow you to grow your monthly contribution from $400 now to a more significant amount in the future. So, that $4 million figure isn't nearly as out of reach as it seems and sounds like it is at this time.
It's also worth pointing out that while the hypothetical account above grew at a smooth and steady annual 10% pace, the market's far from being this consistent. Although you'll likely achieve similar net results with a long-term investment in the S&P 500, you won't be growing your account in the same straight line. Some years will be better than others. In some years you'll even lose ground, albeit temporarily.
Just get started -- when, where, and however you can
But what if you don't even have $400 per month to put toward the effort right now, or maybe you don't have 35 years? That's OK on both fronts -- it just changes the numbers.
The big takeaway here isn't a magic formula for reaching the average American's retirement savings target of $1.46 million. You may be fine with less, or you may need even more.
The chief lesson here, rather, is to just do what you can as soon as you can, since time actually does most of the heavy lifting when it comes to growing a nest egg. For instance, in the example above, tucking away $400 per month for 35 years only translates into total personal contributions of $168,000. The other $1.3 million came from growth achieved on these invested contributions.
The key is just getting started how, when, and where you can, even if it seems like you're not saving enough money to matter yet. You are. Every little bit helps, and it helps even more the sooner you put this money to work.
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