Saving for retirement is an important thing. If you don't do it, you may be limited to Social Security alone once your time in the labor force comes to an end. And that could be a dangerous thing.
Social Security will only replace about 40% of your pre-retirement income, and that assumes you earn an average wage during your career. Most seniors, however, need roughly twice that much income to manage their bills without undue stress or budget cuts. And so you'll clearly need savings of your own if you want to meet that mark.
Meanwhile, recent data from Vanguard reveals that 401(k) savers have an average of $141,542 socked away for their senior years. By contrast, only 15% of savers have a balance of $250,000 or more.
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If you haven't reached the $250,000 mark in your 401(k) plan, there may not be any reason to panic. But if you're older, it may be that you need a serious catch-up plan.
It's all about your personal timeline
If you're in your 20s or 30s and you don't have $250,000 saved for retirement, don't sweat it. The reality is that many people start off with lower wages earlier on in their careers, and at that point, you've only had a decade or two to benefit from compounded returns in your 401(k).
But if you're in your 50s and you don't have $250,000 socked away for retirement, that could be more problematic. And if you're within a few years of retirement, well, frankly, it may be very problematic.
If you withdraw from your retirement savings plan at an annual rate of 4%, a $250,000 balance will translate into $10,000 of annual income. Frankly, that's not a lot. And so if you don't even have $250,000 to your name, and you're nearing retirement, then it's important to take steps to ramp up your contributions.
Doing so may require you to cut back on spending or pick up a side job. But making those sacrifices now could spare you a world of financial stress in retirement.
In fact, let's say you're 60 years old with $200,000 in your 401(k). Let's also assume you want to retire at age 67, and that you've already moved over to more conservative investments in your retirement plan that are giving you a 5% average annual return.
Based on your age, you can contribute up to $27,000 a year to a 401(k). Do so for seven years, and you'll boost your $200,000 balance to $501,000. That's more than double what you started with.
Also, with that balance, a 4% annual withdrawal rate gives you around $20,000 in yearly retirement income. That's certainly better than $10,000.
Put yourself back on track
If you're lacking in retirement savings as that milestone nears, it's important to push yourself to ramp up while you can. That could mean slashing expenses, working extra, or even delaying your official workforce exit. But if you don't make that effort, you could wind up sorely unhappy in retirement. And that's really not what you want.
