When it comes to saving for retirement, everyone's situation is different. While one person may be able to survive on a couple of hundred thousand dollars over several decades, another person may need well over a million dollars just to make ends meet throughout retirement.
For that reason, comparing your 401(k) balance to someone else's is like comparing apples and oranges. That said, it's hard not to be curious about what your friends, neighbors, and coworkers have saved for retirement.
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The average 401(k) participant has around $92,000 stashed in a retirement account, a new report from Vanguard found. But that number is skewed by power-savers with loads of cash in their 401(k), so a more telling figure is the median amount workers have saved -- which is a mere $22,000.
Another important factor to consider when looking at these numbers is age. A 25-year-old with $22,000 saved is off to a good start, for example, but a 60-year-old with $90,000 may be in trouble. The Vanguard report also broke down average and median savings amounts by age groups and found that savings varied widely:
| Age | Average 401(k) Balance | Median 401(k) Balance |
|---|---|---|
| Under 25 | $4,236 | $1,427 |
| 25 to 34 | $21,970 | $8,126 |
| 35 to 44 | $61,238 | $22,123 |
| 45 to 54 | $115,497 | $40,243 |
| 55 to 64 | $171,623 | $61,739 |
| 65 and older | $192,877 | $58,035 |
Data source: Vanguard's 2019 "How America Saves" report.
So does this mean if you have more than the average worker your age that you're on track to retire comfortably? Not necessarily. Rather than comparing yourself to others, it's more important to calculate your individual retirement number to gauge whether you're saving enough.
Determining your unique retirement number
There's no one-size-fits-all answer to how much you should have saved by the time you retire. Besides the fact that everyone lives different lifestyles -- some more expensive and others more frugal -- there are also various other factors that come into play, such as whether or not you have a pension and how much you're expecting to receive in Social Security benefits.
One of the quickest ways to get a ballpark estimate of what you'll need to save is to use a retirement calculator. But because most calculators use slightly different algorithms, you'll probably end up with several different results. That's OK, though, as there's no one right answer for how much you'll need to save.
As you're inputting your information, just be sure to look closely at how the calculator is determining your results. For example, is it figuring in Social Security benefits? If not, you may need to save slightly less than what it suggests. Does the calculator account for inflation? If it doesn't, you might need to save more than you think.
Another way to estimate how much you should be saving is to use the Rule of 25. This is based on the 4% rule, which says you can withdraw 4% of your total savings the first year of retirement, and then adjust that withdrawal amount each year afterward to account for inflation. The Rule of 25, then, simply allows you to work backwards to determine how much you should have in total savings based on the amount you need to withdraw each year.
So, for instance, say you expect to need $50,000 per year in retirement. You also expect to receive $1,500 per month (or $18,000 per year) in Social Security benefits, bringing the amount that needs to come from your personal savings down to $32,000. Multiply that figure by 25, and you'll determine you'll need to have around $800,000 saved by the time you retire. Then if you want to check your work, take 4% of $800,000 for a result of $32,000.
How to tell whether you're on track to reach your goal
So you know you have to save, say, $800,000 by the time you retire. How do you know whether you're saving enough now to reach that goal? The key is to have a monthly saving goal in mind, and then consistently check your progress every few years.
Most calculators will tell you what you should be saving each month to reach your overarching retirement goal. But you can also use a compound interest calculator to play around with different numbers and see how your total savings would change if you were to save different amounts each month.
In this example, if you're 30 years old with no savings and you want to retire at age 67 with $800,000, you'd need to save just over $400 per month to reach that goal, assuming you're earning a 7% annual rate of return on your investments. But if you were only able to save, say, $300 per month, you'd end up with total savings of around $577,000, all other factors remaining the same.
Breaking your big goal into smaller, more manageable goals can sometimes make it easier to save. So rather than fixating on that intimidating $800,000 figure, focus instead on the $400-per-month goal. You can also break that down even further by looking at it as $100 per week, or around $13 per day. As you're saving, simply take it day by day or month by month to slowly but slowly reach your big goal.
Also, don't forget to check in on your progress and hold yourself accountable. If you skip saving one or two months, boost your savings over the next several months to catch up. Not saving a few hundred dollars may not seem like a big deal, but if you make a habit of not saving, you could end up hundreds of thousands of dollars short by the time you reach retirement age.
Every so often, it's also a good idea to check in on your big goal to make sure it still aligns with your needs. Maybe you've come down with health issues that could raise your expenses in retirement, or perhaps you've moved to a more expensive city and will need more money than you previously thought to keep up your current lifestyle. It's better to make adjustments sooner rather than later when you still have plenty of time to save.
Rather than trying to keep up with the Joneses and compare your savings to what your friends and coworkers have stashed away, focus on what you need to be financially successful. In the end, it's your retirement at stake, and a more personalized approach to saving and goal-setting will ensure you can achieve the retirement of your dreams.
