Social Security will help you pay the bills in retirement, but it won't cover all of your living expenses by itself. The program's benefits, if taken at your full retirement age, will replace about 40% of your former wages if you were an average earner, but most seniors need roughly twice that amount to maintain a reasonable standard of living. As such, unless you're due to receive a fat pension, you'll likely need savings and investments of your own to bridge that gap.
But a large number of Americans are way behind in this regard.
An estimated 15% of working Americans have less than $1,000 socked away in an IRA or 401(k), reports GOBankingRates. Now if you're in your early 20s, that's not so terrible. But if you're older and are still that far behind on preparing for your golden years, you're putting yourself at serious risk of being perpetually cash-strapped as a senior.
How much retirement savings do you need?
There's no magic number that guarantees financial security during retirement, but as a general goal, you'll want to close out your career with about investments equal to 10 times your ending salary -- probably in an IRA, a 401(k), or both. So, for example, if you expect to earn $80,000 in your final year of full-time employment, aim to have your nest egg hit $800,000 that year.
Of course, there's wiggle room in that formula. If you're planning to live a truly modest lifestyle in retirement, then you might be able to manage with saving less. The same holds true if you're sitting on a home that has appreciated significantly in value, and that you comfortable selling and downsizing from. And some people may expect to inherit a large sum of money from a relative -- though that assumes that they don't spend it all during their own retirement, and given how much seniors often have to lay out for healthcare and long-term care, that's an assumption to be wary of making.
But generally speaking, 10 times your ending salary is a reasonable goal to aim for. So if your nest egg today wouldn't even cover a top-of-the-line smartphone, you'll need to start making some changes.
Ramping up on the savings front
It's hard to set aside money for a decades-distant purpose when near-term expenses eat up the bulk of your income. But if you don't make the effort, you're apt to regret it later. The best way to begin is to track your spending for a month or two so you can see clearly where your money is going at present. Once you have a firm handle on that, set up a budget, and figure out which expense you're willing and able to cut back on. If you live in a larger apartment that costs $1,400 a month in rent, could you downsize to a smaller space that costs just $900? Or perhaps you're ready to join the cord-cutting trend and cancel your cable subscription. You might get rid of your gym membership, cut back on entertainment outside the home, or start cooking more at home rather than springing for restaurant meals or takeout as frequently.
Obviously, if you have the time and the ability, taking a side job on top of your main one would increase your income, and provide you with more money you could route into an IRA or 401(k). In fact, if you earn enough money from that second gig, you may not need to cut back on living expenses at all.
Consistent effort goes a long way
You might assume that to retire with a portfolio worth 10 times your final salary, you'll really need to sock away large chunks of cash every month between now and the end of your career. But if you invest wisely, you may find that even modest monthly contributions to your IRA or 401(k) plan yield the results you're after.
Consider the case of a person in their early 30s with no savings, who hopes to retire in their late 60s. If that individual manages to consistently set aside $500 a month for the next 35 years, and invests it largely in stocks to generate an annualized return of 7% (which is a bit below the market's average), they would wind up with roughly $830,000. That's not a small amount of money. Given 40 years instead of 35, they'd end up amassing about $1.2 million.
Saving for retirement does demand some sacrifices. But if you give yourself a lengthy savings window and invest your nest egg wisely, you'll likely come away with enough money to enjoy retirement rather than struggle through it. Just don't make the mistake of thinking you'll be able to get by happily on Social Security with no personal savings whatsoever.