Generation Xers: Are you feeling anxious about your retirement savings? You're not the only one. A 2020 study from Bank of America concludes that only 23% of Generation X savers are confident about their progress on saving for retirement.
But here's another tidbit to know. Based on your age today, 2021 could be the year you turn things around. That's because you should reach the retirement age of 67 in 12 to 27 years, which means you have time to double, and possibly quadruple, the retirement plan contributions you make this year.
The doubling rule of 72
You can use compound interest calculators or complex equations to predict the growth of your retirement savings. But you don't have to. The rule of 72 offers a simpler, back-of-the-napkin approach to estimate how long it takes to double your money. You simply divide 72 by your projected growth rate, and the answer is your doubling time in years. Note that the rule of 72 only accounts for doubling your existing balance and does not consider additional contributions, which would expedite your progress even more.
In this formula, the projected growth rate is the wild card. Unfortunately, the actual growth you've seen in your 401(k) over the last couple of years isn't likely to continue indefinitely. For the sake of being realistic, it's better to project growth based on longer-term market trends. Historically, the stock market has grown about 7% per year on average after inflation. If you have a mix of mostly equities with some fixed income in your retirement account, it's reasonable to estimate 6% to 7% future annual growth.
Using those percentages, the rule of 72 says your money will double in value about every 10 to 12 years. So, if you have $100,000 in your 401(k) today, it should grow to $200,000 in just over a decade if markets perform as they have in the past.
2021 could be the turning point
More importantly, the contributions you make in 2021 have a good shot at doubling before 2033, when the first Generation Xers hit 67. If you're targeting the early 2030s for retirement, this could be the last year to make contributions that will grow by 100% before you retire. And if you're a younger Generation Xer who's eyeing retirement in the 2040s, you're in an even better place; you likely have time to quadruple the contributions made this year.
To bring this point home, let's run through the numbers. First, say you want to retire in the early 2030s. According to Vanguard, a leading investment company, average retirement savings for a 55-year-old is about $190,000. If you have that money invested at 6% or 7% annual growth, it should double to $380,000 in 10 to 12 years. Now, if you buckled down and added another $20,000 to your savings (including employer match) in 2021, that could add $40,000 to your bottom line, bringing your estimated balance at retirement to $420,000, not including any contributions you make after this year. That's a 10% increase, driven by a single year of contributions in your 50s.
For younger Gen Xers, things look even more interesting. A planned retirement in the late 2040s allows for two doubling cycles. If you could add $15,000 to your retirement account this year including employer match, those funds could double to $30,000 and then $60,000 by the mid-2040s. Plus, the contributions you make over the next 10 years should double at least once before you retire.
Doubling in retirement
Hopefully, your retirement will last 30 years or more. As long as you keep your money invested, it should continue to grow, but your doubling cycles will slow down. There are a couple of reasons for this. First, you'll likely move into a more conservative mix of investments, which will lower your growth rate and lengthen the doubling time. And second, you'll transition from contributing money to withdrawing money. Depending on how your account is growing, that could reduce the balance you have available to double.
That means it's important to take advantage of doubling cycles now, while you're still contributing. Think of it this way: Your contributions today have more upside than the contributions you'll make later. Step up your savings efforts this year and reap the benefits of that upside before it trails away.