There's a reason workers are encouraged to do what they can to save for retirement. Without a nest egg, retirement could become a period that's laden with financial stress.
If you're an average earner, Social Security will only replace about 40% of your pre-retirement wages. But most seniors easily need around twice that much replacement income to cover their expenses and have money left over to actually enjoy that stage of life.
In fact, Northwestern Mutual's most recent Planning & Progress Study found that Americans believe they'll need $1.27 million, on average, to set the stage for a comfortable retirement. And the good news is that it may be easier than you'd expect to amass a nest egg that large.
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It's all about starting early and investing wisely
Many people put off retirement savings because their income is monopolized by other expenses, like mortgage payments and child care costs. But if you make an effort to start funding an IRA or 401(k) plan from a young age, you could set yourself up to retire with quite a lot of money.
Starting young is only one piece of the equation, though. You'll also need to invest your money in stocks so your portfolio is able to generate strong returns. If you do these two things, you might easily end up with $1.27 million without having to part with too much income year after year.
In fact, let's say you begin saving $300 a month for retirement at the age of 23, and you do this through age 67, which is full retirement age for Social Security purposes for anyone born in 1960 or later. If your portfolio delivers an average annual 8% return, which is a bit below the stock market's average, you'll end up with about $1.285 million -- a touch more than the $1.27 million Americans seem convinced will make for a comfortable retirement.
Now clearly, if you fund your IRA or 401(k) plan to the tune of $3,600 a year, that's $3,600 you won't have available to spend on other expenses, whether it's housing, food, or leisure. But if you're willing to spend minimally in certain expense categories, you could set yourself up to retire with a pretty large pile of cash.
Come up with your own savings target
Of course, just because Americans seems to have landed on $1.27 million as the ideal retirement savings target doesn't mean that's the amount you have to aim for. It may be possible for you to enjoy your senior years to the fullest on a lot less. Or, you may have goals that require a larger nest egg than $1.27 million. So it doesn't necessarily pay to get too hung up on that figure.
What does pay, though, is to start contributing money for retirement savings purposes at a young age and to invest your savings in stocks from the start. Doing so could be your ticket to living it up during your senior years, no matter what that looks like for you.
