The average American believes they'll need a hefty $1.3 million to retire, according to numbers from financial planning and insurance company Northwestern Mutual. And given today's typical household expenses and the expected rates of returns on appropriate retirement investments, this estimate isn't out of line.
The problem? That's a lot of money to amass -- especially if you're starting out with nothing. Indeed, it's so much money that some people might not even bother trying.
This a big mistake, of course. It's also a mistake that can easily be avoided.
See, retirement fortunes are rarely built overnight from huge incomes and windfall investments. Most people reach the seven-figure mark by making modest-but-steady contributions to the effort over a long period of time, merely matching the stock market's long-term growth rate. Rather than worrying about their ultimate goal, these investors instead focus on reaching monetary milestones en route to retirement, which are much less intimidating targets.
With that as the backdrop, here's a closer look at how much money you should have saved up at the age of 50 -- an age at which it's still not too late to do something about it if you're coming up short.
The magic number
Don't worry. There's a specific number (or at least a narrow range of numbers) coming. But let's preface the specifics with an explanation of how these figures are determined.
The goal of this exercise is figuring out the finite amount of money that will allow you to maintain your current standard of living once you retire. This will take more for some people than others. Ultimately, though, the numbers are based on your current income and the lifestyle it funds -- you'll need a multiple of that amount once your work-based income is no longer coming in.
These numbers also assume you'll continue adding money to your retirement fund in the meantime, and invest the bulk of it in the stock market. After all, at 50 years of age you've still got time to ride out two or maybe even three bear markets.
So what's the number? Mutual fund company T. Rowe Price says you should have somewhere between 3.5 times and six times your annual salary tucked away in a retirement fund by the time you're 50; the midpoint of that range is 4.75 times your yearly income. Assuming you're earning the average of $66,300 per year for someone between the ages of 45 and 54 right now (according to the Bureau of Labor Statistics), you should have somewhere in the ballpark of $300,000 already saved up for retirement.
You can still close the gap
Not there? Maybe you're nowhere close? Don't sweat it... at least not yet. Time is on your side in a handful of different ways.
Chief among these ways is the fact that -- statistically speaking -- you're probably going to be earning about as much 10 years from now that you're making now. But you'll also have a big chunk of the debt on life's biggest expenses (homes, cars, school, and children, etc.) paid down if not outright eliminated. You should be able to come up with more investable income in the foreseeable future than you have in the past. This may even be a prime time to start a side business as a means of drumming up some additional investable cash, capitalizing on the tools, skills, and knowledge you've acquired up until this point.
You've also got something else that's just as important (if not more so) that you didn't have before. That's wisdom. Even if you don't have a great deal of money saved up for retirement, you're apt to be more disciplined than you've been in the past, with a better understanding of how to invest in a way that minimizes your risk while maximizing your gains. You may be forced to invest in a way you were hoping you wouldn't have to at this age. But, as noted, you've still got many years ahead, and you can still afford to overweight your portfolio with reliable growth stocks.
Image source: Getty Images.
Finally, the third advantage you now enjoy that you couldn't before is more generous contribution limits on individual retirement accounts, or IRAs. As of this year anyone at or over the age of 50 can contribute an additional $7,500 to work-based retirement plans, which otherwise limit contributions to $23,000 for anyone under the age of 50. For ordinary self-directed traditional IRAs and Roth IRAs, anyone under the age of 50 can only contribute $7,000 per year in 2024, but people age 50 and older can add $1,000 to that cap.
This isn't chump-change, particularly given that -- with the exception of Roth IRAs -- these contributions are usually tax-deductible.
Don't delay, start today
Excited? Worried? Maybe a little of both?
These emotions are understandable if you're 50 years old and your retirement savings aren't quite where they need to be. You've got some work to do, to be sure. But it's not too late to do it. You've got somewhere in the ballpark of 15 high-earning, relatively low-cost years to catch up. The key is just planning smart and being patient, accepting the fact that you're not going to close the gap in just a few months. Trying to do so would require taking on more risks than is merited, in fact -- a recipe for disaster.
Whatever the case, do start today even if you're starting out small. Something is better than nothing.
By the way, if you're looking for the next milestone to aim for, T. Rowe Price suggests you should have saved up between 4.5 and eight times your annual wages by the time you're 55, six to eleven times your annual salary when you're 60, and 7.5 times to 13.5 times (an average of 10.5 times) your yearly work-based wages by the time you're 65.
That last amount is around $700,000, if you're an average earner today, which is a lot more than $300,000 to be sure. Just keep in mind that market-based returns on the money you've already got invested will actually do most of the heavy lifting between now and then.
