Saving and investing for retirement is essential if you want to enjoy your golden years.
The average Social Security benefit for retired workers is currently $1,915 per month. That's not a ton of money to cover necessary expenses as well as retirement hobbies, activities, travel, etc. But consistently saving and investing in a tax-advantaged retirement account like a 401(k) or IRA can set you up to be able to spend much more later in life.
If you're looking for a benchmark for how much you should have saved in your retirement accounts by the time you call it quits, you might want to start with knowing how much the average retiree has today. Fortunately, the Federal Reserve surveys American households every three years, detailing demographic and financial details, including how much they have saved in their retirement accounts.
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Here's how much the average retiree has in their retirement accounts
The Fed's survey of consumer finances asks for details on all sorts of retirement accounts. That includes employer-sponsored plans like 401(k)s and Keoghs, every flavor of IRA, and even the cash value of pensions.
The most recent Fed survey took place in late 2022. It found the average retirement account balance among people who'd already retired was $513,200. However, that average was pulled up by retirees with substantial savings in their accounts.
A better metric may be the median balance, which is the amount that half of retirees have more than and half have less than. The median balance in retirees' retirement accounts was $170,000.
It's important to note a few things about those numbers. First of all, that only includes retirees with any savings in retirement accounts. Anyone who doesn't have a pension or a retirement account balance doesn't count toward those averages. As such, the real averages are lower when you account for those households. Second, it includes retirees of all ages, whether they just quit working or they're decades into retirement. (The oldest person in the most recent survey was 95.)
For some, those numbers may seem out of reach. Building a six-figure nest egg takes years of consistent saving and investing. For others, they may seem low. But don't get too complacent. The truth is that $170,000 probably isn't enough for most people to live the retirement they want.
If you make a plan and stick to it, you can outdo the average retiree and set yourself up for a great retirement.
How to become better than average
If you want to retire with a better-than-average retirement account balance, you need to dedicate yourself to saving and investing.
The lowest-hanging fruit may be your employer's 401(k) match. If you're not getting the maximum matching contribution from your employer, you're leaving free money on the table. Even if your 401(k) has high fees, it usually makes sense to contribute enough to receive the maximum employer match. Few investments provide an immediate return of 50% or 100%, but the 401(k) match is one of them, though not all employers provide a match.
Beyond the 401(k), consider using an IRA. You can open one with no fees and you get a couple of tax advantages on your investments. With a traditional IRA, you can deduct any contribution from your taxes, which may allow you to save more for retirement today. With a Roth IRA, you won't pay any taxes on your withdrawals in retirement, which can help your money go further when you're spending it. You won't pay any taxes on capital gains or dividends in either account.
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Another advantage of IRAs is that you have more investment options than a 401(k). You can invest in most securities offered in a standard brokerage account instead of a set list of funds offered in your employer-sponsored plan. Even so, a broad-based index fund investing in all the stocks in an index like the S&P 500 may be your best choice for both an IRA and a 401(k). It's simple, straightforward, and requires very little account maintenance.
Consistently investing just a few hundred dollars each month in an index fund in your retirement accounts could result in a retirement account approaching seven figures by the time you leave the workforce, if you start early enough. Even if you're starting late, you can still catch up by piling as much as you can into your accounts. The IRS will even let you add thousands of dollars more per year into those accounts once you reach 50 years old thanks to catch-up contribution limits.
The earlier you start, the better, but there's almost always a path to achieving an above-average retirement.
