The average retiree on Social Security today gets about $1,915 a month, or roughly $23,000 a year. If the idea of having to live on such little income scares you, then the solution is simple: You'll need to build up a retirement nest egg so you have money outside of Social Security to fall back on.
Motley Fool research finds that the average retirement savings balance is $333,945 based on the most recent data available. But the median retirement plan balance is only $87,000. And when you have a median that's considerably lower than the average, it's an indication that the median is a more representative figure.
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A retirement savings balance of $87,000 is clearly better than a $0 balance. And it's also important to note that $87,000 in retirement savings means something very different for a 35-year-old than for a 62-year-old.
But let's be real -- you probably want to do a lot better than $87,000 in the context of growing your retirement nest egg. The good news is that if you play your cards right, you could wind up with $1 million to your name -- and a really sweet retirement to follow.
It's all about starting young and choosing the right investments
You might assume that to retire with $1 million, you need to give up every possible enjoyable thing you spend money on and save every cent of your paycheck you can. Well, that's just not true. You can actually get away with saving very little of your income and still wind up with $1 million. But to do that, you need two things:
- Time.
- The right investment strategy.
The first simply means you need to start saving for retirement early on. Don't wait until your 40s even though it may be tough to carve out money for retirement savings when you're younger. The more years you have to enjoy compounded returns in your 401(k) or IRA, the larger a balance you stand to wind up with.
For the second, the right investment strategy should really focus on stocks. While they carry risk, they've historically offered a lot of reward.
If you're not confident in your ability to put together a portfolio of individual stocks, though, fear not. You can do quite well for yourself by loading up on S&P 500 index funds.
The path to $1 million may be pretty smooth
So let's put everything together, shall we? Imagine you're 26 years old and are ready to get serious about retirement savings.
If you sock away $300 a month in a retirement account between now and age 67, which is your full retirement age for Social Security purposes, and your portfolio generates an average annual 8% return, which is a notch below the stock market's average, you could end up with just over $1 million.
Meanwhile, the Bureau of Labor Statistics puts the median annual wage for 26-year-olds today at about $56,000 . Contributing $3,600 of that toward retirement means parting with about 6.5% of your income. That's not an easy thing to do per se, but it's fairly reasonable. After all, it's not like you're looking at giving up 25% of your paycheck.
So there you have it. An $87,000 nest egg might make for a more comfortable retirement than a $0 nest egg. But if you really want to enjoy your senior years to the fullest, then it pays to aim much higher. And you may be surprised at how easy it is to amass a full million by the time your career is set to wrap up.
