Retiring a millionaire is something many people aspire to do. But recent data from Vanguard indicates that it's not a particularly common achievement.
In its most current How America Saves report, Vanguard put the average retirement savings among Americans aged 65 and older at $272,588. But there's more to the story.
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When we look at the median retirement savings balance for that same age group, we get to only $88,488. When you have this type of discrepancy between an average and a median, it generally indicates that the median is a more representative number.
In this case, what's likely happening is that a small percentage of very strong savers are driving the average retirement plan balance upward. But most older Americans are likely lacking in savings, since a balance of $88,488 isn't particularly large. In fact, if we apply the 4% rule to that sum, it results in an annual income of about $3,500 from savings. Even in addition to Social Security, that's not a lot to live on.
But things don't look much rosier for those with $272,588 in savings, either. Using the 4% rule, a balance that size gets us to about $11,000 in annual income. It's an improvement from $3,500, but it's not a huge amount.
If these numbers are worrying to you, that's understandable. But you should also know that with the right strategy, you can set yourself up to retire with a lot more money than the typical older American today.
Grow your savings to the max
Older Americans today had a disadvantage earlier on in their careers. Many were probably led to believe that they could work hard and receive a pension that would sustain them during retirement, only to see private sector companies largely do away with that model over the years.
Today's workers are no doubt well aware that pensions are no longer the norm. That gives them an automatic edge -- motivation to save.
If you're eager to retire with well more than $88,488 or $272,588, you need to do two things:
- Start socking money away in an IRA or 401(k) plan at a young age
- Invest heavily in stocks to grow your portfolio
The more time you allow your money to sit in an invested retirement plan, the more gains you're apt to be looking at. That could spell the difference between a cash-strapped retirement and a comfortable one.
In fact, let's say you begin saving for retirement at age 30 and continue doing so until age 67, which is full retirement age for Social Security for people born in 1960 or later. If you sock away $400 a month during that time and your portfolio delivers an average annual 8% return, which is a bit below the stock market's average, you'll end up with about $975,000 . That's more than 3.5 times the average savings balance among Americans 65 and older today.
Even if you get a later start to retirement savings, if you manage to save $400 a month over 27 years instead of 37, you'll still end up with about $419,000 to your name, assuming that same 8% return. And if you can boost your monthly contributions to $500 in this scenario, you're looking at $524,000.
It's OK to aim higher
Retiring on $272,588 isn't the end of the world. Those who live frugally may be well-equipped to make a nest egg that size work. But that doesn't mean you shouldn't try to do better. With the above strategy, you have the potential to set yourself up for the retirement of your dreams.
