Not Putting Enough Toward Retirement? Experts Say This Is the Magic Number
Written by
Caitlyn Moorhead
Edited by
Nicholas Morine
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Retirement is supposed to be a well-deserved time to kick off your work boots and live a life of leisure. You’ve toiled hard for decades and hopefully, you saved and invested enough money along the way to cushion your nest egg.
Unfortunately, this isn’t always the case as many Americans wind up neglecting their retirement savings altogether and aren’t financially equipped to retire anytime soon.
You could take advice from Gen Zers, who are more interested in “soft saving,” — the idea being that you focus on experiences that bring you enjoyment and promote your well-being now while saving less for the future. This relaxed approach toward retirement means working longer, or perhaps even not retiring at all.
Or, you could try a more structured millennial approach such as with the 50/30/20 budgeting rule, which is where you allocate 50% of your paycheck to needs, 30% to wants and the remaining 20% directly to your savings or retirement accounts.
However, not all financial advisors would be on board for either approach. So, you still might be wondering just how much you have to save to retire comfortably. Here’s what some of the experts say.
Experts Say 15% Is The Magic Number
“Shark Tank” star and successful businessman Kevin O’Leary explained to “Good Morning America” that it’s possible to retire a millionaire on an average income — but doing so requires discipline, as highlighted by GOBankingRates.
“The average salary in America is $60,000,” O’Leary explained. “If you invest 15%, you’ll end up with $1.5 million in the bank after a career, because it compounds with market returns of 6% to 8%. And you can do it with anything — all these apps you’ve got that are available out there, fintech apps, you could download and do this. You must invest 15% — minimum.”
He explained further that adjusting your lifestyle to ensure that you can save a minimum of 15% toward retirement no matter what should be your top priority.
What Is the 15% Rule
As the name would imply, the 15% rule suggests that you should save at least 15% of your gross income toward retirement every year. That’s a combination of contributions to employer-sponsored retirement plans like a 401(k)s, Roth IRAs and any personal high-yield savings accounts.
The goal is to have that percentage of your income invested in retirement accounts consistently over time, starting early to benefit from compound interest. This may seem like a lofty goal, especially for those in their 20s or early 30s who are just starting out in their careers.
However, experts like O’Leary emphasize that even incremental increases in saving early on can have an exponential impact on the future.
Don’t Underestimate the Power of Compound Interest
Why does saving early and consistently make such a difference? The answer lies in compound interest.
Compound interest allows your money to grow on itself — that is, you earn interest not only on your original contributions but also on the interest your savings have already generated. The longer your savings can compound, the more your money will grow.
For example, saving just $5,000 per year starting at age 25 could result in over $1.3 million by the time you reach 65, assuming an average 7% annual return. However, if you wait until age 35 to begin saving, you’d need to contribute over $9,000 annually to reach the same target.
The earlier you start, the less you need to save each year to hit the same retirement goals.
Final Take To GO: Retirement Age Numbers and Beyond
The bottom line is that many experts also recommend having a retirement savings goal based on your retirement age. One guideline commonly used is the idea of having 10 times your annual salary saved by the time you reach 67, or what has now become the traditional retirement age. If you make $50,000 annually, for example, you should aim to have $500,000 saved by retirement.
For those who want to retire earlier or have a more lavish lifestyle in their retirement years, that number can increase. Financial advisors generally suggest that you consider your desired lifestyle, anticipated healthcare costs and whether you’ll be downsizing your home or relocating to a less expensive area.
Saving for retirement early and often is crucial to building the foundation for a bright financial future.
Adam Palasciano contributed to the reporting for this article.
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