When it comes to retirement savings, everyone's situation is different. While a person can survive with a few hundred thousand dollars over several decades, another person may need more than a million dollars to make ends meet throughout their retirement.
For this reason, comparing your 401 (k) balance to that of someone else is like comparing apples and oranges. That said, it's hard not to be curious about what your friends, neighbors and colleagues have saved for retirement.
The average participant of 401 (k) has about $ 92,000 hidden in a retirement account, reveals a new report from Vanguard. But this number is skewed by energy consumers saving a lot of money in their 401 (k), a more telling figure is the median amount saved by workers – that's only $ 22,000.
Age is another important factor to consider when considering these numbers. A 25-year-old man with $ 22,000 saved is a good start, for example, but a 60-year-old man with $ 90,000 may be in trouble. The Vanguard Report also disaggregated the average and median savings amounts by age group and found that the savings achieved varied considerably:
|Age||Average balance 401 (k)||Median balance 401 (k)|
|Less than 25||$ 4,236||$ 1,427|
|25 to 34||$ 21,970||$ 8,126|
|35 to 44||$ 61,238||$ 22,123|
|45 to 54||$ 115,497||$ 40,243|
|55 to 64||$ 171,623||$ 61,739|
|65 and over||$ 192,877||$ 58,035|
Does this mean that if you have more than the average worker of your age, you are about to take a comfortable retirement? Not necessarily. Rather than comparing yourself to others, it is more important to calculate your individual number of retirees to assess whether you are saving enough.
Determine your unique retirement number
There is no single answer to what you should have saved during your retirement. Apart from the fact that everyone lives different lifestyles – some more expensive and others more frugal – many other factors come into play, such as whether or not you have a pension and the amount that you hope to receive in Social. Benefits of security.
One of the fastest ways to get a rough estimate of what you need to save is to use a retirement calculator. But since most calculators use slightly different algorithms, you will probably get several different results. This does not matter, though, because there is not one right answer to know how much you will need to save.
When entering your information, be sure to look at how the calculator determines your results. For example, does this figure in social security benefits? Otherwise, you may need to save a little less than this suggests. Does the calculator take into account inflation? If this is not the case, you may need to save more than you think.
Another way to estimate the amount you should save is to use the 25 rule. This rule is based on the 4% rule, according to which you can withdraw 4% of your total savings the first year of your retirement, then adjust the amount of this withdrawal. every year thereafter to account for inflation. The rule of 25 therefore simply allows you to work backwards to determine the total amount of your savings you should have based on the amount you have to withdraw each year.
So, for example, suppose you need $ 50,000 a year in retirement. You also expect to receive $ 1,500 a month (or $ 18,000 a year) in social security benefits, which will reduce the amount that must come from your personal savings to $ 32,000. Multiply that number by 25 and you will find that you will need to save around $ 800,000 when you retire. Then, if you want to check your work, take 4% of $ 800,000 for a result of $ 32,000.
How to tell if you are on track to reach your goal
So you know you need to save $ 800,000 by retirement. How do you know if you are saving enough to reach this goal? The key is to have a monthly savings goal in mind and then regularly check your progress every few years.
Most calculators will tell you what you should save each month to reach your ultimate retirement goal. But you can also use a compound interest calculator to play with different numbers and see how your total savings would change if you save different amounts each month.
In this example, if you are 30 years of age without savings and you want to retire at age 67 with $ 800,000, you will need to save just over $ 400 a month to achieve this goal, assuming you earn 7% per year. year. rate of return on your investments. But if you could save only $ 300 a month, you would save about $ 577,000, all other factors remaining unchanged.
Divide your goal into smaller, more manageable goals can sometimes make the economy easier. So, instead of fixing this intimidating figure of $ 800,000, focus instead on the goal of $ 400 a month. You can also break it down further by considering it as $ 100 a week, or about $ 13 a day. While you are saving, simply take it day by day or month by month to slowly but slowly reach your big goal.
In addition, do not forget to check your progress and to hold yourself accountable. If you fail to save one or two months, increase your savings over the next few months to catch up. Not saving a few hundred dollars may not seem like a big deal, but if you take the habit of not saving, you could end up with hundreds of thousands of dollars before you reach the point. retirement age.
From time to time, it is also a good idea to check your big goal to make sure it always fits your needs. Maybe you have health problems that could increase your retirement expenses, or maybe you have moved to a more expensive city and need more money than expected to maintain your lifestyle. current life. It is best to make the adjustments as soon as possible, when you still have enough time to save.
Rather than trying to keep pace with the Joneses and compare your savings to the ones your friends and colleagues have hidden, focus on what you need to succeed financially. In the end, it is your retirement that is at stake, and a more personalized approach to saving and setting goals will allow you to achieve the retirement of your dreams.