Planning for retirement can be confusing. Many people don’t understand how much they need to save every month in order to hit their goal, and their goal often isn’t informed by their own financial reality. For years, $1 million was touted as the ideal amount of retirement savings, but the truth is, you may need more or less than that. It all depends on how long you live, what your living expenses are, and how much money you’ll get from Social Security or a pension. However, for the sake of round numbers, let’s assume that that’s how much you need. How do you get there?

If you have a 401(k), the simplest solution is to make regular contributions every pay period. The amount that you need to contribute depends on how long your money will have to grow. Here are a few examples to illustrate this.

## The sooner you begin, the easier it becomes.

Let’s assume that you have the median income in the U.S. — $61,372 — and that you plan to retire at 65. Here’s a chart to give you some idea of how much you would need to save each month in order to retire with $1 million, depending on when you began saving. It also shows the percentage of the median income that would go toward this goal. All of these figures assume that you have no retirement savings prior to this and that your investments have a 6% annual rate of return.

Starting Age |
Monthly Contributions |
Percentage of Median Income |
---|---|---|

20 | $363 | 7.1% |

25 | $502 | 9.8% |

30 | $702 | 13.7% |

35 | $996 | 19.4% |

40 | $1,443 | 28.2% |

45 | $2,164 | 42.3% |

50 | $3,439 | 67.2% |

55 | $6,102 | 119% |

60 | $14,333 | 280% |

As you can see, the earlier you begin saving, the less of your own money you need to contribute and the more your savings accumulate. This is because of compound growth. When you contribute money to your 401(k), its value will begin to rise, assuming you’ve made smart investments. The longer it sits there, the more time it has to grow, and that means a larger nest egg for you to withdraw from once you exit the workforce.

But things get a little trickier if you wait until you’re older to begin saving. It’s still possible to begin in your 30s, but you’re now contributing a much larger portion of your income toward retirement. If you wait until your mid-40s, there’s a chance you may never reach your goal.

You’re allowed to contribute up to $19,000 to a 401(k) in 2019, or $25,000 if you’re 50 or older. If you do the math yourself, you’ll realize that after age 40, this limit is too low to enable you to ever hit your $1 million savings goal. The monthly savings amount for a 45-year-old, for example, is $2,164. In a year, that adds up to $25,968 — well above the contribution limits for this year. You could make up for some of this by investing the money in an IRA instead, but you may have to set your sights on a lower goal.

The same goes for adults who wait until their 50s to begin saving. While you do have the option of making catch-up contributions at this point, even this will not be enough to get you to your $1 million goal. This doesn’t mean you won’t be able to afford retirement, but you may not be able to retire as comfortably as you’d hoped.

## Factors affecting how much you must save

As I already mentioned, you may need more or less than $1 million to retire comfortably. The only way to know for sure is to get out your calculator and do the math. Subtract your estimated life expectancy from your planned retirement age to figure out how many years of savings you need. Then total up your estimated expenses in retirement, and don’t forget to factor in an extra 3% per year for inflation. You can use a retirement calculator for this if it’s easier. Then subtract what you expect to get from Social Security to find out what you need to save on your own.

The above examples assume that you had no retirement savings before you began contributing to your 401(k). However, this may not be the case for you. Any earlier contributions to 401(k)s or IRAs will help you, even if you go a long time before making another contribution. Here’s a calculator you can use to determine how much your prior contributions could be worth at your retirement age. Enter the current value of your account, your expected rate of return, and the number of years until you plan to retire. Then subtract this amount from your savings goal to figure out how much you still need to save.

It’s also important to factor in employer-matched funds, any of which significantly reduce the savings burden on you, if its offered. The numbers listed above represent the total amount that needs to be saved each month in order to keep you on track, but this could be entirely your responsibility or split between you and your employer. If your employer does match your contributions, you should aim to contribute at least enough to get the full match so you can take advantage of the free money.

Finally, the calculations above assume a 6% rate of return, but this is only an estimate. Your accounts may have a better or worse return, depending on what you choose to invest in. If you expect higher returns, you may not need to save quite as much each month because your money will grow more quickly. But if you’re relatively conservative and you think your returns may be lower, you may need to contribute a little more.

There is no magic formula for determining how much you need for retirement, but one thing is always certain. The earlier you begin saving for your retirement, the better off you will be. Even small contributions make a difference, so if you’re not already contributing to your retirement accounts, consider starting today.

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