These are simple numbers but aren’t easy. Most people cringe at the mere concept of saving 15% of their income. What is even more frightening about this presentation is it shows how much income and what average rate of return you need to retire with a million dollars — a barely adequate amount for generations who are still working.
It’s always worth pointing out that saving in your 20s is incredibly more beneficial in the long-term than beginning to save even ten years later, much less twenty. The power of compounding is a wonderful thing.
Experts often recommend saving up $1 million before you retire. While that’s more than enough for some, others may not find it sufficient, thanks in part to longer life expectancy and disappearing pensions. Still, it’s a helpful rule of thumb as you begin to plan for your retirement needs.
To get there, financial planners suggest saving anywhere between 10% and 15% of your gross salary. To make the process easier (and less expensive), you’ll need to get started early — or earn a substantial salary later on. In many situations, that means bringing in much more than $61,372, the median household income in the U.S.
Below, CNBC calculated the amount you need to earn annually in order to save $1 million by 65 by putting 15% of your earnings into investments.
If you start at age 25:
- With a 4% rate of return, you need to earn $67,459 per year and save $843.24 per month
- With a 6% rate of return, you need to earn $39,971 per year and save $499.64 per month
- With an 8% rate of return, you need to earn $22,764 per year and save $284.55 per month
If you start at age 30:
- With a 4% rate of return, you need to earn $87,262 per year and save $1,090.78 per month
- With a 6% rate of return, you need to earn $55,872 per year and save $698.41 per month
- With an 8% rate of return, you need to earn $34,644 per year and save $433.96 per month
If you start at age 40:
- With a 4% rate of return, you need to earn $155,086 per year and save $1,938.57 per month (exceeds the $19,000 annual limit on 401(k) contributions)
- With a 6% rate of return, you need to earn $114,867 per year and save $1,435.83 per month
- With an 8% rate of return, you need to earn $83,563 per year and save $1,044.53 per month
For context, the average American’s 401(k) plan grew at a compound annual average rate of 14.2% between 2010 and 2016, according to a study of more than 6 million accounts by the Employee Benefit Research Institute, a nonprofit based in Washington, D.C. Of course, there’s no guarantee of similar growth in the future.
Keep in mind that these numbers don’t take into account the many ups and downs you may experience over your lifetime, including periods of unemployment or sudden financial windfalls or losses.
It’s also important to consider how pay increases will affect your savings over time. If you consistently put away 15% of your income, the actual amount you contribute each month will grow as your salary rises, which can help you build up your retirement fund more quickly.
And while it may be difficult to save 15% of your earnings when you only make around $30,000 or $40,000 a year, remember that you can work your way up. Save what you can now and increase your contributions as your salary rises. That may mean eventually putting away more than 15% of your salary later to make up for lost time.
To get started saving for retirement, take advantage of your employer-sponsored 401(k) plan, if your company offers one. You should aim to contribute at least enough to earn any company match, which is essentially free money. If your company doesn’t offer a 401(k) or comparable plan, or you max out your 401(k) for the year (the limit is $19,000 for 2019), you can still save for the future. Look into other retirement savings vehicles that offer tax benefits, such as a Roth IRA, traditional IRA and/or a health savings account. Beyond tax-advantaged account, you should also consider a brokerage account.
Remember: The most important factor in building a well-funded retirement account is to start saving and investing as much as you can as early as you can. You want to take advantage of compound interest, which is when any interest earned then accrues interest on itself.
No matter the amount you’re contributing, the earlier you’re able to start socking money away, the bigger the boost the stock market will give you in the long run.