How much difference would $200,000 make to your retirement nest egg? If you decide you can retire comfortably with $200,000 less in savings, how much sooner could you retire?
And what's the first retirement planning step you should take if you want to retire early or save that extra $200,000?
Those are real-world questions because $200,000 is how much less money — that's right, less — workers in 401(k) plans tell Charles Schwab they'll need to start retirement compared to how much they figured they'd need in 2021.
Now, 401(k) members say they'll need only $1.7 million for retirement. That's down from the $1.9 million that workers said they would need 14 months ago.
That translates into working about two and a half years less if you keep saving at the same pace, in a conventional work-and-save scenario.
Retirement: How Soon?
This analysis assumes you start to work and save at age 25. It also assumes you retire at age 70. Why? That's when your Social Security benefit will top out. Under current rules, your benefit can't grow any bigger just from delaying its start beyond 70.
This scenario also assumes that your annual pay is $50,000 at age 25 and grows 2% a year.
That's realistic. The average annual salary for private-sector, nonfarm, U.S. workers of all ages was $58,060 as of July, according to the Bureau of Labor Statistics.
This scenario also assumes your retirement savings are invested so they grow at an average annual rate of 7%.
That's conservative. On average, the S&P 500 has grown more than 10% per year since 1926, through July 31 of this year. And that includes lots of steep downturns such as the Great Depression.
How Much You Must Save For Retirement
In addition, our forecast assumes that you sock away 6.87% of your pay. That's what it will take for you to reach a $1.9 million balance by age 70.
That 6.87% rate of savings should be very doable. It's well below the 10% that financial advisors universally recommend. With luck, it shouldn't pose a financial burden on you.
Common Company Match
And we assume you have the most common size company match: 50% of what you contribute, up to 6% of your annual salary.
So, all in all, by the time you turn age 70, your nest egg would grow to roughly $1.9 million.
At that pace, your retirement savings balance will have reached $1.7 million when you were about 67-and-a-half years old.
So it takes two and a half years to save the extra $200,000.
Most Important Question Before Retirement
But what you should really figure out is how much income your savings will provide in retirement.
Figuring that out should be your first step in retirement planning, says Rob Williams, managing director of financial planning, retirement income and wealth management at Charles Schwab.
Do that even before you pick a target amount as your retirement savings balance.
Why focus on income? The best way to tell how much savings you'll need by retirement is to find out how much income your savings will generate.
Will it be enough based on your lifestyle, health and life expectancy?
Online Calculators
To learn how much income your savings will generate, use an online retirement income calculator. Calculators typically tell you how they reach their conclusions.
If the income projection is not high enough, alter the numbers to see how much savings you need to generate the amount of income you'll want. "The modern approach to retirement planning is not about interest rates and CD rates or bonds," Williams said. "It's about how much you can withdraw from a diversified portfolio over the number of years you expect to be retired, with a cushion so you can feel confident the money will last."
Second Planning Step
Your second step? Remember that you'll have financial help. You won't have to cover all of your expenses from savings. A single-earner household with $100,000 of income before retirement at age 67 can expect Social Security to replace 27% of their preretirement, pretax income, according to Fidelity Investments.
Forty-five percent of their replacement income will typically come from their own savings.
The household makes up for the final 28% by lowering spending after retirement. The household no longer needs to spend money for things like commuting to work, buying work clothes, paying for lunch at work and contributing income to retirement savings, Fidelity says.
As for the nuts and bolts of actually saving the money, stick to the basics:
- Start early. Start saving for retirement as soon as you begin work. "The later you start, the more dollars you'll have to take out of your paycheck every month," Williams said.
- Save enough. Experts urge you to save 10% of your annual pay. Odds are, your total savings will be about 15% of your pay once you receive any company match.
- Invest savings properly. When you're young, invest for growth. The portion of your portfolio whose purpose is not to pay for near-term goals has time to rebound from any pullback in the market, like the current one. In your fifties and older, whether you devote 100% of your diversified, long-term portfolio to stock funds depends on your risk tolerance, goals and time frame. But focus on growth when you're young. In your twenties, thirties and forties, invest up to 100% in stocks and stock funds, says T. Rowe Price.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform.
