Most Americans know that they should be saving for retirement. The problem is most don’t save enough, and some don’t save at all.
In fact, according to the most recent report from the Transamerica Center for Retirement Studies (TCRS), current retirees have an estimated median retirement savings of $75,000, while 31% of retirees have less than $50,000 in savings, and 9% had no savings whatsoever.
When we look at Americans who are still working — and should be actively saving for retirement — it seems the trend toward under-saving will be perpetuated by younger generations as well. According to another study by TCRS, the average estimated retirement savings by age group for each decade of an American’s working life is well below what is recommended. It breaks down as follows:
While the numbers don’t look great for those who wish to enjoy a comfortable retirement, there are steps you can take to ensure you don’t face a retirement income shortfall when you do decide it’s time to stop working. By acting now, you can help your future self enjoy a more leisurely and relaxed retirement.
How Much Do You Need?
First, you’ll need to determine how much you should have saved during each decade of your career based on your current income. If you need help figuring that out, take a look at How Much Money Should I Have Saved.
For the sake of comparison, let’s assume that you make about the average household income in the U.S. — or $75,000 — annually.
- Recommended savings by age 25*: $45,000
- Average retirement savings: $16,000
The first rule of any good retirement savings plan is simple: start early. If you start saving early in your career, you can set the foundation for a secure retirement much more easily than if you were to wait even five or 10 years. This is due to the power of compound interest.
While many 20-year-olds are burdened with overwhelming student loan debt — the average 2017 graduate owed $28,650 — even saving a small percentage of your income can fast-track you to financial success.
First of all, if your employer matches a certain percent of contributions you make to your defined benefits plan — generally a 401(k), 403(b), or 457(b) — set up an automatic contribution that is at least enough to capture that match. For example, if your employer will match 2% of your annual income, at $75,000 a year, you should contribute at least $1,500 each year.
If you have high-interest debt (debt with interest rates higher than 5.5%), focus on paying that down as quickly as possible. Otherwise, the interest will cost you a lot over time and slow your progress toward retirement. Then turn to putting money away toward retirement each month.
If even the thought of paying down your debt faster or adding small contributions to your retirement seem out of reach, consider saving money in other ways so that you can meet your financial goals. For instance, cut out unnecessary expenses like your morning latte, an unused gym membership, or cable. If you can’t cut back on expenses, you might want to consider a part time job to pad out your savings and retirement accounts. After all, you likely won’t ever have as much energy as you do now, or as much free time.
- Recommended savings by age 35*: $127,500
- Average retirement savings: $45,000
By the time your 30s roll around, you’ll likely be more established in your chosen field. Along with that experience comes a bit more financial stability. Maybe you’ve gotten a substantial raise, and diligently made loan payments in your 20s to greatly reduce your student loan debt.
However, while your 20s may have been less financially secure, your 30s will likely introduce new life events that can often distract you from your retirement plan. Many millennials are waiting well into their 30s to buy a house, and more Americans are waiting until their 30s to start a family.
With that added responsibility comes added expense. For instance, in some U.S. cities, home prices are more than 10 times what the median household earns. In addition to that, the USDA estimates that it costs an average of $233,000 to raise a child.
How are you supposed to fit in retirement savings around your current life?
At a minimum, maintain the level of savings you set in your 20s by continuing to contribute enough to your 401(k) to capture any employer match. Then, if you haven’t done so already, open an Individual Retirement Account — either a traditional or Roth IRA — and put any extra cash in that account up to the annual limit ($6,000 in 2019).
If you’re able to max out your IRA, try to increase your 401(k) retirement savings by 1–2% each year up to the maximum ($19,000 in 2019). By increasing your savings incrementally, you’re less likely to miss those extra few dollars in your paycheck. And even if those percentages seem small, even a little bit extra every month can grow substantially over time with the compound interest on your side.
- Recommended household savings by age 45*: $232,500
- Average household retirement savings: $63,000
By the time you reach your 40s, you should be well-established in your career. You’ve hopefully had significant pay raises by now, providing additional money for savings goals. But with more money, as they say, comes more problems. While you might have a bigger paycheck, you might also have heftier monthly expenses, such as a mortgage payment and a growing family to support.
Financial experts recommend you have three times your annual salary saved in retirement accounts by the time you start your 40s, but to many that might seem impossible. It is at this point in their careers that many Americans fall dangerously behind in their retirement savings.
If you’re significantly behind, take a careful look at your monthly expenses. You may find you’re spending money on luxuries you could do without. If you can trim the fat in your monthly expenditures, it is in your best interest to try to max out your retirement accounts during this decade of your working life.
- Recommended savings by age 55*: $390,000
- Average retirement savings: $117,000
When you reach your 50s, you’re getting close to retirement so this is a critical time if you haven’t already started saving. However, your financial situation is likely more complicated than ever. That house you bought back in your 30s might need some maintenance, and by now you might be paying your kids’ college tuition.
The upside is that you’re probably taking home more in every paycheck than you ever have. If you can avoid lifestyle inflation, the good news is that you can use that extra income to start making catch-up contributions to your retirement accounts. If you’re over the age of 50, you can contribute an extra $1,000 each year to your IRA, and an extra $6,000 each year to your 401(k).
If you’re significantly behind in your retirement goals, you might want to consider downsizing that older home for a smaller, newer model when your kids move out for college. At this point, it is also likely a good idea to consider a financial advisor to help you with your retirement planning, and to make sure you’re maximizing your return on any investments you’ve made up to now.
- Recommended savings by age 65*: $645,000
- Average retirement savings: $172,000
Once you make it to your 60s, you’re in the home stretch. By now, you should start reaping the benefits of all those decades of saving.
We recommend you have 10x your annual salary at this point, although the average American falls far short at only $172,000. Unfortunately, it will be much harder to make up for any shortfall at this point. Compound interest won’t have time to work its magic, and any money you put aside will have much less time to grow before you need to use it for living expenses.
While Social Security benefits can be helpful to Baby Boomers when making up the difference — the average monthly benefit for a retiree was $1,461 per month in 2019 — it typically doesn’t cover all monthly expenses. Additionally, millennials and some of Gen X should seriously consider saving earlier in their careers. After all, the Social Security Administration forecasts it will run out of reserves by 2037, and the first millennials will start hitting retirement age around 2040.
Start Saving Now
While how much money you need in retirement will vary based on your income level over the course of your working life, as well as your spending habits, it’s important to put aside money for the future.
It doesn’t matter whether your current nest egg is behind the recommended amount. At any age, the most important step you can take to secure a comfortable retirement is to start saving — now.
*All calculations based on a $75,000 annual household income.