Today's workers have a challenging task ahead of them in saving for retirement.
It's a rare employer that still offers a pension, and Social Security benefits are only designed to replace around 40% of your pre-retirement income. That means the majority of your income in retirement will need to come from your savings.
Retirement isn't cheap, though, and the average worker estimates retirement will cost around $1.7 million, a survey from Charles Schwab found.
That might sound like a crazy high number, but it may be fairly accurate depending on your situation.
If you spend $60,000 per year and live for 25 years in retirement, that's $1.5 million right there -- not even accounting for inflation. And with healthcare and long-term care costs skyrocketing, you could spend tens or even hundreds of thousands of dollars on those costs alone.
With that in mind, say you wanted to build an especially sturdy nest egg worth $2 million. How much would you need to save right now to reach that goal?
Age makes a major difference when saving for retirement
One of the most important factors when it comes to how much you need to save is your age. The more time you have left to save, the less you'll need to save each month to reach your goals.
This is why it's so crucial to start saving early. Thanks to compound interest, your money grows exponentially the longer it has to grow. So it should be no surprise that the sooner you start stashing cash in your retirement fund, the easier it will be to reach the $2 million mark.
For the sake of simplicity, let's assume you currently have no retirement savings and you're earning a modest 7% annual rate of return on your investments. Depending on the age you begin saving, here's how much you'd need to save each month to reach $2 million in savings by age 67:
|Age You Began Saving||Amount Saved per Month||Total Savings by Age 67|
Source: Author's calculations
It may be tough to stash away more than $500 per month at age 20, but it's downright impossible for the average person to save over $19,000 each month if they wait until their 60s to start saving for retirement. So even if you feel like you don't have much to save now, keep in mind that the longer you wait to start, the more challenging it will become to reach your goals.
Boosting your retirement savings when you don't have much cash to spare
If you're feeling discouraged by how much you need to save for retirement, remember that doing anything is better than doing nothing.
The majority of workers will not be able to save $2 million by retirement age, but that doesn't mean you're doomed to live your golden years in financial despair. What's most important is that you're saving something for the future.
If you're finding it challenging to round up any cash to save for retirement, take a hard look at your budget to see if there are any areas where you can cut back.
Start tracking your spending to get an idea of which categories of your budget you're spending the most in, then try to reduce your spending wherever you can. Sometimes it's tough to tell exactly where all your money is going each month, but once your expenses are laid out in front of you, it will be easier to see if there are areas where you're overspending without realizing it.
Once you have some extra cash to save, make sure you're investing it in the right places. More than half (53%) of Americans are putting at least a portion of their retirement savings in a savings account, according to a survey from Morning Consult, which is a mistake that's more harmful than it may seem.
Even the best savings accounts only have interest rates of 1% to 2% per year, which is hardly enough to keep up with inflation -- meaning your money could actually lose value if you keep it in a savings account long-term.
Although the stock market has its ups and downs, you'll typically see long-term returns of around 6% to 10% per year -- as long as you're properly diversifying your portfolio. So if you want to save a significant amount for retirement, you're much better off investing in the stock market than stashing your cash in a savings account. It may be intimidating, but it's the best way to help your money grow faster in a relatively short period of time.
Retirement can be incredibly expensive, and it may be daunting to try to save as much as you need. Most people may not be able to achieve $2 million in savings by retirement age, but it's still important to save as much as you can.
Every dollar counts, and the earlier you begin saving, the better off you'll be in retirement.