You’ll need money in retirement to cover your bills outside of Social Security. These monthly benefits will only replace about 40% of your pre-retirement income if you earn an average salary. If you prefer not If you’re facing a 60% pay cut in retirement, then saving for yourself is crucial. And you can do it in an individual retirement account (IRA), 401(k), or a combination of the two.
You may be in the early stages of your career and your retirement plan balance is minimal. Or maybe you’re in your late 40s or early 50s and curious about how your savings compare to the average person’s. Recent data from the Federal Reserve tells us that among people with retirement savings, the average balance in 2022 was $331,400. And if you’re thinking “damn, my balance is nowhere near the same”, stop there.
The only reason to panic over a low retirement plan balance is if you’re about to end your career and don’t have time to catch up. Even then, all is not lost, although you may need to make some adjustments to your plans.
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But if you’re several years away from retirement, don’t worry if your IRA or 401(k) balance doesn’t come close to average. You may be able to increase your nest egg without having to part with a lot of money.
A difficult comparison
Before we talk about building a big nest egg, let’s get one thing out of the way. The average retirement saver may have a balance of $331,400, but if you only have a few years to save for the future, you might naturally have much less.
Remember, there is a big difference between being 25 and 55 in the context of saving for retirement. So give yourself a little grace if your balance isn’t close to $331,400.
Also remember that the Federal Reserve calculates the retirement balances of all savers, including the highest earners. It may be that a small percentage of very high IRA or 401(k) balances push the average up.
How to increase your retirement plan balance
You may have very little money saved for retirement. You may not even have any saved yet. Do not panic. When it comes to building a nest egg, time is a very effective tool. The stock market too. Put them together and you could end up with a lot of wealth over time.
Over the past 50 years, the stock market has generated an average annual return of 10%, as measured by the S&P 500. If you load your IRA or 401(k) with S&P 500 stocks or index funds (funds that track this index), you could benefit from the same return over time.
So let’s say you can contribute $200 per month to a retirement plan over 30 years. You’ll have about $395,000 at the end of your savings window thanks to this 10% average annual return on your investments. And even though that’s certainly not the case easy Parting with $200 a month, especially if you have a lot of expenses, if you earn a typical salary it can be doable with careful planning and spending.
If your retirement plan balance is comparable to that of the average saver or, better yet, higher, congratulations! This is a great achievement. But don’t worry if your balance is much lower, because over time you could see it take off in a big way.
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