Wealthy Americans — those in the top 10% by net worth — are miles ahead of middle-class Americans when it comes to their retirement savings.
As of 2022, the 10%ers had an average of $1.3 million in retirement savings, according to a Motley Fool Money analysis of Federal Reserve data. And that only includes assets held in retirement accounts — not any other funds or properties.
Meanwhile, middle- to upper-middle-class Americans had an average of $106,000 in their retirement accounts.
That may seem discouraging, but believe it or not, ordinary people can save $1.3 million or more for retirement — if they start early and invest aggressively.
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How can a typical American save $1.3 million for retirement?
There are four big factors that determine how much you can save for retirement:
- Your income
- How much of your income you save for retirement
- How much time you have left before retirement
- How you invest your retirement fund
If you start early and invest 15% or more of your income into high-growth assets like stocks, then you’ll be well on your way to saving seven figures. If you’re around 40 or older and far behind, you might still get there — if you dig deep and find ways to increase your income and cut back on spending.
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Example: a 30-year-old earning $50,000
Let’s say you’re 30 years old, you earn $50,000 a year, and you’re starting with $0 in retirement savings.
If you put 15% of your wages into a 401(k) or individual retirement account (IRA) — a total of $7,500 per year — and earned 7% per year on your investments, then you’d have a nest egg of $1,294,000 at age 68.
This assumes you never get a raise at any point in your career, which you probably will. And that 15% can include an employer 401(k) match. So if your employer matches 401(k) contributions of up to 5%, you’d only need to pitch in 10% of your own money.
This also assumes you earn less than the stock market’s long-term returns of 10% per year (as measured by the S&P 500 Index). So it’s possible that you earn more than 7% per year — but it’s safer to assume that you won’t.
You will need to invest in some high-growth assets like stocks, though. If you just put your money in a high-yield savings account, it won’t achieve the growth you’ll need.
Example: a 45-year-old earning $80,000
Now let’s say you’re 45 and you make $80,000 a year. You have $100,000 in retirement savings — a bit below the median amount for your age group.
If you invested 20% of your income (including any employer match) and earned 7%, you’d have $1,329,000 in your retirement accounts at age 68.
If you were starting with $0 in retirement savings, though, you’d need to save at least $24,000 a year — 30% of your income — to reach the same result.
The biggest factor is time, so start now
There are two big things to remember here.
- Thanks to compound interest, the sooner you start investing, the faster your retirement savings will grow.
- Even if you can’t realistically save $1 million or more by retirement, saving aggressively now will still give you the best odds of retiring with the income you need.
Also remember that there is no “magic number” when it comes to retirement savings. You don’t need to keep up with the wealthiest Americans, and most of us can get by on far less money than they have. Just aim high and save as much as you can — starting now.
