Having a cash balance that equals six times your annual salary by your 50th birthday is recommended, but it also depends on your personal circumstances.
In an ideal world, you will have more than enough money tucked away for retirement by the time you stop working. However, saving that much isn’t always easy.
A 2023 Northwestern Mutual Planning and Progress study discovered a wide discrepancy between the amount people have saved for retirement by certain ages, and how much they thought they needed. For example, participants in their 50s thought they needed $1.56 million in their accounts by their age but their average balance was $110,900.
Here’s how much you may want to have saved by the time you reach 50, and tips on how to make your goal a reality.
Six Times Your Salary, With Personal Conditions
In general, having a cash balance that equals six times your annual salary by your 50th birthday is recommended. Therefore, if you earn $74,580 – the real median household income in 2022 as per the U.S. Census report – $447,480 would put you in the safe zone.
It isn’t necessarily wrong to want to accumulate a specific dollar figure in your 401(k) or IRA by age 50, says Scott Sturgeon, founder and senior wealth advisor at Oread Wealth Partners in Leawood, Kansas. But a flat answer like you should have nearly half a million saved simply doesn’t work for everyone.
“You may have access to income streams like Social Security, a rental property, a business you own or even some part-time work you’re passionate about,” Sturgeon says.
“The better answer is to determine and target the right amount for your personal financial situation. To get that number, you’ll need to develop a comprehensive financial plan,” he adds.
All of your income streams will impact how much you need to save to fund your lifestyle in retirement.
What your investment portfolio balance should be also depends on your projected retirement expenses, and everyone has a different lifestyle. If you envision luxury travel and splurging on the grandkids, you’ll need a lot more than if you’re looking forward to staying close to home and living simply.
Or, perhaps you will transition into an expensive retirement community, or will need medical care that’s not covered by insurance.
“Instead of focusing on what you need your savings to be at 50, it might be a more prudent approach to build and implement a financial plan that’s going to incorporate the unique nature of your finances into determining what you need to do over the next 10 to 15 years to prepare for retirement,” Sturgeon says.
“Maybe it’s saving more, maybe it’s not, but until you have that transparency and guidance, it’s pretty much impossible to know an exact amount you would need at a certain period of time,” he says.
Follow the 4% Rule to Avoid Running Out of Money
The last thing you want to do is run out of money in your golden years. Kendall Meade, a Charleston, South Carolina-based certified financial planner at SoFi, recommends using the 4% rule as a preventative measure. It assumes a 30-year retirement.
“A rule of thumb is that you can safely withdraw 4% of your investment portfolio in the first year of retirement and adjust it for inflation in subsequent years without outliving your money,” Meade says, explaining that it comes from a study that analyzed rolling 30-year historical periods to understand the maximum sustainable withdrawal rate for a person living for 30 years in retirement.
It is also based on a portfolio in which half is invested in equities and the other half is invested in fixed income. With that in mind, consider how much you would like to have on hand to spend each year you aren’t working.
Meade offers the following financial goalposts:
- To spend $50,000 a year, you will need $1.25 million at retirement.
- To spend $75,000 a year, you will need $1.875 million at retirement.
- To spend $100,000 a year, you will need $2.5 million at retirement.
If these sums seem overwhelming, you can reduce the amount you need saved, says Matthew Wollmann, certified divorce financial analyst and vice president of investments at Wedbush Securities in Los Angeles.
“There are factors that would enable you to retire with less than $2.5 million and still receive $100,000 annually in retirement,” Wollmann says.
“You can work longer and delay retirement so you will receive more in Social Security benefits. Every year you delay taking Social Security you are afforded an 8% raise to your income benefit resulting in substantially more income if one can afford to wait until full retirement age,” he adds.
Haven’t Saved the Amount You Want? Follow These Tips
If you haven’t amassed much for retirement and your 50th birthday isn’t so far away, start to save aggressively now.
- Save raises and bonuses. “One of the biggest hindering factors for retirement goals is lifestyle inflation,” Meade says. “This is when your expenses increase as your income grows.” Instead of spending more as you earn more, save the money. It keeps your expenses lower, you’ll need less to replace your current lifestyle in retirement and more of your money will grow as it’s invested.
- Max out your company retirement plan. Employer-sponsored retirement accounts, such as 401(k)s and 403(b)s, allow you to save and invest using pretax dollars. If your company matches a portion of your contributions, you will receive free money to add to your savings. Contributions come straight out of your paycheck, too, streamlining the savings process. If you’re under the age of 50, the IRS allows you to contribute a maximum of $22,500 in 2023. If you’re 50 or older, you can add an extra $7,500.
- Jumpstart an individual retirement account. In addition to your employer’s plan, you can contribute to an IRA. For 2023, the IRS allows you to contribute a maximum of $6,500 to your traditional IRAs and Roth IRAs if you are under the age of 50.
- Take advantage of a health savings account. If you have access to an HSA, contribute as much as you can. In 2023 the IRS allows you to save $3,850 as an individual and $7,750 as a family. Instead of using the cash to fund healthcare costs, though, you can invest it. Allow the funds to grow and save the money for health care expenses in retirement. “This type of account is considered a triple tax savings,” Meade says. “You don’t pay taxes on the money you contribute, it grows tax free and as long as you use the money for qualified medical costs it is tax free when you take it out.”
Act Fast for Better Results
Keep in mind that you need to outrun the rising cost of goods and services.
“Inflation over the last 50 years is running 3.8%, making it important to map out your retirement plan because cost of living only goes up over time,” Wollmann says.
It’s easy to put off the tasks involved in saving for retirement. There’s always something else to do and other expenses to cover.
However, even a little effort to change your financial approach so that you do have enough money to live on when you stop working can make an enormous difference. By the time you hit your half century mark, you’ll want to feel like you’re on the right path for the next stage of your life.
