It's wise to start saving for retirement as soon as you get your first job. But for those who delayed or were unable to do that, all hope is not lost.
Even starting at age 50, it is possible to save more than $1 million for retirement, according to research released in May by the American Association of Individual Investors (AAII). Or looking at it another way, even for those who have paltry savings by the time their 50th birthday rolls around, adding $1 million to their nest egg from that point forward is attainable. Many 401(k) participants save less than the 15% of pay that is often recommended, data from Vanguard and Fidelity show.)
The chart below from the AAII shows five different scenarios of how much people can accumulate by saving from age 50 to age 70:
- You make the maximum 401(k) contribution, including the catch-up contribution allowed for those 50 or older (a total of $24,000 a year).
- You make the full $18,000 a year 401(k) contribution, but skip the catch-up provision.
- You save $1,000 a month (setting aside $12,000 a year).
- You contribute the maximum to an IRA, including a catch-up contribution ($6,500 per year).
- You make the maximum $5,500 IRA contribution, but skip the catch-up provision.
In each case, Charles Rotblut, a vice president at AAII and editor of the AAII Journal, assumed that you would earn 8% a year from a stock and bond portfolio. The 401(k) and IRA contribution limits are based on the rules for 2017.
The projected account balance at 70 years old ranges from $1.3 million for a person who maxes out his or her 401(k) including catch-up contributions to $300,000 for a person who saves only to the basic $5,500 annual IRA limit.
Of course, for people who have been half-hearted savers, putting aside as much as $24,000 a year — even with a substantial paycheck — won't be easy.
Meeting that goal will likely involve changing saving and spending habits. Cutting habitual and often mindless day-to-day spending, like going to Starbucks for a $4 cup of coffee, is a start. But for people who don't have a history of saving, it may also require far bigger changes like downsizing housing costs or taking a second job. (Some diligent savers take similar moves in order to afford early retirement.)
"People need to look for ways to both save and consider what they can do to boost their income, whether it's getting a promotion where they're at, changing jobs, or, in some aspects, considering having a part-time job in addition to their full-time one," Rotblut said.
A recent study found that more Americans than ever believe they will need at least $1 million for a comfortable retirement. But dwelling on that target number will make the task more daunting, Rotblut said.
"Worrying about the big number they're going to reach, it's going to seem almost unattainable," he said. Instead, people should focus on finding ways to save money because "they'll realize they'll make far more progress than what they think will be possible."