Experts often recommend saving up $1 million before you retire. But for many people, even $1 million may not be enough, thanks in part to longer life expectancies and disappearing pensions.
For those looking to give their retirement plan a boost, CNBC calculated how much you need to put into your 401(k) each month in order to reach $2 million by age 65, depending on when you start saving. Most financial planners suggest you put away anywhere between 10% and 15% of your gross salary for retirement, so CNBC also calculated the salary you’d need to earn in order to save $2 million without putting away more than 15% of your income.
It’s worth noting that 401(k) plans come with contribution limits: In 2019, you can invest up to $19,000 in your account, up from $18,500 in 2018.
It’s also important to remember that investing through a 401(k) or other retirement savings account should be seen as a long-term plan. It’s impossible to predict future market returns, and investors should expect to experience both rises and dips in the market.
While these calculations don’t take into account the many ups and downs people experience over their lives, such as pay increases, periods of unemployment or sudden financial windfalls or losses, it can be helpful to get a sense of what you should be saving to build a substantial retirement fund.
Here’s how much you need to put away to save $2 million by age 65.
If you start at age 25:
With a 4% rate of return: $1,686.48 per month (exceeds the $19,000 annual limit)
- Annual salary needed if you save 10% of your income: $202,377.73
- Annual salary needed if you save 15% of your income: $134,925.24
With a 6% rate of return: $1,004.27 per month
- Annual salary needed if you save 10% of your income: $120,512.74
- Annual salary needed if you save 15% of your income: $80,345.84
With an 8% rate of return: $572.90 per month
- Annual salary needed if you save 10% of your income: $68,748.06
- Annual salary needed if you save 15% of your income: $45,834.33
If you start at age 30:
With a 4% rate of return: $2,188.83 per month (exceeds the $19,000 annual limit)
- Annual salary needed if you save 10% of your income: $262,659.38
- Annual salary needed if you save 15% of your income: $175,115.01
With a 6% rate of return: $1,403.79 per month
- Annual salary needed if you save 10% of your income: $168,455.30
- Annual salary needed if you save 15% of your income: $112,309.15
With an 8% rate of return: $871.88 per month
- Annual salary needed if you save 10% of your income: $104,626.11
- Annual salary needed if you save 15% of your income: $69,754.23
If you start at age 40:
With a 4% rate of return: $3,890.07 per month (exceeds the $19,000 annual limit)
- Annual salary needed if you save 10% of your income: $466,808.42
- Annual salary needed if you save 15% of your income: $311,221.17
With a 6% rate of return: $2,886.03 per month (exceeds the $19,000 annual limit)
- Annual salary needed if you save 10% of your income: $346,323.36
- Annual salary needed if you save 15% of your income: $230,893.79
With an 8% rate of return: $2,102.99 per month (exceeds the $19,000 annual limit)
- Annual salary needed if you save 10% of your income: $252,358.93
- Annual salary needed if you save 15% of your income: $168,247.70
As the numbers show, investing your savings early can be powerful thanks to compound interest, which is when any interest earned then accrues interest on itself. Basically, the earlier you’re able to start putting money away, the more it will grow. If you start at 25, you need to save far less each month to retire with $2 million than if you begin saving just 10 years later.
If you’re planning to put away more than the $19,000 401(k) limit, you’ll need to find additional ways to invest your money. First, take advantage of other retirement savings vehicles that offer tax benefits, such as a Roth IRA, traditional IRA and/or a health savings account. There are also limits to how much you can save in these accounts (in 2019, you can contribute $6,000 total into your traditional and/or Roth IRA and $3,500 into an HSA, $7,000 for families). Once you hit those limits, you’ll want to consider more traditional brokerage accounts, like ETFs or mutual funds.
To figure out where to start investing, you should first determine which account — your 401(k) included — is the best option for you, depending on your income and tax status, Nick Holeman a certified financial planner and senior financial planner at Betterment, tells CNBC Make It.
Traditional 401(k) plans, for example, offer tax savings up front, while Roth-style accounts offer tax-free withdrawals in retirement. Here’s a breakdown of how different types of plans work.
“Most people should start with 401(k) if there’s a match,” Holeman says. But, “if your 401(k) has really high fees or really bad investment options, you might be better off starting with a traditional or Roth IRA and then going to your 401(k) after you’ve maxed that out.”
Begin by contributing to the account that makes the most sense for you. Then, “waterfall your way down,” Holeman says. “Figure out how much you need to save, then rank the accounts from best to worst and fill up the buckets as you go until you’re unable to save anymore.”
Of course, saving hundreds or thousands a month is an ambitious goal. But even if you aren’t able to put in that much every month, you should aim to contribute enough to your 401(k) to earn any match your employer offers. It’s essentially free money: When companies offer a 401(k) match, they agree to kick in whatever contribution you make up to a certain amount, so if your employer offers a 5% match, and you contribute 5% of your salary, the equivalent of 10% of your salary goes into the tax-advantaged account.
This year, the average employer 401(k) match is 4.7%, according to Fidelity, which manages more than 30 million retirement accounts. That’s a record high, the company tells CNBC Make It.
