Many financial experts recommend saving at least $1 million in order to live comfortably in retirement. But the average American believes that they need even more than that: $1.7 million, according to a recent survey from Charles Schwab, which looked at 1,000 participants in 401(k) plans nationwide.
However, many people fall short of that goal. To get an idea of what it actually takes to build up a $1.7 million retirement portfolio, CNBC calculated how much you’d need to save and invest each month in order to reach that milestone by 65, depending on when you start.
Most financial planners suggest putting 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 $1.7 million — without putting away more than 15% of your income.
Keep in mind that although these calculations can help you get a sense of what you should be saving to build a substantial retirement fund, they 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.
Here’s how much you need to put away to save $1.7 million by age 65.
If you start at age 25:
With a 4% rate of return: $1,433.51 per month
- Annual salary needed if you save 10% of your income: $172,021
- Annual salary needed if you save 15% of your income: $114,686
With a 6% rate of return: $853.63 per month
- Annual salary needed if you save 10% of your income: $102,436
- Annual salary needed if you save 15% of your income: $68,294
With an 8% rate of return: $486.97 per month
- Annual salary needed if you save 10% of your income: $58,436
- Annual salary needed if you save 15% of your income: $38,959
If you start at age 30:
With a 4% rate of return: $1,860.50 per month
- Annual salary needed if you save 10% of your income: $223,260
- Annual salary needed if you save 15% of your income: $148,848
With a 6% rate of return: $1,193 per month
- Annual salary needed if you save 10% of your income: $143,187
- Annual salary needed if you save 15% of your income: $95,463
With an 8% rate of return: $741.10 per month
- Annual salary needed if you save 10% of your income: $88,932
- Annual salary needed if you save 15% of your income: $59,291
If you start at age 40:
With a 4% rate of return: $3,306.56 per month
- Annual salary needed if you save 10% of your income: $396,787
- Annual salary needed if you save 15% of your income: $264,538
With a 6% rate of return: $2,453.12 per month
- Annual salary needed if you save 10% of your income: $294,375
- Annual salary needed if you save 15% of your income: $196,260
With an 8% rate of return: $1,787.54 per month
- Annual salary needed if you save 10% of your income: $214,505
- Annual salary needed if you save 15% of your income: $143,011
Your retirement fund shouldn’t be languishing in a traditional savings account. Instead, invest those dollars in a tax-advantaged retirement plan, such as a 401(k) or Roth IRA. 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.
The simplest way to get started is to contribute to your employer-sponsored 401(k) plan. Even if you aren’t able to save much, you should still aim to put enough into your 401(k) that you earn any match your company offers, which is 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.
But 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.
What to do if you exceed the 401(k) limit
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.
Here are three steps to follow to get the most out of your investment dollars:
1. Figure out which retirement savings account makes the most sense for you
Determine which tax-advantaged retirement savings accounts are the best options 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. These can include a 401(k), Roth IRA, traditional IRA and/or a health savings account.
Traditional 401(k) plans, for example, offer tax savings up front, while Roth-style accounts offer tax-free withdrawals in retirement.
2. Max out your retirement accounts
Once you’ve determined the best account for you, contribute as much as you can.
“Most people should start with their 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.”
Once you’ve maxed that out, “waterfall your way down” through other tax-advantaged accounts, 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.”
Keep in mind account limits. In addition to the $19,000 you can put in your 401(k), you can also contribute $6,000 total into your traditional and/or Roth IRA. Individuals can put $3,500 per year into an HSA and families can contribute up to $7,000.
3. Branch out to other investments
Once you hit the limits, you’ll want to consider more traditional brokerage accounts, like ETFs or mutual funds.
For retirement savings, Berkshire Hathaway CEO Warren Buffett recommends low-cost index funds. “Consistently buy an S&P 500 low-cost index fund,” he told CNBC’s On The Money in 2017. “I think it’s the thing that makes the most sense practically all of the time.”
He’s not just talk: Buffett has even said he’s instructed the trustee in charge of his estate to invest 90% of his money into the S&P 500 for his wife after he dies.