For years, a $1 million nest egg was considered the gold standard in retirement planning, but times have changed. Now, many people expect to spend closer to $2 million.
Saving that much can seem like a tall order, but it actually might take less money than you think. In fact, there’s one path that can get you there for just $358 per month.
How to turn $358 a month into $2 million
Saving $2 million on your own for retirement is an impossible feat for most people, which is why investing is key. You might only earn a few dollars in interest per year with a savings account, but if you invest your money, you could see it grow by over 30% in some years.
Of course, there’s also a risk that you could lose money. But over the long term, the stock market tends to do well. Over the last 50 years, the S&P 500 index has had an average annual return of 9.4%. That can help your money grow much more quickly than a savings account.
If you earned a 10% average annual rate of return over 40 years, you’d only need to invest about $358 per month to reach your $2 million goal. That’s not too bad, but it might not be a feasible savings plan for you.
For one, there’s no guarantee of earning a 10% return every year. That’s why a lot of people use a 5% or 6% estimated annual rate of return when planning for retirement. This way, if their money grows more slowly, their retirement plans won’t be derailed.
Another potential problem with the $358 per month scenario is that you may not have 40 years left until retirement. If you have a shorter time frame, you’ll need to save more per month to reach your goal.
Ultimately, the only way to know that you’re saving enough is to create a custom retirement plan based on your lifestyle and spending habits.
How to figure out how much you actually need to save for retirement
The first step to estimating your retirement needs is to think about how you plan to spend your retirement. You can use your current expenses as a baseline, but you’ll probably spend more in some areas and less in others as you age. Try to anticipate any big-ticket purchases you might make in retirement as well.
Once you have a rough estimate of your annual retirement costs, you can use this, along with your estimated life expectancy, to determine your total retirement costs. Don’t forget about inflation. A 3% annual inflation rate is a good rule of thumb. A retirement calculator can help you do the math to figure out how much you need to save in total and per month to reach your goal.
The next step is to subtract money you expect from other sources, like Social Security, a pension, or a 401(k) match, to figure out what you need to save on your own. Your employer should be able to provide you with details on your 401(k) match or pension. And you can estimate your Social Security benefit at various ages by creating a my Social Security account.
If you find you’re not able to save as much as you need to each month, you might have to go back to the drawing board. Consider delaying retirement a few months or years to see what kind of difference this could make. Or you could look for ways to slash your expenses right now to free up more cash for retirement savings.
Once you have a plan you feel comfortable with, set up automated retirement contributions so you don’t forget to make them. Your employer should enable you to transfer a certain dollar amount or percentage of each paycheck to your 401(k) each pay period, if you’re eligible for one. And if you have an IRA, you should be able to set up regular transfers from a bank account.
Don’t forget to go back over your retirement plan once every year or two to make sure everything is on track. If your investments are growing faster or slower than you anticipated or if your plans for retirement change, you may have to adjust your savings strategy going forward to keep yourself on track for the retirement you want.