Experts often recommend saving up $1 million before you retire. But in many cases, that may not be enough, thanks in part to longer life expectancy and disappearing pensions.
What would it take to bump your retirement savings goal up from $1 million to $1.5 million? CNBC calculated how much you need to put into your 401(k) each month in order to reach that milestone by 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 $1.5 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 $1.5 million by age 65.
With a 4% rate of return: $1,264.86 per month
With a 6% rate of return: $753.20 per month
With an 8% rate of return: $429.68 per month
With a 4% rate of return: $1,641.62 per month (exceeds the $19,000 annual limit)
With a 6% rate of return: $1,052.85 per month
With an 8% rate of return: $653.91 per month
With a 4% rate of return: $2,917.55 per month (exceeds the $19,000 annual limit)
With a 6% rate of return: $2,164.52 per month (exceeds the $19,000 annual limit)
With an 8% rate of return: $1,577.24 per month
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 $1.5 million than if you begin saving just 10 years later.
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.
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
First, 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. Here's a breakdown of how different types of plans work.
2. Max out your retirement accounts
Once you've determined the best account for you, contribute as much as you can to it. "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), 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.
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.
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