I Only Have $150K Saved, But Everyone Says $5.5M Is What You Need For Retirement. How Can I Possibly Make It Work?

Saving for retirement can be stressful because it can be hard to figure out the amount you need to invest for your future.

If you have $150K saved, that’s a good amount of money  — but whether you’re on track or not depends on factors like your age and your income level. If you’ve heard that “everyone” needs $5.5 million, though, you are likely misinformed and you’re going to need to redo some of your calculations to figure out the amount you actually need. 

Once you’ve calculated the right amount to invest, you can make a plan to achieve your goal and have the secure retirement you deserve. 

How much do you really need to save for retirement?

The idea that you need $5.5 million for retirement would mean that the vast majority of people are never able to stop working. The median 401(k) balance among Americans 65 and over is just $88,488 according to Vanguard’s How Amereica Saves Report. Obviously, that is not anywhere near $5.5 million. 

In fact, a nest egg of $5.5 million would provide you with an annual income of $203,500 not including Social Security and assuming you followed a safe 3.7% withdrawal rate. While it would be nice to have that much, chances are good you aren’t even making that much money now.  It’s very unlikely you will need so much money as a retiree.

What you do need to do, however, is aim to replace around 70% of your pre-retirement income at an absolute minimum — and ideally, replace around 80% to 90%. Social Security will provide a good portion of that money, as your benefits are designed to replace around 40% of pre-retirement earnings. That leaves you with around another 40% to replace.

If you were earning, say, $50K you’d need your investments to provide around $20,000 per year. To figure out how much you need invested, multiply that $20K times 100 and divide by 3.7 if you plan to stick with that safe 3.7% withdrawal rate. You’ll discover you need around $540.541 invested. 

Obviously, if you make more, you’ll need more — but you are probably far closer to hitting your target than you think. 

How to save the amount you need for a secure future

Once you know how big your nest egg must be, you can work backward to decide how much to invest each month. There’s a great calculator on Investor.gov that shows you how much you must save each month to hit your target. You can input the amount you currently have, the number of years to retirement, and the expected returns you think you’ll earn to find out what to invest each month to be ready to retire with the money you need. 

If your goal is $540,541 and you have $150K already, then assuming you have 15 years until retirement and earn a 7% average annual return, you’d only need to invest around $420 a month to reach your goal. If you have a longer timeline or think you’ll earn more than 7% a year, this number will go down. If you want a bigger nest egg, this number will go up.

The reality is that setting unrealistic expectations can discourage you from even trying to save — despite the fact success is within reach. Now, if you want to retire at 50 with $5.5 million to travel the world and earn a six-figure income, that’s probably going to require a lot of effort and sacrifice to get there from $150K — and it may be impossible depending on how much you earn. But if you can set more realistic expectations, you can work towards them over time and have a comfortable retirement you enjoy.  

Figure out your target number and start making the necessary contributions to your 401(k) automatically today and you’ll be well on your way. 

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