24/7 Wall St. Insights:

• Here is what is needed by age 35 if you want to retire comfortably.
• It is okay to be behind; a number of strategies are available to catch up. 
• Being ahead is even better, affording you additional options to save even more.
• Also: Take this quiz to see if you’re on track to retire ^(Sponsored)

Retirement is not cheap. You need a good sized nest egg to live out your Golden Years comfortably. It is even truer for high-income households who want to maintain the standard of living they’ve come to enjoy.

The best way to do so is to begin investing early. By putting the power of time and compound interest to your advantage, the odds tilt dramatically in your favor. For the average person, simply buying an S&P 500 index fund is the easiest path to achieve this.

The benchmark index has a remarkably consistent track record of generating returns of about 10% annually over many decades. It is unlikely to achieve this rate in any particular year, but through the market’s ups and downs over your investing lifetime, it is not unreasonable to expect such results.

It naturally follows that the more you save when you are younger, the more you will have to spend when you retire due to the magic of compound interest.

Where you at?

For a family with a household income of $300,000 annually, it needs to have $1.03 million saved by age 35 to be on track for their retirement plan. Sure, your eyes just rolled to the back of your head over how large that number is, but for those seeking a comfortable retirement, it is essential to aim at that target.

Yet there are a few assumptions to make in achieving the goal. First, it assumes you are saving at least 15% of your pre-tax retirement income and are in the 28% tax bracket.

Importantly, to get to that million-dollar figure, it assumes you are generating 6% returns annually on your portfolio before retirement, 5% afterwards, and begin receiving Social Security at 65.

It is why an index fund with dividends reinvested could be your best option. According to Hartford Funds, 85% of the benchmark index’s cumulative total return can be attributed to reinvested dividends and the power of compounding, going all the way back to 1960.

With all those assumptions in place, you can sustainably live in the lifestyle you have become accustomed to while in retirement.

What to do if you are behind

So you look at what you need, see what is in your retirement account now, and realize you are not hitting the $1.03 million target by 35 years old. First thing, don’t despair. There are steps to take to make up the shortfall.

Boost your retirement savings rate. While 15% is the target, being behind means you need to increase it, hopefully without undercutting your existing standard of living too much. Fully fund your 401(k) so that you can get the full employer match and max out your contributions to a Roth IRA. After that, and if you can, also contribute to a traditional IRA.

Live below your means. It’s not good enough to live within your means, you must live below them. That’s something everyone should do no matter where they are on their retirement savings journey.

Eliminate high-interest debt. By paying off credit cards, car notes, and other consumer debt sporting high interest rates, you enjoy an immediate return for your finances.

Consult with a financial planner. A financial advisor can help you develop a personalized retirement plan that meets your individual situation. They can also help you identify areas where you can save more or invest more effectively.

What to do if you are ahead

Congratulations! You looked at your position and realized you’re ahead of the game. Now is not the time to kick back and cruise. Here’s what you can do to accelerate your position and further pad your retirement savings.

Increase your savings rate. Just like those who are behind, bumping up the amount you set aside for retirement can pay dividends down the road with increased funds. Make sure you’ve maxed out all of your retirement account options and then look to taxable brokerage accounts, particularly because you won’t be taxed or penalized if you need to withdraw funds before retirement age.

Invest in a diversified portfolio. Look beyond just stocks for your investments. Real estate, rental properties, perhaps even cryptocurrency, are some ways to diversify and maximize returns, even if they do contain higher elements of risk.

 

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