Personal Finance

If your household brings in $200k per year, this is how much you need saved for retirement by age 45

Rich Duprey

Published: November 17, 2024 8:40 am

An important part of retirement planning is keeping track of how you are progressing. If you don’t know where you are, understanding where you are going becomes more difficult.

And the devastating impact of inflation has made it infinitely harder to achieve your goals. The rising cost of goods and services means you may need to adjust your goals to meet the new targets. 

For example, the cumulative increase in inflation over the last four years has dramatically driven the cost of food higher. Data from Statista shows that the price of a basic food basket that cost $158.22 in 2020 today costs $210.15, a 33% increase. And inflation that had been moderating is once again on the rise. 

It is essential that plans that you made several years ago for what you thought you were going to need be updated to reflect today’s new realities.

24/7 Wall St. Insights:

• You need to know where you are before you can understand where you are going.
• Inflation has moved the goal posts for most in what it will cost to maintain their standard of living in retirement.
• High-income wage earnings have more options open to them, even if they still feel inflation’s impact.
• Also: Take this quiz to see if you’re on track to retire

The new benchmark for comparison 

While there is no perfect yardstick to use, financial planners have general rules of thumb for where you should be at different points in your life. Recently, retail broker Edward Jones released a comparison of average retirement savings balances by age group.

By using a measurement of how others are performing in your age bracket, you can get a sense of where you should be. For example, those who are 45 years old represent the midpoint between those just starting out in their careers and individuals on the cusp of retiring. The survey shows high-income wage earners with salaries of $200,000 a year should have between $1.1 million and $1.325 million a year.

There are, of course, assumptions that go into those numbers. Edward Jones assumes you want to maintain your current lifestyle in retirement and will adjust your spending annually to account for 3% inflation.

It further assumes you are contributing 15% of your pre-tax income to your retirement savings and are in a 25% tax bracket. Your portfolio earns 6% returns before you retire and 5% afterward when you begin taking Social Security at age 65 with an average benefit that is the lesser of 35% of your gross income or the maximum benefit of $41,112. 

Those million-dollar figures may be eye-opening for you, so let’s see what you can do if you find yourself behind or even if you are ahead of the game.

What to do if you are behind

No need to freak out if you haven’t reached the average retirement savings threshold. There are concrete things to do to get ahead.

Live below your means. Although we’re told to live within our means, that’s not enough. You must live below them. Budgeting your expenses can help you see where your money is going and what can be cut.

Hike your savings rate. While 15% of your pre-tax income is the goal, being behind means you must do more. Fully fund your 401(k) and contribute the maximum to your Roth IRA. 

Get rid of all high-interest debt. You can get an immediate return on your finances by paying off your credit cards, auto loans, and other consumer debt with high interest rates.

Talk to a financial planner. Consulting with a financial advisor can help you craft a personalized retirement plan and identify areas where you can save more or invest more effectively.

Accelerate your savings if you are ahead

You have done the hard work already, but now is not the time to quit. If you are ahead of the average savings, here are things to do to accelerate your goal.

Increase your savings rate. You are likely maxing out your 401(k), getting any employer matches, and contributing as much as possible to a Roth IRA. Now look to taxable brokerage accounts for further savings. While they won’t give you a tax break, they also won’t  penalize you if you need to withdraw funds before retirement age.

Begin diversifying your investments. Stocks probably account for the majority of your portfolio, so now would be the time to diversify into alternative assets such as real estate, rental properties, commodities, private equity, venture capital, or hedge funds to diversify and maximize returns.