What Will Saving 5% of Your Income a Year Do for Your Retirement?

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Saving 5% of your earnings year after year could go a really long way. Read on to learn more. 

It’s important to save for retirement so you have some income during your golden years on top of whatever benefits you collect from Social Security. But it’s not always so easy to find money for your IRA or 401(k). After all, you might have a mortgage loan to pay for many years or childcare costs to keep up with. And unless you earn a bundle of money, finding any funds for retirement savings might be a tall order.

Now, you’ll often hear that you should aim to save 15% to 20% of your income — or more — for retirement. That may be doable if you’re bringing in $200,000 a year. But what if you earn more of an average wage?

Median weekly earnings for U.S. workers were $1,118 during the third quarter of 2023, according to the Bureau of Labor Statistics. That’s about $58,000 a year, assuming 52 weeks or work.

In that case, saving 15% of your income would mean parting with $8,700 annually, or $725 a month. That’s probably not doable.

But what if you were to save 5% of your income for retirement? On a $58,000 wage, that’s a monthly IRA or 401(k) contribution of $242. And it might go a really long way toward helping you retire with a lot of money.

The right investments and savings window make all the difference

You might be quick to assume that saving $242 a month for retirement, or 5% of a typical wage, won’t yield very impressive results in the context of building a nest egg. But actually, you’d be surprised at how much wealth you can accumulate over time.

Let’s imagine you’re able to save $242 a month between the ages of 24 and 67. That’s a 43-year savings window. Let’s also assume that your portfolio is loaded with stocks and that it gives you an average annual 10% return. That’s consistent with the stock market’s average return over the past 50 years, so it’s a fairly reasonable assumption.

In that case, you’ll be looking at a portfolio worth about $1.7 million by the time your retirement rolls around. Really. And a big reason is that you’ll get to benefit from many years of compounded returns.

But what if you don’t manage to start saving $242 a month at age 24? Maybe you can’t do that until age 44. In that case, you’re narrowing your investment window to 23 years. But assuming that same 10% return, you’ll be looking at $231,000.

Clearly, that’s a far cry from $1.7 million. But seeing as how the average 60-something has a retirement plan balance of $112,500, according to Northwestern Mutual, it still puts you way ahead of the game.

It’s okay to do the best you can

If you’re able to set aside 15% to 20% of your income per year or more for retirement, then the more power to you. It’s great to be able to do that, and hopefully your efforts will result in the retirement you’ve always dreamed of.

But if you’re not able to save at that level, don’t sweat it. As you can see, you have an opportunity to build plenty of wealth if you save and invest consistently over a long period of time — even if you never manage to sock away more than 5% of your paycheck.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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