Investment Returns Needed to Meet Retirement Goals - 2019 Edition

Saving for retirement is an important goal no matter your age. But if you're like most Americans, you probably haven't saved much yet. Investing is a necessary part of building your retirement nest egg. The stock market usually offers better returns than standard savings accounts, which may leave you wondering how aggressively you should invest for your future and what returns you actually need to reach your goals. SmartAsset ran the numbers for a couple of different scenarios to help you answer these important questions.

To calculate the investment returns you would need to reach your retirement savings goals, SmartAsset analyzed data from the Federal Reserve Bank of St. Louis on Americans' average annual savings rate. We used that rate, as well as triple that rate, to estimate the necessary rate of investment returns someone would need to meet savings targets between $200,000 and $1.5 million. We did not include savings from Social Security or pensions. The Data and Methodology section below details where we got our data and how we put it together.

Key Findings

• The average savings rate isn't enough - Using data from the Federal Reserve of St. Louis, we found that the average American saves about $1,200 each year in total. However, allocating that entire amount to your nest egg isn't enough if you want to live comfortably in retirement. Even if you start saving at age 30, you would need to achieve returns of more than 11% to build $500,000 in savings. While the stock market has seen periods during which returns have crossed 11%, it's not guaranteed that you would earn those returns regularly in the future. Even saving triple the average annual amount probably isn't enough, unless you plan to live frugally in retirement.
• The earlier, the better - Unsurprisingly, it's easier to reach your retirement savings goals if you start sooner. Even just waiting until age 35 to start saving for retirement means the average saver would need an investment return of 12.6% to secure a goal of $500,000.
• Older savers need to save more aggressively - If you wait until you're 50 to start saving for retirement, you would need returns of 14% or more just to meet a modest savings goal. Instead of betting on incredible returns, you will need to save aggressively. Consider contributing as much as you can to your employer-sponsored retirement account. In addition, try to max out an individual retirement account (IRA).
• Social Security: not enough on its own, but still important - Many Americans rely strictly on Social Security to meet their retirement savings needs. Unfortunately, this isn't enough to live on in most places. And even in the places where it is enough, you'll still need to pinch pennies. At the same time, Social Security is an important part of the retirement puzzle. We estimate that a 30-year retirement would cost just shy of $1.5 million. Unless you made retirement savings a priority starting in your 20s, you wouldn't reach that $1.5 million on your own. However, Social Security can augment your savings enough to help you live more comfortably in retirement.

The table below lays out the returns you would need if you saved about $1,209 each year and invested it for retirement. This savings figure represents the average amount that Americans save each year, according to Federal Reserve of St. Louis data.

The following table shows the rate of return you would need to achieve if you saved triple the annual savings rate (about $3,627) each year. If you start saving at this rate when you're 30, building a retirement nest egg of $500,000 is well within the realm of possibility. That may be enough for some people. As we mentioned, these tables do not take Social Security into account. If you received the average Social Security benefit (about $1,400 per month) for a 30-year retirement, you'd earn more than $500,000 in benefits. Combined with your own savings, that's enough to help you live comfortably in many places. Below, it is possible to gauge the investment returns more aggressive savers of different starting ages would need.

To determine the rate of return you would need in order to meet your retirement savings goal, we started with a few assumptions:

• Retirement age - We used a retirement age of 65.
• Savings before investing for retirement - Using the 2016 Survey of Consumer Finances from the Federal Reserve, we found the median savings by age. We assumed that someone saving for retirement would already have this amount of money saved.
• Annual savings - This is how much the average person puts toward savings each year. We calculated this value using two pieces of data. The first was the average annual disposable income. This is how much is left after paying all of your living expenses. Then we used the average annual savings rate to calculate how much of that disposable income the average person would put into savings. Data for annual disposable income and the annual savings rate comes from the Federal Reserve Bank of St. Louis.

Using the data above, we calculated the rate of return that you would need on your investments in order to achieve set retirement savings goals. Our calculations only include your contributions to a savings account. We did not include any earnings from Social Security or pensions.

Thoughts on Investing for Retirement

• Watch your asset allocation - Investing is a great way to build wealth, but your investment strategy may need to change as you approach retirement. For example, you probably want to invest more aggressively when you're 40 than when you're 60. Adjusting your asset allocation allows you the possibility of doing so. And even if you don't change your target asset allocation, it's important to check your investments regularly to ensure that you stick to your target portfolio. As some investments grow more quickly than others, your portfolio will naturally drift away from your target allocation over time.
• Get a second opinion - Investing is daunting if you don't have a lot of experience. Speaking with an expert could make your life a lot easier. A financial advisor is an expert who has gone through the training to help people make smart decisions with their money. So if you're unsure about what to invest in or how much to invest, reach out to a financial advisor today. Advisors can also help you create a financial plan and manage other aspects of your money.

Questions about our study? Contact us at press@smartasset.com