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As if inflation's impact on today's prices wasn't bad enough, it's also driving up how much people will need to retire. And the ones who will feel the brunt of it are the younger generations, Generation Z and millennials.
In the past, a popular rule of thumb was that you'd need a nest egg of $1 million to retire comfortably. Wealthcare Financial recently did an analysis, and it found that won't be enough. When Gen Z and millennials reach retirement age, they're going to need $3 million in retirement savings.
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The rising cost of retirement
After years of hearing that $1 million was a good goal for retirement, $3 million is a huge, scary jump. How did Wealthcare Financial come up with this number?
Based on how the cost of living has gone up, Wealthcare Financial estimates that the younger generations will need between $120,000 to $150,000 per year by the time they reach retirement age.
Shaun Tarzy, managing partner at Wealthcare Financial, clarified that $3 million is the upper end of the target range. It was chosen with the assumption of spending $150,000 per year over a 20-year retirement. It's recommended as more of a goal to aim for than as a firm amount you absolutely must have.
The important takeaway here is that retirement savings needs are changing. If you're a younger adult, you can't go by what worked in the past. Everything's getting more expensive, and it will continue to do so. Inflation will hopefully slow down, but some inflation is normal. And that means costs are going to be much higher decades down the road than they are now.
Getting ahead of the curve with your retirement savings
The Wealthcare Financial report also had a few retirement savings guidelines, and they'll probably stun those of us without a generous trust fund. It says that Gen Z and millennials should have:
- $500,000 in retirement savings by age 25 (yes, half a million dollars)
- $1 million by age 40
- $2 million by age 50
- $3 million by age 60
If you're not there, don't fret. Not many people are. According to a Vanguard report, adults between the ages of 25 and 34 had a median 401(k) balance of $14,100 in 2021.
It is, however, important to make saving for retirement a priority. A bigger nest egg will allow you to have a more comfortable retirement. It could also help you retire early, if that's an interest of yours.
Fortunately, there is one proven way to beat inflation and build a strong retirement fund -- investing. For adults of all ages, investing in stocks is highly recommended. Even though the stock market is down for 2022, over the last 50 years, the average stock market return is 10% per year.
While investing is a good general strategy, there are also some more specific actions to take to build wealth:
- Set aside at least 15% to 20% of your gross income to your retirement savings.
- Max out any 401(k) match your employer offers.
- Contribute to an individual retirement account (IRA) or a Roth IRA for the tax savings they offer.
- Invest in index funds that track a large number of stocks.
It can be discouraging to hear that you're going to need a massive amount of money to retire. I've found that what works for me is focusing on my financial habits, not a savings target. My goal is to invest at least a certain percentage of my income every month for my retirement. If I do that, I know I'm on the right track.
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