Financial planners and personal finance gurus like Dave Ramsey and Suze Orman often say that to retire comfortably you need to contribute 15% of your income and max out your company’s retirement plan offerings. Allow it to grow over time and through the power of time and compound interest you can retire comfortably. Yet for the average middle-class person earning a median salary of $60,000 a year, that’s pretty much impossible to achieve.
A Redditor on the r/MiddleClassFinance subreddit brought up this topic noting that to max out a 401(k) plan, you would have to contribute $23,500 to a 401(k) retirement plan and another $7,000 for a Roth IRA, or $30,500 total. That means you’re living on less than $30,000 a year or $2,500 per month.
The Redditor wants to know who is doing that and how is it even feasible. The short answer is, it’s not.
24/7 Wall St. Insights:
- Financial gurus tell us to max out our company retirement plans to save up for a comfortable retirement.
- Real-world economics says for middle-class wage earners, that’s not possible. It suggests we need to adjust our strategy.
- While we still need to put something away, don’t let perfection get in the way of good.
- Also: Take this quiz to see if you’re on track to retire (Sponsored)
Living in the real world
We’re living in especially high-cost times. The Federal Reserve just said the Consumer Price Index (CPI) for November rose 2.7%, its fastest increase in the past seven months. Groceries, gas, and new cars all rose, outweighing declines in housing.
Milk was up 2.2%, ground beef rose 4.8%, and eggs surged 37.5% higher last month. Just trying to put food on the table is a terrible strain on budgets. Yet people are goaded to put away 15% of their pay into a retirement account.
The fallacy is that maxing out your retirement accounts with a 15% contribution requires at least a six-figure income. For middle-class people, 15% of your wages is still your target, just don’t expect to hit those maximums. You need money to live on today and it is understandable why people postpone putting aside anything for their retirement.
Adjust your horizons
Now as extremely difficult as it is to meet the high expectations financial gurus set, its actually not impossible. I’m not a financial planner, just some guy on the internet, so these are just my opinions, but you need to have a special set of circumstances to achieve it.
For example, you need to live in a very low cost of living region. People in New York City, Los Angeles, and other expensive metropolitan areas need not apply. Individuals with no student loan debt, no car notes, and those bought very cheap houses or live with their parents have an advantage. Having a spouse who shares your values on money is also a big help.
Yet that’s not the vast majority of middle-class wage earners. So don’t beat yourself up that you are not matching the ideal. As long as you’re putting something away every paycheck, even just $25 or $50, it’s better than doing nothing.
Contributing only $50 a month for 30 years (hopefully contributing more over time) at 7% interest — the average return of the S&P 500 index minus inflation — would get you almost $61,000 at the end. You’re not going to live off that very long, but it shows even very small contributions allows you to have something.
Key takeaways
The value in knowing what you should strive for is that it gives you a goal to work toward. Just don’t expect to hit the ideal at the start.
If you can, move to a lower cost neighborhood. Try to buy a used car you can afford instead of financing a new one. Eat at home instead of going to restaurants. Consider learning a trade instead of getting a college degree with little real-world value that will crush you under a mountain of debt. Find someone who has the same values about money as you do. And, yes, live in your mom’s basement to save money for an affordable house instead of your dream home.
That’s not how social media tells us to live, but living below your means is still smart. And always put a little something aside for your retirement. Work with a qualified financial advisor who can more accurately answer your financial questions to help you eventually achieve your goals.
The goal is to max out your retirement accounts, but as middle-class people getting squeezed harder every day, we also have to live in the real world.
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