The Average Middle-Class Retirement Savings and Tips to Save More

The average middle class may appear well off but often faces significant financial challenges. While they typically have enough income to cover essential needs, accumulating substantial funds for future goals or large expenses, such as buying a house or saving a lump sum for retirement, can be a struggle. According to the Federal Reserve, the median retirement savings for middle-class Americans ranges from $22,380 to $80,000. If you fall within this category, it is important to understand how to save more effectively. 

Consulting with a financial advisor can help tailor a retirement savings plan to your income and financial situation. This article will also discuss what the average retirement savings for the middle class looks like and provide practical tips to help you boost your savings. 

How much does the average middle-class person have in retirement?

According to the Survey of Consumer Finances by the Federal Reserve (2022), the median balance of retirement savings accounts for all U.S. families is $87,000. In contrast, the average income in retirement for U.S. adults 65 and older is $75,020.

Additionally, as of 2022, the median retirement savings for middle-class Americans varied significantly across different net worth percentiles, according to data from the Federal Reserve. Those in the below 25th percentile had median retirement savings of just $6,000. Individuals in the 25th to 49.9th percentile had accumulated a median of $22,380, while those in the 50th to 74.9th percentile had saved $80,000. Within the 75th to 89.9th percentile, the upper middle class boasted median savings of $269,000. At the top, individuals in the 90th to 100th percentile had saved a median of $900,000.

While there is no data on the average middle-class retirement savings by age, according to the 2022 Survey of Consumer Finances, the average retirement savings for all families is $333,940. Breaking it down by age group, individuals under 35 have an average retirement savings of $49,130. For those aged 35-44, the average savings amount to $141,520. People aged 45-54 have an average of $313,220 saved for retirement. This amount increases to $537,560 for the 55-64 age group. Individuals aged 65-74 have the highest average retirement savings at $609,230, while those aged 75 and older have an average of $462,410 saved for retirement. These figures may seem high, but they also include the savings of high-net-worth individuals. However, the reality for the middle class is not as promising. 

Below are some tips that can help the average middle-class individual increase their average retirement savings at retirement:  

Tip #1: Use the 401k and the Individual Retirement Account (IRA) to save for retirement

a. Understanding Retirement Accounts

Saving for retirement can be challenging, especially for the middle class, but accounts like 401(k)s and IRAs can make a significant difference. Both these accounts offer valuable opportunities to invest in a range of securities, including stocks, bonds, target-date funds, mutual funds, and Exchange-Traded Funds (ETFs), and help grow your retirement savings over time.

b. Key Differences and Contribution Limits

The 401(k) is an employer-sponsored account and is set up through your workplace. One of the major advantages of a 401(k) is its higher contribution limits compared to an IRA. As of 2024, you can contribute up to $23,000 if you are under 50, and those aged 50 and older can contribute an additional $7,500, bringing their total to $30,500. Moreover, the combined limit for employee and employer contributions is $69,000. Another significant benefit of a 401(k) is the employer match, where your employer matches a portion of your contributions, which effectively gives you free money towards your retirement savings. On the other hand, IRAs can be opened independently, without the need for an employer. There are two main types of IRAs - Traditional and Roth. Both offer tax advantages, but they operate differently. For 2024, the contribution limit for both Roth and Traditional IRAs is $7,000 if you are younger than 50 and $8,000 if you are 50 or older.

c. Tax Advantages and Choosing the Right IRA

The main difference between Traditional and Roth IRAs lies in the tax treatment. All contributions made to a Traditional IRA are tax-deductible in the year they are made, which can lower your current taxable income. However, when you withdraw your money in retirement, you are liable to pay ordinary income tax. Conversely, all your contributions to a Roth IRA are made with after-tax dollars, which is why they do not provide an immediate tax break. The advantage comes in retirement, as withdrawals from a Roth IRA are tax-free, provided certain conditions are met. Choosing between a Traditional and a Roth IRA depends on your current financial situation and your expectations for retirement. If you expect to be in a lower income bracket during retirement, a Traditional IRA might be beneficial as you would get immediate tax deductions now and can pay a relatively lower tax later. However, if you expect to be in a higher tax bracket, a Roth IRA could offer you more benefits, as it allows for tax-free withdrawals later, even though you pay some tax now. 

It is essential to contribute as much as you can afford up to the contribution limits to maximize the benefits of these two retirement accounts. This ensures that you are taking full advantage of the tax benefits and potential employer contributions. You must also consider diversifying your investments within these accounts to spread risk and increase potential returns.

Tip #2: Start saving earlier and be consistent throughout life  

a. Start Small and Increase Over Time

Starting early in your retirement savings journey puts you ahead in the race and offers you more time to save. It also allows you to take full advantage of the power of compounding. Compounding is the process where the earnings on your savings generate their own profits, leading to faster and higher growth over time. This means that the earlier you start saving, the more potential you have to create substantial wealth.

b. Foster Consistent Savings Habits

When you start saving for retirement early on, there is less pressure to save large amounts immediately. You can begin with smaller contributions and gradually increase them as your income grows. This gradual approach is particularly beneficial for the middle class, who may not always earn high salaries at the beginning of their careers. Over time, as they gain experience and climb the career ladder, their earning potential increases and allows them to contribute more to their retirement savings. Starting young also fosters consistency in your savings habits. Developing the discipline to save regularly, even if the amounts are small, helps build a lifelong habit of saving. This disciplined approach ensures that you continue to save for your future, regardless of financial ups and downs. It instills a sense of financial responsibility and helps you prioritize saving and investing as an essential part of your financial planning.

c. Take Advantage of Investment Opportunities

Additionally, starting early gives you the advantage of being able to take on more investment risk. Younger investors have a longer time horizon before retirement, which allows them to invest in higher-risk, higher-reward assets such as stocks. These investments can offer greater returns over time compared to more conservative investments. As you approach retirement, you can gradually shift to more conservative investments to preserve your accumulated wealth. Your risk appetite drops considerably during this time, and you do not have enough time to build substantial savings. 

While the middle class may start with smaller savings, the habit of saving regularly can lead to significant growth over time. The discipline developed through consistent saving can help ensure that you have enough to enjoy a comfortable retirement. It is important to remember that every little bit counts. Even small contributions can grow substantially over decades, thanks to the power of compounding.

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Tip #3: Avoid overspending and being stuck in debt liabilities  

a. Prioritize Future Needs over Present Desires

While overspending might seem harmless, it can create significant hurdles in your financial journey. Overspending often becomes a hard-to-break habit and leads to increased essential and non-essential costs, causing you to go over budget every month. When you overspend, you prioritize your present desires over your future needs, which may bring short-lived happiness but compromise your long-term financial goals. This inhibits your ability to save for future goals like retirement, buying a house, securing healthcare, and more. It creates a financial imbalance that makes it difficult to achieve financial stability.

b. Avoid Accumulating Debt

One of the riskiest consequences of overspending is accumulating debt. Debt can be challenging to eliminate and often comes with high interest rates that further strain your finances. The money that could be invested in your retirement or other financial goals ends up being used to repay debt and interest. This can severely limit your ability to save and invest by creating a cycle of financial instability.

c. Create and Stick to a Budget

Creating a budget can help you avoid overspending. Monthly budgets allow you to track your money and allocate funds to different essential and non-essential categories, ensuring all your needs are met. This way, you are less likely to overspend. Maintaining a list of your unplanned expenditures is also crucial. If you spend outside of the allocated fields, make sure to note them down to gain a realistic understanding of your spending habits. This can help you identify how often you overspend and the triggers behind overspending. While it is advised to avoid overspending and not resort to taking on debt, you must know how to manage your existing debt. If you already have debt, you need to create a repayment plan to eliminate it as quickly as possible. Focus on paying off the high-interest loans first to lower your overall liability.  

Tip #4: Increase your income through negotiations or side hustles

One of the biggest disadvantages the middle-class faces is their limited income, which can make it challenging to save more for retirement. Finding ways to increase your earnings is essential to overcome this. While it may seem challenging to boost your income significantly, taking small, strategic steps can make a big difference over time.

a. Explore Additional Job Opportunities

First, it is essential to maintain a realistic perspective. While you may not become a millionaire overnight, slow and steady increases in your income can significantly impact your savings. One effective way to earn more is by taking on additional jobs. This could be a part-time position or turning a hobby into a source of income. White-collar employees might also consider blue-collar jobs to earn extra money on the side. Many of these jobs pay hourly, making it easier to fit them into your schedule. Freelancing is another excellent option for increasing your earnings. 

b. Seek Promotions and Enhance Your Skills

Another strategy is to negotiate a raise with your current employer. If you believe in your worth and the value you bring to the company, asking for a higher salary can be helpful. You can prepare for a salary negotiation by compiling a list of your accomplishments and duties performed in the past. Research the salaries for similar positions in other companies and compare them with what your peers are earning. This information can help you make a strong case for a raise. In addition to asking for a raise, consider seeking promotions or better job opportunities within your niche. Make sure to continuously enhance your skill set. This way, you can make yourself more competitive and attractive to potential employers in the job market.  

To conclude

It would be beneficial for the middle class to save adequately for retirement. Often, the middle class only has just enough to take care of themselves and does not have the privilege of relying on children or parents for financial support. Additionally, the middle class may struggle with financial education as they rarely have the time and resources to educate themselves. They are always busy trying to keep things together. This is why hiring a financial advisor is also important. A financial advisor can provide guidance, help create a comprehensive retirement plan, and ensure that they are making informed financial decisions to secure their future.

Use the free advisor match tool to get matched with qualified financial advisors who can help devise a personalized retirement plan based on your unique needs and goals. Answer a few simple questions and get matched with 2 to 3 vetted financial advisors based on your requirements.