Deciding how much money to save for retirement is one of the most important financial decisions a person can make. With people living longer than ever, retirement funds need to last 20, 30 years or more. Unfortunately, many people underestimate how much they need to retire comfortably. Having enough money in the bank at retirement takes careful planning when you’re young.
How Much Money Do You Need To Retire Comfortably?
Most financial experts recommend trying to replace around 80% of your pre-retirement income to maintain your standard of living when you stop working. However, this is just a general guideline. How much income you need during retirement depends on several factors:
- Your desired lifestyle – The more extravagant retirement you envision, the more you’ll need to save. Planning travel, leisure activities, and dining out will increase costs.
- Debt Load – Entering retirement debt-free will reduce expenses and lower the income needed.
- Health Care Costs – As health costs rise, retiree medical bills take a bigger bite of retirement income.
- Life Expectancy – The longer your retirement, the more years of income your savings must cover.
- Rate of Inflation – Rising prices over time will increase what is considered adequate retirement income.
- Rate of Return on Investments – Earnings from investments can extend savings but returns are uncertain.
- Location – Your cost of living based on where you live, especially housing, impacts your retirement money needs.
- Family Situation – Being married or having children/grandchildren can increase retirement costs.
As you can see, retirement planning gets complicated quickly. Working with a financial advisor to run projections can provide more clarity on your specific situation. For those wanting a ballpark estimate, here are some general guidelines on retirement savings to consider.
Retirement Savings Guidelines
Looking at common rules of thumb and expert recommendations can give reasonable starting points for retirement savings targets. Here are a few benchmarks to consider:
- The 4% Rule – This popular guideline says you can safely withdraw 4% of your retirement portfolio each year. So if you have $1 million saved, you can take out $40,000 annually. To have $40,000/year, your portfolio needs to be $1,000,000 ($40k / 0.04 = $1,000,000).
- 10 Times Final Salary – Saving around 10 times your final pre-retirement salary is a common target. If your annual earnings are $100,000 in your last working year, you should aim for around $1,000,000 saved up.
- 70% – 80% of Pre-Retirement Income – As stated earlier, replacing 70% – 80% of your pre-retirement income each year provides most people an adequate standard of living.
- $1.7 Million Retirement Portfolio – Having a $1.7 million portfolio allows withdrawing $68,000 annually for 30 years with a 4% rate of return. This supports around $60,000 in annual spending adjusting for inflation.
How do these general guidelines work out for different income levels? Here is an example chart showing retirement savings targets based on final salary:
| Final Salary | 10 Times Salary | 70% Income Target | 80% Income Target |
|---|---|---|---|
| $30,000 | $300,000 | $21,000/year | $24,000/year |
| $50,000 | $500,000 | $35,000/year | $40,000/year |
| $75,000 | $750,000 | $52,500/year | $60,000/year |
| $100,000 | $1,000,000 | $70,000/year | $80,000/year |
| $150,000 | $1,500,000 | $105,000/year | $120,000/year |
Looking at these examples, a $1 million portfolio provides close to $80,000 annual income for higher earners while still meeting 70% income replacement for more modest final salaries. While not a definitive answer, targeting $1 million in retirement savings is a reasonable starting point for many pre-retirees.
How Much Should You Have Saved Already?
Building up to $1 million or more in retirement savings requires consistently setting aside a portion of income over your working life. The earlier you start saving, the more time compound interest can grow your money. As a result, retirement experts commonly recommend having certain amounts saved at different ages. Here are some examples of savings targets by age:
- Age 30 – Have 1x your salary saved
- Age 35 – Have 2x your salary saved
- Age 40 – Have 3x your salary saved
- Age 45 – Have 4x your salary saved
- Age 50 – Have 6x your salary saved
- Age 55 – Have 7x your salary saved
- Age 60 – Have 8x your salary saved
- Age 67 – Have 10x your salary saved
For example, if you earn $70,000 a year, you would want $70,000 saved by 30, $140,000 by 35, and $210,000 by 40. This allows gradually building up a $700,000 portfolio by age 60 and hitting the $1 million target by normal retirement age 67.
These age-based savings milestones help track if you are on pace for your retirement goals. Falling behind these targets indicates you may need to make adjustments like boosting savings rates. However, don’t be discouraged if not exactly matching the benchmarks for your age. The key is making continual progress and having appropriate savings accumulated before leaving the workforce.
How Much to Save Each Year
Building up retirement savings requires consistently setting aside money from each paycheck over your career. General guidelines on yearly savings rates include:
- 10% of income – Saving 10% annually is a common general recommendation.
- 15% of income – Saving 15% each year provides an even better chance of retiring comfortably.
- Enough to max out employer match – If you have a 401k match, contribute enough to get the full employer contribution.
- Enough to max out tax-advantaged accounts – Put in enough to fully fund all IRAs and 401ks which have annual limits.
Exactly how much you need to save annually depends on factors like your desired retirement lifestyle, income trajectory, expected investment returns, and years until retirement. Working with a financial advisor can help determine an appropriate savings rate for your situation.
Early vs Late Career Savings
Due to the power of compound interest over long periods, accumulating retirement savings is easier in your early career. For example, the chart below shows how saving 15% a year from age 25 to 35 and stopping after yields a larger portfolio than saving 15% annually from age 45 to 65:
| Savings Period | Portfolio at 65 |
|---|---|
| Age 25 – 35 (10 years) | $1,135,000 |
| Age 45 – 65 (20 years) | $855,000 |
Thanks to compound growth, money invested earlier has more time to compound than late career savings. This makes going all-in on retirement contributions early, such as maximizing 401k matches, critical.
How to Save More for Retirement
Consistently hitting yearly savings targets requires discipline but is fundamental to securing your retirement nest egg. If you are falling behind on building your portfolio, here are some tips to save more:
Reduce Expenses and Budget
The less you spend each month, the more you can dedicate to savings. Review expenses for any areas you can cut back and create a lean budget. Pack lunches instead of eating out, downgrade cable TV packages, lower cell phone data limits, or pause unused gym memberships. Little cost cuts add up over time to free up savings capacity.
Earn More Income
Increasing earnings is even better than decreasing costs as it allows dedicating new funds to retirement. Consider negotiating a raise, finding a higher paying job, monetizing a hobby, or starting a side business. Even an extra few hundred dollars each month makes a difference when added to portfolio growth over years.
Automate Savings
Set up automatic transfers from checking to retirement accounts like 401ks and IRAs. Automating forces consistency without any extra effort. Slowly increase the automated amounts as you adjust to having less take-home pay. Over time, your savings rate will compound to reach your retirement goals.
Conclusion
Preparing for a comfortable retirement requires diligently building savings over your working career. While rules of thumb exist, your ideal savings target depends on personal factors like desired retirement income and years until you leave the workforce. Getting an early start, consistently contributing each year, and taking advantage of compound growth can help accumulate the $1 million or more in retirement savings many financial planners recommend. Consistently setting aside 10% to 15% of income gives a high probability of retiring with adequate funds, especially when paired with sensible budgeting and smart investment choices. Discuss your specific situation with a financial advisor and create a customized plan so you can retire comfortably on your terms.