Saving enough money for retirement is one of the most important financial goals for most people. With people living longer lives and healthcare costs continuing to rise, having adequate retirement savings is critical to maintain your standard of living in your later years. Financial experts generally recommend trying to replace around 70-80% of your pre-retirement income to comfortably cover your living expenses, healthcare, and discretionary spending in retirement. But how much exactly should you have saved by age 65 to achieve this?
General Savings Guidelines
As a general rule of thumb, here are some common benchmarks financial planners recommend trying to reach for retirement savings by age 65:
- Have 1x your annual salary saved by age 30
- Have 3x your annual salary saved by age 40
- Have 6x your annual salary saved by age 50
- Have 8x your annual salary saved by age 60
- Have 10x your annual salary saved by age 67
So for example, if you earn $100,000 per year, you would want to aim to have around $1 million in retirement savings by age 65. This 10x annual income target by age 65 is a good baseline goal for most people.
However, the actual amount you need to have saved will depend greatly on your specific situation…
Factors That Determine Retirement Savings Needs
Here are some key factors that can impact how much retirement savings you need:
Your household income
Higher earning households need to replace more income in retirement. Someone used to living on $150,000 per year will need more savings than someone used to $75,000 per year.
Your expected retirement spending
Think about what your spending habits will be in retirement. Do you expect to travel frequently or pursue expensive hobbies? These extra costs require additional savings.
When you plan to retire
Retiring at age 60 requires more savings than retiring at 67 since you need income for a longer period.
Your life expectancy
The longer your retirement, the more years of spending you need to cover. It’s important to estimate your lifespan.
Inflation
Even moderate inflation can significantly erode purchasing power over a 30+ year retirement. Make sure your savings are inflation-adjusted.
Healthcare and long-term care costs
These expenses often increase substantially in retirement and need to be accounted for.
Interest rates and investment returns
Low bond yields and stock returns make accumulating retirement assets harder.
Social Security benefits
For many, Social Security provides a significant portion of retirement income that reduces the required savings.
Pension income
If you have a defined benefit pension, this predictable income stream helps lower the savings needed.
Debt and other obligations
Entering retirement with large debts like a mortgage or student loans will increase the savings required.
As you can see, there are many personal factors that influence exactly how much you need for retirement. Next we’ll examine some specific savings targets.
Retirement Savings Guideline Based on Income
A good way to estimate your target retirement savings goal is to base it on your projected pre-retirement annual household income. Here are some benchmarks to aim for based on income level:
| Annual Pre-Retirement Income | Target Retirement Savings by Age 65 |
|---|---|
| $50,000 | $500,000 |
| $75,000 | $750,000 |
| $100,000 | $1,000,000 |
| $150,000 | $1,500,000 |
| $200,000 | $2,000,000 |
So for example, a couple earning $100,000 per year prior to retirement would target having around $1 million saved by age 65. To maintain a similar lifestyle, a couple used to $200,000 would want roughly $2 million.
These figures assume retirement at age 65. If you retire earlier, you need to save more since your nest egg has to last longer.
Retirement Savings Guideline Based on Percent of Income
Another common benchmark financial experts recommend is to target replacing 70-80% of your pre-retirement income in order to maintain your standard of living.
Based on this guideline, here is an estimate of the retirement savings needed by age 65 for various income levels:
| Annual Pre-Retirement Income | 70% Income Replacement | 80% Income Replacement |
|---|---|---|
| $50,000 | $875,000 | $1,000,000 |
| $75,000 | $1,312,500 | $1,500,000 |
| $100,000 | $1,750,000 | $2,000,000 |
| $150,000 | $2,625,000 | $3,000,000 |
| $200,000 | $3,500,000 | $4,000,000 |
This shows that for an upper middle class couple earning $150,000 per year, a retirement savings target between $2.5 – $3 million by age 65 would support replacing 70-80% of income.
Impact of Social Security and Pensions
One way to estimate your necessary retirement savings is to determine your expected annual spending needs in retirement then subtract out any Social Security, defined benefit pensions, or other guaranteed income streams.
For example, a couple expecting $75,000 in annual spending in retirement:
- Estimated Social Security income of $30,000/year
- Pension income of $15,000/year
- Leaves $30,000 per year needed from retirement savings
To generate $30,000 annually from savings, assuming a 4% withdrawal rate, would require $750,000 in retirement savings by age 65.
This quick calculation shows the impact of Social Security and traditional pensions – they allow you to get by with lower retirement savings.
Individuals without pensions or Social Security would need to replace their entire income with savings.
Impact of Retiring Early
Retiring before age 65 requires additional retirement savings because:
- You are living on your savings for more years
- You miss out on additional years of earnings, investment growth, and retirement plan contributions
- You potentially start Social Security benefits earlier at a reduced amount
Use this table as an estimate for how much more you may need to save if you retire early:
| Age of Retirement | Additional Savings Needed |
|---|---|
| 62 | 20-25% more |
| 60 | 33-50% more |
| 55 | 75-100% more |
| 50 | 100-150% more |
So if you planned to retire by 55, you should aim to have double the retirement savings target for age 65. Early retirement dreams require discipline and diligent saving.
Recommendations to Boost Retirement Savings
If you are falling short of the retirement savings benchmarks, here are some tips:
Take full advantage of 401(k) or IRA tax benefits
Max out contributions to tax-advantaged retirement plans each year to benefit from compounding investment returns. Try to save at least 15% of your income annually.
Cut expenses and redirect savings to retirement
Look for areas to trim spending so you can invest more towards retirement. Even small reductions add up over time.
Pay down debts
Reducing debts, especially high interest ones, frees up cash flow to save more for the future.
Delay retirement a few years
Even just a couple extra years of work and savings can have a big impact during your final career years.
Review your investments
Having the right asset allocation and investing in low-cost diversified funds helps returns.
Consider retirement benefits like annuities
These can provide guaranteed lifetime income to hedge against longevity risk.
Downsize your home
Selling a large home to move into a smaller one in retirement can unlock equity.
Conclusion
Saving enough for retirement takes diligent planning and commitment through your working career – there are no shortcuts. Use the income and asset replacement guidelines in this article as a reference based on your household earnings and expected retirement lifestyle. Take advantage of long time horizons and compounding returns by consistently investing over time. Seek the help of a financial advisor if needed to develop a detailed retirement plan tailored to your situation. With the right preparation, you can feel confident about achieving your retirement goals.