You can take several approaches in deciding how much to save for retirement. Determining the right number means honestly assessing your current and future income, and identifying your ideal retirement lifestyle, along with its associated costs.
Why You Need a Retirement Target
Establishing a clear retirement savings goal can help you stay in financial health during your retirement years. One in three Americans say they feel “very confident” about having enough money to last through their retirement years, according to the 2022 Retirement Confidence Survey by EBRI. “Setting a target for saving for retirement helps motivate you, forces you to stay on track, and helps you prioritize your spending,” Danielle Miura, certified financial planner (CFP) and founder of Spark Financials, told The Balance in an email. Working in smaller increments to save can make a larger retirement goal seem less overwhelming. Setting a goal can also help you visualize where you’d like to end up in retirement, Miura said. Once you do that, it becomes easier to align your goals with your actions. Once you set a savings goal, review it annually to ensure your goal is still appropriate for your financial situation. Remember to consider potential costs for long-term care in your later years.
Figuring Out How Much You Need To Retire
Everyone will have a different target amount to save for retirement and different budgeting strategies based on their lifestyle goals, income, and personal financial situations. Three common strategies to save for your goal include the 15% rule, the 80% rule, and the “10 times your salary” rule.
The 15% Savings Rule
The 15% savings rule for retirement dictates that you consistently save 15% of your income. The younger you begin this strategy, the more time you have to benefit from the power of compounding interest on any investments. For example, you’re 25 years old and making $40,000 a year. If you save 15% of that, or $6,000 per year, you’d have $240,000 by the time you are 65. If you invested the funds, say through an IRA or 401(k), and earned an average of 7% annual rate of return, you’d have $1.2 million saved by age 65. This example assumes your income never changes. If your income increased over time, you would save more than $6,000 a year. For example, if you earned $100,000 per year at age 35, you’d then save $15,000 a year, or 15%. There are two potential downsides with the 15% rule. First, this rule assumes you can afford to set aside 15% of your pay for saving or investing. That may not be realistic if you’re just starting out in your career and earning a lower income or you’re paying off debt. You may only be able to save 10% or even 5% of your income instead. Next, the 15% rule doesn’t account for inflation, which can affect both your ability to save now and your purchasing power in the future. With higher inflation, many people may not be able to afford to budget 15% of their income toward retirement, Muira said. Conversely, the more inflation rises, the more you might need to save to make up for price increases once you reach retirement age.
The 80% of Income Rule
The 80% rule for retirement focuses on how much of your current income you’ll need to live on instead of what percentage of your income to save. It dictates saving enough to replace 80% of your income in retirement years. If you make $100,000 a year, you’d aim to save enough to provide you with 80% of that, or $80,000, per year in retirement. So, you’ll need to estimate your expected length of retirement. How much you will truly need will depend on many factors, including the expenses for your expected lifestyle.
10 Times Your Salary
Another commonly used rule of thumb for retirement is to save 10 times your salary by the time you plan to retire. To calculate your target retirement amount, simply multiply your annual by 10. So if you make $100,000 a year, aim to save $1 million. Depending on when you plan to retire, expected spending, and inflationary changes, saving 10 times your income may be enough. On the other hand, you might need to save 12 or even 15 times your income, especially if you’d like to retire before age 65.
Find the Target That Fits Your Goals
Everyone’s needs and goals are different, and the savings rule you apply can depend largely on your vision for your retirement. Miura suggested asking some specific questions that can help you decide which strategy may be right for you:
What do you want your retirement to look like?What will your primary and secondary income sources be in retirement (i.e., 401(k) savings, IRAs, taxable accounts, pensions, Social Security)?How much do you anticipate paying in taxes in retirement?How much do you anticipate paying for medical care and where will the money for those expenses come from (Medicare, Medicaid, long-term care insurance)?
Those questions can help you shape your estimated retirement budget. “The key to deciding how much to save for retirement is deciding how much you want to spend during retirement,” Miura said. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
