How Much Money Do You Need to Save for Retirement?

In this article, you will learn:

  • How to calculate how much money you need to save to retire
  • How to monitor your retirement savings progress
  • How to predict how much money you will need to live comfortably in retirement
  • How to use simple financial models to predict how much money you need to save for retirement
  • How to benchmark how much money you should save by what age
  • Why financial literacy is critical to your retirement planning success
  • What types of retirement accounts are available in the United States
  • What are the basic steps you must take to establish your retirement savings plan
  • What remedies are available to maximize your retirement savings

The question of “How much do I need to save to retire?” is a common one. It’s essential to stay on track as you plan for retirement. Know how much money you should save by what age to assess your progress.

Retirement planning exists to help you to answer how much money you need to save to retire. Of course, your answer to the question may vary from another person’s. What you earn now, your current lifestyle, your future lifestyle, and other factors all affect what you can afford in retirement years from now.

How Much Do I Need to Save to Retire?

Step 1: How Old Are You Now?

Start where you are with basic information, e.g. your current age, to calculate how much you need to save for retirement.

Your age helps to start you on the long path necessary to reach your desired retirement lifestyle. Let’s review some simple calculations to use in order to answer your questions about how much you need to save to retire:

  • The answer to “How much do I need to save to retire?” will depend on your current earnings and your ability to predict the lifestyle you want in retirement.
  • Calculating how much money you should save throughout your lifetime helps you to stay on track. Financial planning and time are needed to reach these retirement goals.
  • Using simple calculations can help you to arrive at the right amount of money to save to reach your retirement goals.

Step 2: How Do I Calculate How Much Money I Need to Retire?

Retirement planning professionals often recommend that you should save at least 10 times an average pre-retirement income with the goal of living on less than this pre-retirement income level.

Let’s say you earn $100,000 per year now. You’d like to live on at least $80,000 per annum in retirement:

  1. Adjust your retirement income level based on the additional income sources you will have in retirement. If you have access to a pension, Social Security, or part-time job income in retirement, you might not need to save as much money now.
  2. Adjust how much money you’ll need if your health or other lifestyle factors warrant it.

What Is the Four Percent Rule?

Retirement planners use an easy formula to estimate how much you should save for retirement to meet your lifestyle goals.

This formula is called “the four percent rule” because you divide the future retirement yearly income goal by four percent.

To achieve the example of an $80,000 per year annual income, you need to save approximately $2 million:

  • $80,000 in annual income divided by 0.04
  • $2 million in retirement capital assumes an after-tax and inflation return of five percent on your investments and no additional income streams, e.g. Social Security or pension.
  • The four percent rule is based on a 30-year retirement. If your family members tend to live longer, you should increase your portfolio savings to cover lifestyle, medical care, and other expenses that may increase over your lifespan.

Pre-Retirement Savings Needed to Achieve Your Retirement Savings Goals

In order to determine how much you need to save to reach a retirement plan goal, you should regularly assess your savings goals.

Use these formulas to assist in setting age-related savings goals before retirement.

Save a Percentage of Your Current Salary

Your annual earnings may fluctuate over your career. To determine how much money you should save at various life stages, think of savings as a percentage of your annual salary.

Many experts suggest saving approximately 15 percent of your annual gross salary. Make saving a habit and start saving early in your working life. Include savings gathered in all your retirement accounts. Don’t forget to include employer matching contributions, e.g. your employer-sponsored 401(k) or another plan.

How Much Should You Save by Age

Retirement planning specialists recommend the following benchmark contributions. Based on your annual income, here’s what you should save for retirement at the following ages:

  • By age 30, you should accumulate a year’s annual salary in tax-deferred retirement accounts
  • By age 40, you should accumulate three times’ your annual salary in tax-deferred retirement accounts
  • By age 50, you should accumulate six times- your annual salary in tax-deferred retirement accounts.
  • By age 60, you should accumulate eight times your annual salary in tax-deferred retirement accounts.
  • By retirement at age 67, you should accumulate 10 times your annual salary in tax-deferred retirement accounts.

Alternative Ways to Calculate Retirement Savings

Some retirement planning professionals recommend that you put away 25 percent of your gross annual salary—starting as soon as you begin working in your 20s.

For many workers, saving 25 percent of gross income seems like an impossible dream. Remember to include 401(k) accounts and employer matching contributions and take advantage of as many types of retirement saving plans as possible.

Comparatively, if you ascribe to this formula, you’ll also accumulate one times your yearly income at age 30.

By continuing this savings rate, you will accumulate approximately two times your annual income by age 35; three times your annual income at age 40; four times your annual income by age 45; five times your annual income by age 50; six times your annual income at age 55; seven times your annual income at age 60; and eight times your annual income at age 65.

Using this approach, you will save the equivalent of a full year’s salary every five years. Over the course of your working life, you’re theoretically ready to retire by age 65.

What’s the Best Retirement Savings Model for You?

Regardless of your retirement savings preferences, keep in mind that life happens. You may be affected by job loss, e.g. during a global pandemic or you may experience a personal or family health crisis.

It’s important to use these retirement savings guidelines to assess whether you’re on track to meet your savings goals.

Saving Enough Money for Retirement

If you’re concerned about saving enough money to retire, you’re in good company. According to U.S. Census statistics:

  • Almost 35 percent of working savers between the ages of 15-64 say that they participate in a 401(k) plan
  • About 18 percent of workers have IRA or Keogh retirement accounts
  • Approximately 13.5 percent of workers have a cash balance or defined-benefit retirement plan

Financial literacy is an important component of saving enough money for retirement. In 2022, a major financial literacy study concluded that less than 60 percent of Generation Z/Millenial savers believe they will have enough money to retire.

Multiple retirement planning surveys show that more than half of adults aren’t confident in their ability to understand how to save and plan for retirement. Almost 20 percent of respondents across studies report they’re worried about not having enough money to retire.

They also report that it’s difficult to understand basic investing concepts or unusual financial products, e.g. digital currencies.

According to the Natixis Global Retirement Index (2021), most adults reported they expect to work past the traditional retirement age. About 40 percent of those surveyed expressed doubts about their ability to comfortably retire.

How to Save Enough Money for Retirement

The above calculation methods can be used to know (1) how much you should save, and (2) how much you should accumulate in retirement accounts by what age.

Many financial services companies and banks offer free online calculators to help you understand how to meet your personal retirement savings goal. As an example, your bank’s online calculator can help you compute how various savings or withdrawal fees impact your nest egg.

How Much Should a Couple Save to Retire?

Like individuals, knowing how much a couple must save to retire depends on what they earn now and the lifestyle they want to enjoy in retirement. Most financial planning experts use 80 percent of pre-retirement yearly earnings as a baseline.

Many retirement planning professionals recommend that you save at least 10 times your joint annual income by your mid-to late-60s.

The Four Percent Rule in Retirement

The four percent rule is also used to calculate how much retirees may withdraw from their retirement accounts per year (assuming a 30-year retirement duration).

To answer the question, “How much money should I save for our retirement each year?” consider saving at least 15 percent of your combined gross annual earnings. Ideally, couples should start saving in their 20s until they retire.

Considerations about How to Save Enough Money for Retirement

Like many realities, sometimes it’s possible to save more money for retirement and sometimes it’s not possible to save the average amount.

Life happens. What is important is to stay consistent to reach your savings goals. Track your progress each year. As you reach each benchmark, you know you’re making progress and staying on track to achieve a comfortable retirement.

Your employer-sponsored 401(k) is a good place to start. If your employer offers a 401(k) plan, it’s a great decision to sign up. Many employers also make it easy to invest a portion of your pre-tax income in the 401(k) plan—and some match your contributions. For instance, it you invest a certain amount of money each year, your employer contributes up to a certain percentage in matching funds.

It’s vitally important to save for your retirement now. Whether you’re a new employee in your 20s or you’re close to retirement age, it’s still possible to grow the amount of money available for your retirement.

Follow these guidelines to reach your retirement savings goals.

Start Saving for Retirement as Early as Possible

There’s an old adage about successful investing. It’s time in the market, and not market timing, that helps people grow their capital:

Start saving early

The earlier you start to save for retirement, the better you will be. Investing smaller amounts of money over a longer time horizon may impact your bottom line more than investing larger sums for shorter periods. The power of compound interest is an example of why it’s important to start saving for retirement in your 20s.

Let’s say you’re a 25-year-old investor. Putting away just $75 each month will help you to accumulate more retirement savings 40 years from now than if you invest $100 every month as a 35-year-old investor.

Start now

You can take steps today to increase your retirement nest egg. If you start saving for retirement later in life—or even if you haven’t started to invest—you aren’t alone.

Contribute to your employer-sponsored 401(k)

For instance, you contribute $100 pre-tax per pay period. You’re in the 12 percent tax bracket. No taxes are taken from your contribution, so investing for retirement now means you pay current taxes. Your take-home paycheck decreases to just $88 before state, local, and FICA tax withholding.

Take advantage of your employer match funds

When an employer matches your employee 401(k) contributions, contribute enough to get the full match. If your employer matches half of your contributions up to a cap of five percent of your annual income and you make $50,000 per year, contribute $2,500 to the 401(k) and your employer gives you $1,250. Take advantage of this generous employee benefit.

Open an Individual Retirement Account (IRA)

Opening a self-directed IRA or a traditional one is another way to feather your retirement nest egg. Select either a traditional individual retirement account or a Roth IRA. Contributions to your traditional IRA are often tax-deductible. Because your contributions grow without the impact of taxes (tax-deferred) until you withdraw money in retirement, it’s possible to grow your retirement assets faster.

In contrast, Roth IRAs are funded with after-tax dollars. When you turn 59-1/2, you may make qualified distributions on a tax-free basis. Discuss which IRA works best for you.

Make catch-up contributions at age 50+

Annual contributions to your retirement plans are limited. That’s another reason to start saving early to fund your retirement. When you’re 50 years or older, it’s possible to contribute more money each year to your retirement accounts. Catch-up contributions are one of the ways to boost retirement savings.

Automate your retirement savings

Avoid thinking about how much or when to contribute to your retirement accounts. By automating your contributions, money is automatically contributed to your retirement plan on a regular basis. Your retirement funds grow without thinking about it.

Limit spending

If you spend too much, it’s more difficult to save enough. Make a budget and stick to it. How much money you contribute to your retirement accounts now could make a substantial difference later.

For instance, contributing six percent of your income vs. four percent might add more than $100,000 to your retirement savings over a 30-year horizon (based on a $50,000 annual salary).

Set savings goals

It’s important to consider how much money you need to retire. Knowing how much you need directs your decisions to save money now.

Put away extra money

When you receive a pay raise or bonus, invest the money in your retirement accounts. Financial planners suggest putting a minimum of half of the additional money in retirement savings. While it’s tempting to spend a tax refund or bonus on vacation, pay your retirement accounts first.

Delay Social Security retirement payments

Social Security pays beneficiaries for each year they delay their Social Security benefits before age 70. It’s possible to receive Social Security retirement benefits as early as age 62 but you won’t earn as much as if you wait until age 70.

In addition, delaying the receipt of your Social Security retirement benefits may also mean higher future survivor benefits for a husband or wife.

The Bottom Line: Saving Enough Money for Retirement

Simply put, knowing how much money you need to fund a comfortable retirement is the first step. Calculating how much money you need to save is the next step.

It’s essential to regularly invest money for retirement. Think creatively about how to increase the amount of money you contribute to your retirement plans.

Although investing too little or starting too late is a potential pitfall to saving enough money for retirement, the good news is you can start now. Make consistent goals to save for your retirement. Efforts made now can pay off in your golden retirement years to come.