How much should I save for retirement?

Man with earbuds in his ears sitting across an armchair smiles while he looks at a tablet screen.Image: Man with earbuds in his ears sitting across an armchair smiles while he looks at a tablet screen.

In a Nutshell

Figuring how much to save doesn't have to be complicated. Consider following one of these common rule-of-thumb suggestions that may help guide anyone planning for retirement.
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Whether you’re just entering the workforce or in your prime working years, the prospect of saving for retirement may seem daunting.

Pinpointing the exact amount you should save each year or the size of the investment balance you must have to comfortably retire may make you want forget retirement planning and splurge on a beach vacation instead.

Fortunately, though, figuring how much to save doesn’t have to be time consuming or complicated.

Use rules of thumb to get started

If you don’t have much time to plan for your future, consider following one of these common rule-of-thumb suggestions that may help guide anyone planning for retirement. However, remember that these are rules of thumb and your individual situation and requirements may vary.

1. Save 10–15% of your income every year within a retirement account, such as a 401(k) plan or IRA.

PJ Wallin, a Certified Financial Planner™ (CFP®) and lead advisor of Atlas Financial in Richmond, VA, uses 10–15% as a starting point in retirement planning. This rule of thumb sets the tone for his discussions with clients, who may need to save more depending on their intended lifestyle in retirement.

Here’s how this strategy works: Assume you make $50,000 yearly throughout your working lifetime and earn average investment returns of five percent annually both before and during retirement. Let’s also assume you start investing at 25 and retire at 65. By setting aside and investing 10–15 % of your income for those 40 years, your investments might grow to anywhere from $600,000 to $900,000 and may generate about $30,000 to $45,000 yearly in retirement.

This is just an example and your results may vary, but this shows you the power of investing a moderate amount on a consistent basis.

2. OR accumulate an investment balance that is one times your salary at age 35, three times at 45, five times at 55 and eight times at 67.

According to William Baldwin, Enrolled Agent (EA) and Forbes contributor, if your salary is $50,000 throughout your working lifetime, you’d want to have retirement savings of $50,000 at age 35. Under those same parameters, by the time you’re 55, your investment balance should be $250,000, and when you retire at 67, you should have $400,000 set aside for retirement. These investments may generate an annual income of about $20,000. (Notably, the Fidelity guideline assumes that you’ll collect Social Security benefits in retirement, which will be in addition to the total above.)

However, your actual investment returns could vary significantly and so could the retirement balances you’ll accumulate by following these rules of thumb.

Personalize your retirement calculations

To be as fully prepared for retirement as possible, consider running personalized calculations based on your personal situation.

Here are some of the elements you may want to consider when figuring the size of investment balances you’ll likely need in order to handle expenses in retirement:

  • How much you’ll need to live off in retirement.
  • Your current age, expected age at retirement and life expectancy.
  • Estimated rate of return on your investments as you accumulate wealth during your working years.
  • Estimated rate of return on your investments during your retirement years.
  • Income from additional sources.
  • Your current retirement account balances.
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To help determine these figures, consider these guidelines from Nancy Anderson, a CFP® in Salt Lake City, UT and a Forbes contributor on retirement:

  • Project your living expenses in retirement to be at least 100% of your current spending. Then add another 20% as a cushion for unforeseen circumstances.
  • Plan to live to 100. By counting on a long life, you’ll be more likely to save enough to support yourself during many years of retirement.
  • Use a 6% rate of investment return in your pre-retirement years.
  • Apply a four percent return to investment balances during retirement when you take distributions (as you’re likely to become more conservative and earn less in these years).

Tom Sightings, a personal finance writer, presented this roadmap on U.S. News & World Report:

  • Figure out how much of your living expenses may be covered from non-investment sources such as rental properties, royalties from creative works or a private pension.
  • Then, calculate the annual income you’ll need to generate from investments.
  • Next, determine how much wealth you should accumulate for retirement.
  • Finally, figure how much you should save each year to build to that dollar amount.

A Working Example

Let’s say you’re 25 years old and plan to retire at 60. You think you’ll spend $40,000 yearly during your retirement years. You’ve already saved $15,000 in a retirement account. Right now, you’re actively shopping for a house you plan to rent out; your plan is to use the house and other resources to generate $10,000 annually in rental income by the time you retire. You have 35 more years to save and invest for retirement. If you live to 100, you’ll need to support yourself for 40 years.

First, calculate the retirement account balance needed to sustain $38,000 in annual expenses (120 percent of $40,000 less the $10,000 covered by other sources) for 40 years. If you assume you’ll earn four percent each year on your investments after retirement, you’ll need about $755,000 at the start of retirement.

Note that your savings of $15,000 today alone should grow to approximately $115,000 at retirement. So you’d need to accumulate an additional $640,000 to cover the difference between $755,000 and $115,000. In this scenario, assuming a 6% pre-retirement return, you’d need to save and invest about $6,000 yearly to meet this goal.

There are many financial spreadsheet functions and online calculators that can help with your planning. To begin, try checking out our compound interest calculator.

Bottom line

Rules of thumb can help guide you on how to start saving for retirement. As you become more savvy financially, you can develop and monitor a more customized plan to successfully save for your retirement.

Estimate your retirement savings

Use our retirement calculator to see how much money you could save by the time you retire, along with an annual breakdown of how much your estimated retirement savings could grow year over year.