How much to save for retirement

How much to save for retirement? 4% rule & savings benchmarks

Thinking about how much to save for retirement can be tricky since it really depends on your lifestyle. Someone who loves the finer things in life will need a different amount compared to someone who is more frugal.

But don’t worry. There are some handy guidelines to help everyone figure out how much to save by retirement age without needing a calculator.

How much money do I need to retire?

The amount you need to save for retirement hinges on several factors:

• The lifestyle you want during your retirement years
• Your current earnings
• Your current spending habits
• How much you have already saved in accounts, investments, and equity

While it’s easier to pin down current expenses and savings, envisioning your retirement lifestyle is a bit more abstract. However, this exercise can be inspiring. Do you see yourself traveling the globe, relaxing at home with family, or enjoying spa days? Your retirement savings will vary greatly based on these plans, but they can also serve as a source of motivation for your savings journey.

Now that you have a rough idea of your desired retirement lifestyle consider these three questions:

1. At what age do you want to retire? The earlier, the more money you’ll need.
2. How many years do you have until this age? The more years, the better, as it gives you more time to save.
3. What are your investment returns? Higher returns mean you’ll reach your goal faster.

General retirement savings benchmark for everyone

A lot of financial experts suggest aiming to save about ten times your pre-retirement salary. However, this is not a rigid rule. On top of that, many recommend planning to live on roughly 80% of your pre-retirement income each year to keep a comfortable lifestyle. These are benchmarks, not strict guidelines, and can be adjusted to fit your unique circumstances.

For example, if you earn €58,000 annually, you’ll need savings to provide €40,000-€52,000 per year in retirement. If you retire at 67 and live until 85, you’ll need savings for 18 years, which means you’ll need €720,000-€936,000 by retirement.

Alternatively, if you’re making $100,000 a year before retiring, you’ll want around $80,000 per year after you retire to maintain your current lifestyle. Of course, keep in mind that this amount may change based on other income sources like Social Security, pensions, or part-time work, as well as personal factors such as your health and lifestyle choices. 

The 4% rule of retirement savings 

One handy way to figure out how much you need to save is the 4% rule. It’s pretty simple: just divide your desired annual retirement income by 4%. According to this guideline, you can take out 4% of your retirement savings annually without running out of money, adjusting for inflation.

Let’s say you want $80,000 a year in retirement. According to the 4% rule, you’d need a nest egg of about $2 million ($80,000 / 0.04). This assumes a 5% return on investments after taxes and inflation, without counting on any additional retirement income like Social Security and keeping a lifestyle similar to what you’re living now.

This rule generally assumes you’ll be retired for 30 years. If you live longer, you’ll need your savings to last longer, especially since expenses like healthcare can rise as you age.

The 15% rule of retirement savings

According to Fidelity, an investment company focused on pensions, you should aim to save approximately 15% of your income before taxes each year from the age of 25 to 67. This helps ensure you can maintain your current lifestyle in retirement.

Fidelity’s calculations assume government support will cover some of your pension needs, so you’ll need to save about 45% of your retirement fund. You can achieve this by saving 15% annually, starting at 25. If you start saving at 35, Fidelity suggests you can still retire by 65 with this strategy.

How much to save for retirement by age

Your age can give you a good starting point to estimate how much you need to save. This estimate helps you set realistic goals to reach your retirement dreams. Let’s dive into some simple methods to crunch these numbers.

Knowing how much to save at different stages of your life is super helpful. Here are some benchmarks to keep you on track.

Retirement savings by age chart

This table can help you figure out how much you should have saved by certain ages:

Age	Savings benchmark (multiple of annual salary)
30	1x annual salary
40	3x annual salary
50	6x annual salary
60	8x annual salary
70	10x annual salary

Retirement savings based on your salary | An alternative formula

Saving a percentage of your salary can make it easier. Experts suggest saving 15% of your gross salary starting in your 20s and continuing through your working life. This includes savings across various retirement accounts and any contributions from your employer if you have a 401(k) or another employer-sponsored plan.

Here’s another way to look at it: try saving 25% of your yearly gross salary, starting in your 20s. This might seem a bit intimidating, but keep in mind it includes your 401(k) contributions, any matching from your employer, and other retirement savings.

If you stick to this plan, you should have saved your entire annual salary by the time you turn 30. Continuing at this rate, your savings could look like this:

Age	Savings benchmark (multiple of annual salary)
35	2x annual salary
40	3x annual salary
45	4x annual salary
50	5x annual salary
55	6x annual salary
60	7x annual salary
65	8x annual salary

How much should I save for retirement each year?

A good rule is to save 15% of your annual earnings. Ideally, you’d start in your 20s and continue throughout your working life.

How much does a couple need to retire?

Just like individuals, how much a couple needs to retire comfortably depends on their current income and desired lifestyle. Many experts suggest aiming for retirement income, which is about 80% of the couple’s final pre-retirement earnings.

How to calculate retirement savings?

Besides the methods mentioned earlier, online calculators can be invaluable tools for reaching your retirement savings goals. They can show you how changing your savings and withdrawal rates might affect your nest egg.

There are many retirement savings calculators available, but some stand out. The T. Rowe Price Retirement Income Calculator and MaxiFi ESPlanner are two excellent options to consider.

These calculators take into account:

• Your current age, income, savings, and contributions
• A 3% inflation rate
• A 2% annual salary increase
• A 6% pre-retirement return rate
• A 5% retirement return rate

You can also adjust for:

• Expected government support
• Anticipated retirement expenses
• Investment returns

How do different ages feel about retirement savings

Worried you’re not saving enough for retirement? You’re not alone. As of September 30, 2023, about 70 million people are actively participating in 401(k) plans, plus many former employees and retirees. However, feelings about retirement readiness vary a lot by age.

According to the Northwestern Mutual Planning & Progress Study 2023, while 52% of adults feel they will be ready for retirement, a significant number are worried. The study found that 55% of Generation X, 48% of Boomers, 46% of Millennials, and 35% of Generation Z share these concerns.

These anxieties also impact the expected retirement age across generations. Boomers plan to work until age 71, while Gen Z hopes to retire by 60. Millennials aim for 63, and Gen Xers expect to retire around 65.

5 tips on how to save for retirement

Here are five practical tips to help you save effectively for retirement:

Start early and benefit from Compound Interest

It’s highly advisable to begin saving for retirement the moment you start your first job. The key benefit here is the power of compound interest. Essentially, compound interest allows your savings to grow exponentially over time, meaning the earlier you begin, the more your money will accumulate. To visualize this, think of retirement savings as planting a tree. If you start early, the tree will have plenty of time to grow and strengthen. By the time you reach retirement, that tree, which represents your retirement fund, will have matured into a sturdy oak, offering you a reliable source of financial security and comfort for your future.

Save a chunk of your salary

Ideally, you should aim to set aside approximately 15% of your pre-tax income each year for retirement. This figure is a solid target for ensuring that you build enough wealth to support yourself in your later years. However, if you’re just beginning your career and find it difficult to reach that 15% mark, don’t worry. Start with what you can afford, and gradually increase your contributions as your financial situation improves. On the other hand, if you’re starting to save for retirement later in life, you may need to contribute a bit more to make up for lost time. The key is to find a saving strategy that aligns with your current circumstances while keeping your long-term goals in mind. Striking the right balance between saving and living comfortably is essential to maintaining a sustainable retirement savings plan.

Adjust as life happens

Life is constantly evolving, with changes such as new jobs, promotions, and even unexpected expenses. Given these fluctuations, it’s crucial to make it a habit to regularly review and adjust your retirement contributions whenever your financial situation shifts. For instance, if you receive a raise, it’s a perfect opportunity to increase your contributions to your retirement fund. By doing so, you’re ensuring that your savings grow in line with your improving income, keeping your retirement plan on track. This proactive approach helps ensure that no matter what life throws at you, you remain committed to securing your financial future. Staying flexible and adjusting your savings as needed ensures your retirement goals stay within reach, even as circumstances change.

Diversify your income streams

It’s important to ensure that your retirement plan is built on multiple income sources, rather than relying on just one. In addition to your personal savings, consider other potential income streams such as Social Security, pensions, or even part-time work. Diversifying your retirement income helps to create a more secure financial foundation, reducing the risks associated with relying solely on one source. By having multiple income streams, you’ll not only feel more confident in your financial stability but also experience less stress when it comes to managing your retirement expenses. Moreover, this approach allows you to enjoy your retirement years more fully, with the freedom to pursue hobbies, travel, or simply relax, knowing that your finances are well-supported.

Recovering from losses during your retirement savings journey

During your career’s early and middle stages, you have the luxury of time to recover from any setbacks in your retirement accounts. This period is ideal for taking some risks that could potentially boost your investment returns. Here’s how you can recover from losses during your retirement savings journey:

• Spread your investments across different areas like stocks, bonds, and real estate to minimize risk.
• Try to add more to your retirement savings when the market is down, like snagging your favorite items on sale.
• Keep your money invested even when the market dips so you can benefit when it bounces back.
• Reach out to a financial consultant for personalized guidance and peace of mind.
• Regularly check and adjust your investment mix to make sure it aligns with your goals and comfort level.

The bottom line

There will inevitably be times when you have the ability to save more for retirement and other times when saving less is necessary due to various life circumstances. The key to success lies in staying as close as possible to your retirement savings goal, even during periods when you may not be able to contribute as much. Consistency is crucial, so regularly reviewing your progress is essential to ensure you’re on track. By monitoring your savings and adjusting when necessary, you can remain focused on your long-term objectives while adapting to short-term fluctuations. This proactive approach ensures that, no matter the circumstances, you’re steadily moving towards securing your financial future.

FAQs

What is the ideal amount to save for retirement?

Aim to save 10-12 times your annual salary by retirement. For instance, if you earn $70,000 a year, try to save between $700,000 and $840,000 to maintain your lifestyle comfortably.

Is 25% too much to save for retirement?

Saving 25% of your income might seem high, but it’s great for securing your future, especially if you start late or want to retire early. If it feels like too much, start lower and increase over time.

Can you retire with $1.5 million comfortably?

Retiring with $1.5 million can be comfortable if you manage your expenses and investments wisely. Combined with Social Security or other income sources, this amount can sustain a modest lifestyle.

What is the 50/30/20 rule?

The 50/30/20 rule suggests budgeting 50% of your income for needs (like housing and groceries), 30% for wants (like dining out and entertainment), and 20% for savings and debt repayment. It’s a simple way to manage your finances effectively.

How much do I need to save for retirement if I have a pension?

If you have a pension, estimate your annual retirement expenses, subtract your expected pension and Social Security income, and the remaining amount is what you’ll need to save. This reduces how much you need to save on your own.