An important part of retirement planning is answering the question: How much should I save for my retirement? The answer varies from person to person and largely depends on your current income and the lifestyle you want and can afford in retirement.
Knowing how much to save based on how old you are now is just the first step, but it will get you started on your way to achieving your retirement goals. There are a few simple formulas you can use to come up with the numbers.
Key learning points
- How much you need to save for retirement depends on your current income and the lifestyle you want when you retire.
- Knowing how much you need to save by age can help you stay on track and achieve your retirement goals.
- To come up with specific quantities, you need to use some simple formulas.
How much should I save for my retirement?
Many retirement experts recommend strategies such as saving ten times your early retirement salary and planning to live on 80% of your annual early retirement income.
This means that if you earn $100,000 per year in retirement, you will need at least $80,000 per year to have a comfortable lifestyle after you leave the workforce.
This amount may be adjusted up or down depending on additional sources of income, such asSocial Security,pensionerand part-time work, as well as factors such as your health and desired lifestyle.
Order your copy of the print edition ofInvestopedia's pension guidefor more help putting together the best plan for your retirement.
The 4% rule
To determine how much you need to save to generate the income you need, you can use an easy-to-use formula of dividing your desired annual retirement income by 4%, known asThe 4% rule.
For an income of $80,000, you would need a retirement nest egg of about $2 million ($80,000/0.04). This strategy assumes a 5%return on investment, after taxes and inflation, no additional retirement income like Social Security, and a lifestyle similar to the lifestyle you would live in retirement.
In general, the 4% rule assumes you will live for 30 years in retirement. Retired adults who live longer need longer portfolio longevity, in part because medical costs and other expenses can increase as you age.
Pension savings by age
Knowing how much you need to save for retirement at each stage of your life can help you answer the most important question of all: "How much do I need to retire?" Here are some helpful formulas to help you set age-based savings goals on your way to retirement.
Percentage of your salary
To figure out how much you need to build up at different stages of your life, it can be helpful to think about saving a percentage of your salary.
Fidelity Investments suggests saving 15% of your moneygross salarystarting at the age of twenty and continuing throughout your working life. This should include savings in various retirement accounts, as well as any employer contributions you receive into those accounts, provided you have access to:401(k)or other employer-sponsored plan.
How much should you save for your pension per age?
Fidelity also recommends the following benchmarks – based on a multiple of your annual income – for how much you should have saved for retirement when you reach the following ages.
| Measure pension savings by age | |
|---|---|
| The | Annual salary |
| 30 | 1x annual salary |
| 40 | 3x annual salary |
| 50 | 6x annual salary |
| 60 | 8x annual salary |
| 67 | 10x annual salary |
An alternative formula
Another, more heuristic formula says that from the age of twenty you should save 25% of your gross salary every year. The 25% savings figure may sound scary. But remember, it's not just 401(k) holdings andmatching contributionfrom your employer, but also other forms of pension savings.
If you follow this formula, you should be able to earn your full annual salary by age 30. Continuing with the same average savings rate should yield the following:
- Age 35 – twice annual salary
- Age 40 – three times annual salary
- Age 45 - four times annual salary
- Age 50 – five times annual salary
- Age 55 - six times annual salary
- Age 60 - seven times annual salary
- Age 65 - eight times annual salary
Whether or not you try to follow the 15% or 25% savings guidelines, chances are your actual ability to save will be affected by life events, such as the job losses many have experienced during the COVID-19 pandemic.
Retirement savings Confidence by age
Are you afraid that you are not saving enough for your retirement? You are not alone. As of September 30, 2023, there were approximately 70 million active 401(k) participants, in addition to former employees and retired adults.And while they may actively participate, people's feelings about retirement vary widely depending on their age.
According to the 2023 Northwestern Mutual Planning & Progress Study, the majority of adults (52%) believe they will be prepared for retirement, but many fear this will not be the case. Among respondents, 55% of Generation X, 48% of Boomers, 46% of Millennials and 35% of Generation Z have this fear.
These concerns also impact the age at which members of different generations expect to retire. The same survey found that Boomers plan to work until age 71, while Gen Z expects to retire more than a decade earlier at age 60. Millennials and Generation Xers plan to work until age 63 and 65, respectively.
These figures are slightly less rosy than theseInvestopedia's 2022 Financial Literacy Survey, which found that Boomers expect to work until age 68; Gen Xers, 64; Millennials, 61; and Gen Z, most of themoptimistic about early retirement, said they think they will retire at age 57 — three years younger than Gen Z respondents in the 2023 Northwestern Mutual survey.
Investopedia's research shows that not all adults are particularly confident in their understanding of retirement planning. After digital currencies and investing, retirement was the third least understood concept. And retirement was the top personal finance concern for about a sixth of all respondents.
In the early and middle years of your career, you have time to recover from any losses in your retirement accounts. It's a good time to take some of the risks that can help you earn more from your investments.
How to calculate pension savings
In addition to using the above methods to determine how much you should have saved and by what age, online calculators can be a useful tool to help you reach your target amount.retirement savings goals. For example, they can help you understand how changing savings and withdrawal rates could impact your retirement nest egg.
While there are many online retirement savings calculators to choose from,some are much better than others. OfT. Rowe Price Retirement Income CalculatorInMaxiFi ES-plannerare two that are worth a try.
How much does a couple need to retire?
Just like an individual, how much a couple needs to save to retire comfortably depends on their current annual income and the lifestyle they want to have in retirement. Many experts argue that retirement income should be approximately 80% of a couple's final annual early retirement pension. Fidelity Investments recommends that you save ten times your annual income before age 67.
What is the 4% rule?
The 4% rule is a guideline used to determine how much a retiree can withdraw annually from a retirement account. Pension savings must last thirty years.
How much should I save annually for my pension?
A rule of thumb is to save 15% of your annual income. In a perfect world, saving would start in your 20s and last throughout your working years.
In short
Sometimes you can save more for your pension – and sometimes less. The most important thing is that you get as close to your savings goal as possible and monitor your progress against each benchmarkmake sure you stay on track.
A 401(k) can be a good starting point, if you have access to one. If not, consider oneindividual retirement account (IRA). Because the importance of saving for your pension is so great, we have made lists of thembrokers for Roth IRAsInIRA'sso you can find the best places to set up those retirement accounts.
The article source
Investopedia requires authors to use primary sources to support their work. These include white papers, government data, original reports and interviews with industry experts. Where relevant, we also refer to original research from other renowned publishers. You can learn more about the standards we follow to produce accurate, unbiased content in oureditorial policy.
The Fidelity Investment. "How much should I retire?"
RBC asset management. "Sustainable withdrawal rates in retirement: Use as a guideline to avoid running out of money."Kant 1.
Investment Company Institute. "401(k) Information Center."
Northwestern mutual. "Planning and progress overview 2023."
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