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Life is unpredictable; we all know that. It's hard to guess what the future may hold. But if there's one thing you can control, it's saving for your retirement. Having some savings set aside can go a long way toward living a comfortable retirement — whether it's three years or three decades down the road.
However, saving isn't always cut and dry. How you save and how much often depends on your age. Determining these numbers can be challenging since there's no one-size-fits-all rule for retirement savings. However, the following general guidelines may help.
Determining Retirement Needs & Wishes
Saving for retirement is a personal journey. Depending on individual wants and needs, the amount needed varies for everyone. For example, if you hope to spend your retirement at home with your friends and family and don't have many expenses, you can probably aim to save less than someone who dreams of traveling the world.
One of the first things you should think about when it comes to retirement savings is creating an estimated retirement budget. That can help form the foundation of your retirement strategy. If you're younger, this is more difficult; retirement could be decades away. But having a general idea of what you may need in retirement can help you get on the path to saving what you need every month.
Some major costs and recurring expenses you'll want to consider include:
- Housing
- Transportation
- Utilities
- Insurance
- Health care
- Loans
- Groceries
- Big-ticket items
- Planned expenditures and events
- Emergency savings
Getting a general sense of these costs can go a long way toward helping you start a budget. Then, through the years — and especially as you get closer to retirement — revisit your budget and plans to ensure you're still on track.
Our retirement calculator is a good place to start. It can help you estimate how much you may need to save to retire comfortably. Meeting with a financial professional can also help you figure out your goals. They can work with you to make personalized plans for budgeting, saving and spending over the long term.
How to Estimate Retirement Income
With an idea of how much money you may need in retirement, you have a rough estimate of expenses. Next, you'll want to determine the income needed to cover those expenses and any other wants for your quality of life.
In terms of income, there are several primary sources of it in retirement:
- Social Security benefits
- Employer-sponsored 401(k) savings
- Individual retirement account (IRA) savings
- Pension plans
- Other investment and savings accounts
Potential post-retirement income can come from other places, too, such as selling your home and moving to a smaller residence or working a part-time job. Depending on your situation, you may want to consider a wide range of options as you get closer to retirement. Our retirement cost of living calculator can help you plan.
A couple of generalized approaches can help you figure out how much, in total, you may want to have in your retirement accounts when the time comes:
- 80% of your income. Financial experts generally recommend you to look at your current income and estimate that you'll want to have around 80% of it to meet your needs.1 Of course, this number can depend on your expenses. If you live more frugally, you could live on a lower percentage of your current income.
- 4% of your retirement savings. Another way to look at potential retirement income needs is to estimate you'll need to withdraw about 4% of your total retirement savings each year (and then annually adjust that amount for inflation).
Conventional wisdom has often thrown out $1 million in savings as a benchmark of "enough" in retirement. While that may be plenty for many, you'll want to run your numbers to decide if that's a goal that works for you.
What Percentage of My Income Should I Save?
With an idea of how much money you may spend in retirement and the income you may need to cover those expenses, you can start taking concrete steps toward saving.
You can contribute the money to your 401(k), an IRA or other investment accounts. You can split up a percentage across each or put it all into one account, whatever you prefer. Take your preferred savings rate and apply it to your monthly income; that's how much you should save each month.
Another popular framework is called the 50/30/20 rule. Take your monthly income and break it down into three categories:
- Necessities (food, housing, etc.): 50% of your monthly income
- Discretionary (travel, clothes, activities, etc.): 30% of your monthly income
- Savings (retirement and emergency): 20% of your monthly income
Here's where having an idea about your retirement expenses and income can help. If you don't think you'll need as much money in retirement because you have a low cost of living now, you may need to save less than someone with higher estimated expenses.
Depending on your age, income and other expenses, it may be difficult for you to consistently reach your monthly savings goal. But saving any amount toward retirement when you're young can benefit from having a long time to grow and overcome market fluctuations. Note, though, that investments cannot guarantee growth or even sustainment of principal value; they may lose value over time. Past performance is not an indication of future results.
How Much Should I Save for Retirement in My 20s?
Ask most 20-somethings about retirement, and you'll find it's often considered to be far off in the distance. But the sooner you can start saving toward your retirement, the better. Plus, getting into good savings habits early can pay off decades down the road.
One common suggestion by financial experts is to have saved 50% to 100% of your current salary by the end of your 20s.2 Let's say you are 22 years old and make $50,000 a year. If you put $6,250 a year, or $520 per month, into a 401(k) or other retirement savings account, you could potentially reach $50,000 in savings by age 30. Follow the same math as you age and increase your income.
If you're starting your first job, see if you are eligible for an employer-sponsored retirement plan, such as a 401(k). You can make tax-advantaged contributions to it from your paycheck, which may help you save. Plus, if your employer offers to match a percentage of your contributions, that's even better. It's free money.
How Much Should I Save for Retirement in My 30s?
As you get into your 30s, you may have yourself in a better career position and earning more income. However, many people in their 30s also start seeing significant expenses, including a wedding, buying a home and starting a family.
That may make it more challenging to reach your monthly retirement savings goals, which many experts set between two and three times your annual salary by the time you turn 40. One way to help catch up is to boost your 401(k) contributions to maximize employer matching (if offered). For example, if you contribute 5% of your income to it and your employer matches 3% of that, you're already at 8% of your income going to savings. You might also add any cash windfalls to your savings, such as bonuses or inheritances.
If hitting your goal percentage is hard, try increasing your savings by a small percentage, such as 0.5% or 1% each year. With the anticipation you'll have 30 more years before retirement, that may help you catch up.
Boost your retirement plan by adjusting your savings to fit your 30s income. Start Your Free Plan
How Much Should I Save for Retirement in My 40s?
For many people, you'll have your highest salary jump somewhere in your 40s as you enter your prime earning years. That, coupled with other expenses such as saving for kid's college funds or paying off student debt, means keeping a budget and carefully tracking your expenses is increasingly important.
By the time you hit 50, many experts suggest having between four and six times your annual salary in your retirement savings.
This age is often when people meet with a financial professional to review their total pictures, including retirement plans and strategies to improve financial health. They may have some suggestions to help maximize your retirement savings by setting a targeted monthly amount based on your needs and current income. They can also guide you on potential tax benefits and explore other investment and savings vehicles.
How Much Should I Save for Retirement in My 50s?
Retiring in your 50's may seem just around the corner. Planning and reviewing your current savings rate becomes essential. If you've struggled to hit the 10% to 20% monthly savings suggestions, this may be your chance to catch up.
Experts recommend having seven to eight times your annual income in retirement savings by the time you reach 60. You'll also want to start seriously considering when you may retire and begin claiming your Social Security benefits. Generally, waiting until you've reached your full retirement age or beyond can help increase your monthly income in retirement.
Some special tax rules can help you boost your savings. After age 50, the Internal Revenue Service (IRS) allows for catch-up contributions on select retirement savings accounts. So if you have an IRA or 401(k), you may be able to increase your savings in these accounts each year. Just make sure you follow the IRS guidelines, which are updated annually.3
How Much Should I Save for Retirement in My 60s?
Come your 60s, you're in the home stretch. Depending on your situation, you may be a few years away from retirement or plan to work into your 70s. Regardless of the retirement path you've planned, now is when your decades of hard work saving for retirement can become a reality.
Your final retirement age and lifestyle plans may influence your savings needs. Experts recommend saving between eight and 10 times your annual salary by the time you retire. However, if you plan on a more active lifestyle with a higher cost of living, working longer and saving that much extra may help. It may also help boost your Social Security benefits.
Now is the time to work with a financial professional to go over your plans. They can help you finalize your retirement budget, look at your investments to determine if anything needs adjusting, and offer guidance on the best time to retire based on your financial situation.
It's Never Too Late to Start
Life happens, so you may not have saved 15% of your income every month for the last 20 years. However, that doesn't mean you can't start putting away a percentage of your income every month now and start building your retirement savings.
It may feel overwhelming, but there are resources to help. Chatting with a financial professional is one way to start. They can help you set realistic retirement goals and get you on a path toward saving for your future.
Tailor your retirement plan to match your lifestyle and monthly savings potential. Start Your Free Plan
Sources
- Will Your Retirement Income Be Enough? https://www.investopedia.com/retirement/retirement-income-planning/.
- Savings by age: How much to save in your 20s, 30s, 40s and beyond. Ally. https://www.ally.com/stories/save/savings-by-age-how-much-to-save-in-your-20s-30s-40s-and-beyond.
- COLA increases for dollar limitations on benefits and contributions. Internal Revenue Service. https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions.
