A key part of retirement planning is to answer the question: How much do I need to retire? The answer varies by individual, and it depends largely on your income now and the lifestyle you want in retirement.
Knowing how much you need to save “by age” can help you stay on track and reach your retirement goals. There are a few simple formulas that you can use to come up with the numbers.
How Much Do I Need to Retire?
Most experts say your retirement income should be about 80% of your final pre-retirement annual income. That means if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce.
This amount can be adjusted up or down depending on other sources of income, such as Social Security, pensions, and part-time employment, as well as factors like your health and desired lifestyle. For example, you might need more than that if you plan to travel extensively during retirement.
Retirement Rule of Thumb: 4% Rule
There are different ways to determine how much money you need to save to get the retirement income you want. One easy-to-use formula is to divide your desired annual retirement income by 4%, which is known as the 4% rule.
To generate the $80,000 cited above, for example, you would need a nest egg at retirement of about $2 million ($80,000 / 0.04). This strategy assumes a 5% return on investments (after taxes and inflation), no additional retirement income (such as Social Security), and a lifestyle similar to the one you would be living at the time you retire.
Keep in mind that your life expectancy plays an important role in determining if the 4% rule rate will be sustainable. In general, the 4% rule assumes that you will live for about another 30 years in retirement. Retirees who live longer need their portfolios to last longer, and medical costs and other expenses can increase as you age.
The 4% rule does not work unless you stick to it year in and year out. Straying one year to splurge on a big purchase can have major consequences because this reduces the principal, which directly impacts the compound interest that a retiree depends on to sustain their income.
Retirement Savings by Age
Knowing how much you should save toward retirement at each stage of your life helps you answer that all-important question: “How much do I need to retire?” Here are a few useful formulas that can help you set age-based savings goals on the road to retirement.
Percentage of your salary
To begin to figure out how much you need to accumulate at various stages of your life, it can be useful to think in terms of saving a percentage of your salary.
Fidelity Investments suggests saving 15% of your gross salary starting in your 20s and lasting throughout the course of your working life. This includes savings across different retirement accounts and any employer contributions if you have access to a 401(k) or another employer-sponsored plan.
How much to save for retirement by age
Fidelity also recommends the following benchmarks—based on a multiple of your annual earnings—for how much you should have saved for retirement by the time you reach the following ages:
1x annual salary
3x annual salary
6x annual salary
8x annual salary
10x annual salary
An Alternative Formula
Another, more heuristic formula holds that you should save 25% of your gross salary each year, starting in your 20s. The 25% savings figure may sound daunting. But don’t forget that it includes not only 401(k) holdings and matching contributions from your employer, but also other types of retirement savings.
If you follow this formula, it should allow you to accumulate your full annual salary by age 30. Continuing at the same average savings rate should yield the following:
Age 35—two times annual salaryAge 40—three times annual salaryAge 45—four times annual salaryAge 50—five times annual salaryAge 55—six times annual salaryAge 60—seven times annual salaryAge 65—eight times annual salary
Whether or not you try to follow the 15% or the 25% savings guideline, chances are your actual ability to save will be affected by life events such as the job loss many experienced during the COVID-19 pandemic.
Retirement Savings Confidence by Age
Anxious that you aren’t saving enough for retirement? You’re not alone. A 2020 survey by Charles Schwab of currently employed 401(k) plan participants found that saving enough for retirement continues to be a leading source of significant financial stress for all generations. Participants in the survey anticipate that the economic fallout from the COVID-19 pandemic will have an impact on their retirement savings.
Overall, only 37% of survey respondents think they are “very likely” to achieve their retirement savings goals. Almost half (49%) believe they are “somewhat likely” to do so, and 14% said it is “not likely” at all. Gen X has the least confidence—just 32% feel it is “very likely” they will reach their goals—compared to 39% of baby boomers and 42% of millennials.
In the early and middle years of your career, you have time to recover from any losses in your retirement accounts. That’s a good time to take some of the risks that allow you to earn more with your investments.
How to Calculate Retirement Savings
In addition to using the above methods to determine what you should have saved and by what age, online calculators can be a useful tool to help you reach your retirement savings goals. For example, they can help you understand how changing savings and withdrawal rates can impact your retirement nest egg. Though there are many online retirement savings calculators to choose from, some are much better than others. The T. Rowe Price Retirement Income Calculator and MaxiFi ESPlanner are two worth trying.
How Much Does a Couple Need to Retire?
Much like an individual, how much a couple needs to save to retire comfortably will depend on their current annual income and the lifestyle they want to live when they retire. Many experts maintain that retirement income should be about 80% of a couple’s final pre-retirement annual earnings. Fidelity Investments recommends that you should save 10 times your annual income by 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. It is intended to make retirement savings last for 30 years.
How Much Should I Save for Retirement Each Year?
One rule of thumb is to save 15% of your annual earnings. In a perfect world, savings would begin in your 20s and last throughout your working years.
The Bottom Line
Sometimes you’ll be able to save more for retirement—and sometimes less. What’s important is to get as close to your savings goal as possible and check your progress at each benchmark to make sure you’re staying on track.
A 401(k) might be a good place to start—if you have access to one. If not, consider an IRA. Because the importance of saving for retirement is so great, we’ve made lists of brokers for Roth IRAs and IRAs so you can find the best places to create these retirement accounts.