How Much Should I Save for Retirement?

Planning for retirement is one of the most critical financial decisions you’ll make, yet many people are unsure about how much they need to save. With increasing life expectancies, rising healthcare costs, and the potential for inflation to erode purchasing power, it’s important to carefully plan and save enough to maintain your lifestyle in retirement. This guide will break down how much you should save for retirement and provide practical strategies for reaching your retirement savings goals.

Factors That Influence How Much You Should Save

Several factors affect how much money you will need in retirement. Understanding these factors can help you make informed decisions about your savings:

Desired Retirement Lifestyle
The amount you need largely depends on the lifestyle you plan to maintain in retirement. Do you plan to travel frequently, downsize your home, or stay close to family? Estimating your expenses based on your desired lifestyle is key to determining how much you need to save.
Age You Plan to Retire
The earlier you retire, the longer your retirement savings need to last. Retiring at 65 versus 70 can make a significant difference in how much you need to save. Social Security benefits also increase the longer you delay retirement, which can impact how much you need to draw from your savings.
Current Age and Savings
Your current age and the amount you’ve already saved will dictate how aggressively you need to save going forward. If you start saving early, you benefit from compound interest and may not need to save as much later in life. If you start later, you may need to save a higher percentage of your income or adjust your retirement expectations.
Expected Lifespan
With average life expectancies rising, it’s essential to plan for a long retirement. Many financial experts recommend planning for a retirement that lasts 25-30 years to account for longevity risks. For example, if you retire at 65, you may need savings to last until you are 90 or beyond.
Inflation
Over time, inflation will reduce the purchasing power of your money. A dollar today will buy less in 20 or 30 years. To keep up with rising costs, particularly healthcare expenses, it’s essential to factor inflation into your retirement savings plan.
Healthcare Costs
Healthcare expenses often rise as we age, and Medicare doesn’t cover everything. You’ll need to budget for out-of-pocket costs, such as prescription drugs, long-term care, and other medical services. According to Fidelity, a couple retiring at age 65 in 2024 may need over $300,000 for healthcare expenses alone during retirement.
Sources of Retirement Income
Consider other income sources you’ll have in retirement, such as Social Security benefits, pensions, rental income, or part-time work. These sources can reduce the amount you need to save.

General Rules of Thumb for Retirement Savings

While there’s no one-size-fits-all approach, several rules of thumb can guide you toward your retirement savings goal.

1. The 80% Rule

The 80% rule suggests that in retirement, you’ll need 80% of your pre-retirement income to maintain your current lifestyle. For example, if your annual income is $100,000 before retirement, you should aim for $80,000 per year in retirement. The idea is that you’ll spend less on commuting, work-related expenses, and possibly housing, but you’ll still have regular living costs like groceries, utilities, and healthcare.

Example: If you plan to retire at 65 and need $80,000 per year for a 25-year retirement, you would need about $2 million in savings (excluding other income sources like Social Security).

2. The 4% Rule

The 4% rule is a commonly used guideline for determining how much you can safely withdraw from your retirement savings each year. According to this rule, you should be able to withdraw 4% of your retirement savings annually, adjusting for inflation, without running out of money over a 30-year retirement.

Example: If you have $1 million saved for retirement, the 4% rule suggests you could withdraw $40,000 per year. If this amount covers your living expenses along with other income sources like Social Security, you should have enough savings for a long retirement.

3. Multiply Your Income by 25

This rule of thumb suggests that to retire comfortably, you should aim to have 25 times your annual spending saved by the time you retire. If you expect to need $60,000 per year in retirement, you should aim to save $1.5 million (25 x $60,000).

4. Savings Benchmarks by Age

Financial planners often recommend aiming for specific savings milestones at various ages:

By age 30: Save 1x your annual salary.
By age 40: Save 3x your annual salary.
By age 50: Save 6x your annual salary.
By age 60: Save 8x your annual salary.
By age 67: Save 10x your annual salary.

These benchmarks assume you save consistently throughout your working life and adjust your savings rate as you age.

How to Calculate Your Retirement Savings Goal

To calculate your specific retirement savings goal, follow these steps:

1. Estimate Your Annual Expenses in Retirement

Start by estimating your annual living expenses, considering factors such as:

Housing (mortgage, rent, utilities)
Healthcare and insurance
Transportation
Groceries and daily living expenses
Leisure and travel
Taxes (on retirement income or withdrawals)

2. Determine Your Income Sources

Estimate the amount you will receive from Social Security, pensions, and any other income streams in retirement. Subtract this from your estimated annual expenses.

Example: If your annual expenses are $80,000 and you expect $30,000 from Social Security and pensions, you will need to withdraw $50,000 from your savings each year.

3. Use the 4% Rule

Once you have an idea of how much you’ll need to withdraw from your savings each year, use the 4% rule to calculate your total savings goal. Simply multiply your required annual withdrawal by 25.

Example: If you need $50,000 per year from your retirement savings, multiply that by 25, which means you should aim to save $1.25 million.

4. Adjust for Inflation

It’s essential to factor in inflation when planning for long-term savings. Over a 30-year retirement, inflation can significantly erode the purchasing power of your savings. Consider increasing your savings target by at least 2%-3% per year to account for inflation.

How Much to Save Each Month Based on Your Age

The earlier you start saving, the less you’ll need to set aside each month thanks to the power of compound interest. Below is a general guideline on how much you should save each month based on your age and retirement goals.

1. In Your 20s and 30s

Start saving as soon as you can. Aim to contribute at least 10%-15% of your income toward retirement. Consider maximizing employer-matched contributions to your 401(k) or IRA.

2. In Your 40s

If you’re in your 40s and haven’t been saving as much as needed, you’ll need to ramp up your contributions. Try to contribute 15%-20% of your income to catch up.

3. In Your 50s

Your peak earning years should also be your peak saving years. Consider contributing the maximum allowed to your 401(k) or IRA. In 2024, individuals 50 and older can contribute an additional $7,500 per year to their 401(k) in catch-up contributions, and an additional $1,000 to their IRA.

4. In Your 60s

If you’re nearing retirement, reassess your savings and retirement goals. If you’re falling short, you may need to delay retirement or adjust your lifestyle expectations. Maximize contributions and ensure your asset allocation is appropriate for your risk tolerance and timeline.

Tips for Reaching Your Retirement Savings Goals

Start Early
The earlier you start saving, the more you benefit from compound interest. Even small contributions can grow significantly over time.
Increase Contributions Gradually
If you can’t start saving 15% of your income right away, begin with what you can and increase your contributions as your income grows.
Maximize Employer Contributions
If your employer offers a 401(k) match, make sure you contribute enough to take full advantage. It’s essentially free money toward your retirement.
Diversify Your Investments
A diversified portfolio reduces risk and helps your savings grow over time. Ensure you’re invested in a mix of stocks, bonds, and other assets suitable for your risk tolerance and timeline.
Reassess Your Plan Regularly
Review your retirement savings plan at least once a year. Adjust your contributions, investment strategy, or retirement goals as needed to stay on track.

Conclusion

How much you should save for retirement depends on your lifestyle goals, income, age, and expected expenses. While rules of thumb such as the 4% rule or saving 25 times your annual spending are good starting points, personal factors like inflation, healthcare costs, and life expectancy should be considered in your retirement plan. The key to a comfortable retirement is starting early, saving consistently, and revisiting your plan regularly to ensure you’re on track to meet your long-term financial goals.