How Much To Save For Retirement?
How much should you save for retirement? It's personal. Bottom line: Start saving today. Here are some rules of thumb by age.
Savings For Retirement During Working Years
I've worked with folks in their 20s, freshly graduated from college and starting their first job. Some of them are "adulting" for the first time and navigating first paychecks and first apartments.
I've also worked with folks in their 40s, careers are in full swing, and so is life - young children, buying a bigger home, thinking about the future.
And I've worked with folks in their 60s, winding down their careers and considering what's next.
But in every case, their financial plan includes retirement savings. It must, because we are responsible for our own retirement savings. Social Security won't cover all our income needs.
In our previous post, we examined factors that impact an individual’s retirement planning, including the amount of education one has, the number of years one works and amount of savings, and the number of years one plans to live in retirement and how much income one will need.
Each of these factors is specific to an individual’s personal situation. But we can also look at some basic rules of thumb related to saving for retirement. Due to the value of compound interest, the more years you have to save for retirement, the less of your income you need to save.
Required Savings Rate for Retirement By Beginning Age
Here’s a chart from The American College for Financial Services that shows the age at which regular savings begins, and the associated required savings rate. Of course there are a lot of assumptions here, including a reasonable rate of return, normal raises, an 80% wage replacement ratio, and expecting that social security benefits will be received. Talk to your financial advisor about your specific situation.
Ages 25-35
If you’re beginning to save for retirement between ages 25-35, good job taking care of your future self! Time is on your side. The amount of your income you should save for retirement is 10-13%. This means that for every paycheck, set aside at least 10% towards retirement. In practical terms, if you earn income of $100,000, this means saving $10,000-$13,000 per year, or about $1,000 per month.
An easy way to do this is through saving in your employer’s workplace retirement account, like a 401k, because these savings can occur automatically from every paycheck. Can’t save 10% right away? That’s ok; start with a lower percentage, and enroll in an automatic 1% annual increase. The more you can automate your savings, the more likely you are to save.
Ages 35-45
If you’re beginning to save between ages 35-45, you’ll need to save 13-20% of your income annually for retirement. This is more than if you had started to save earlier in life. But that’s ok, just start somewhere. Also, this period of life can be the time when one’s income is increasing year over year due to promotions and career growth – take advantage of this by increasing your savings rate with every raise you get and again in January with an automatic 1% increase. You’ll do yourself a favor by keeping your lifestyle costs lower than your income and save for the future while you’re at it. Again, do what you can to automate your retirement savings, such as enrolling in your employer’s 401k.
Let's say you're now earning $200,000 - you would need to save $26,000-$40,000 per year. Folks under 50 can only save $23,000 in your 401k in 2024 tax year unless your 401k plan permits after tax contributions (read more about types of 401k contributions here). So you'll need to be diligent about saving outside of your workplace 401k, in another place such as an after tax brokerage account.
Ages 45-55
If you’re beginning to save between ages 45-55, your savings rate needs to be 20-40% of your income because unfortunately, you don’t have time on your side. Your retirement years may be less than 20 years away, which means you’ll need to save a much larger amount of your income to prepare for retirement. Say you're making $250,000 now. You'll need to save $50,000-$100,000 per year just for retirement, not including any other expenses like college education or a home purchase.
If you’re over age 55 and haven’t yet saved for retirement, realistically you will need to delay your retirement age to give you more time to save. Your retirement might look different too: for example, you may continue working throughout retirement to supplement your income.
Rules of Thumb, Not Personal Advice
Keep in mind, these retirement savings rates by age are rules of thumb only, and not meant as personalized advice. Talk to your financial advisor for recommendations on your specific financial situation.
The most important thing for any worker: save something for retirement with every paycheck. Even if the percentages above seem difficult for you, start somewhere. Your future self will thank you.
Are you thinking about your own retirement planning? Reach out to talk about your personal financial situation.