Experts recommend saving at least 10-15% of your pre-tax income for retirement each year, with the aim of replacing 70-90% of your pre-retirement income.
On average, most people will need somewhere between 55 to 80% of their preretirement income to maintain their current lifestyle in retirement.
So, if you make $75,000 per year pre-tax, you should try to save between $7,500 and $11,250 (per year) for retirement, either in a retirement fund like a 401(k) or 403(b) or an investment fund like an IRA (or combined). And, that's assuming you start saving for retirement at age 25 and retire at age 67. If you start saving later or plan to retire earlier, you may have to adjust your percentage of savings.
How much do I need to save for retirement?
How much you need to have saved for retirement depends on your personal situation and future goals, such as your life expectancy, current spending and savings, and the lifestyle you want to live when you're retired. To calculate how much you should save, start by:
Estimating your future income needs
First, list your average monthly expenses for mortgage, utilities, other bills, transportation, groceries, entertainment, debt, and any others.
From that list, think about which costs will decrease, increase, stay the same, or be eliminated altogether. For example, you may move into a smaller home so your mortgage will decrease, but your healthcare coverage costs may increase. Or, currently you may not include travel expenses, but you plan to travel more once you're retired so that will increase.
Compile a new list that includes estimates of what expenses you'll have in retirement and what those will be. Include expenses you don't have now but may plan on, such as traveling or other hobbies.
Once you have that total, multiple it by 12 to get the total income you'll need each year to be able to pay for those needs. This can give you a rough idea of the income you'll need to support your spending habits, but you'll want to ensure you include wiggle room for unplanned expenses as well.
Compare this to your current income to determine your replacement ratio, or how much of your income you should aim to replace in retirement. If you plan to lead a relatively quiet lifestyle, you may only need to replace 60-70%, but on the other hand, you may need to replace 80-90% or more.
Planning for emergencies.
You should always have an emergency fund that holds at least 6 months’ worth of living expenses, though some experts recommend up to 9-12 months’ worth. It’s important to have this back-up plan to ensure you’re prepared for unplanned and unexpected costs that may come your way. Then, you don’t have to worry about tapping into other savings accounts.
Using a retirement calculator.
While you can do rough estimations on your own, a retirement calculator can help you understand where you are in your savings progress now, and how much further you have to go. These tools use your annual spending estimates as well as future projections, including factors such as inflation and life expectancy, to estimate how much you'll need to retire and whether you're on the right track.
Working with a financial advisor.
If you want to ensure you're on track and planning appropriately, you may want to talk to an expert. As your life circumstances change, your retirement and savings plans may need to be adjusted. A financial advisor can help you account for those adjustments and ensure you stay on track.
The important thing to keep in mind that not all of your retirement funds need to come from your savings. In fact, only about 45% of your retirement income will come from savings. The other percentage will likely come from Social Security, pensions, or other investments you've made over the years.
Consider an average life expectancy of around 80 years. If you retire at age 67, you have at least 13 years of income you’ll need to replace. Say by your calculations, you’d like to live off $50,000 per year. That means you’ll need about $650,000 between retirement savings and Social Security to live the life you plan. Depending on your lifestyle plans, you may need more or less than that.
Or, you can set a savings goal. For example, if your goal is to have $1 million when you retire, that means your replaced annual income will be nearly $77,000.
Average retirement savings by age
When you're ready to exit the workforce, you'll want to be prepared for the future. Saving for retirement now can help ensure you're in the best financial situation possible and may even set you up to be able to retire early.
Experts recommend the following benchmarks to help you track toward your savings progress:
Multiple of Annual Salary Saved
Here's an example that illustrates the importance of starting to save early:
- Person A sets aside $100 per month starting at age 25. Assuming annual returns of 10%, this person would have a retirement balance of more than $640,000 by age 65.
- Person B sets aside $200 per month but doesn't start until age 35. Assuming the same 10% returns, they will have saved closer to $440,000, or $200,000 less, by the time they turn 65.
In this example, you see it's not all about the balance you're contributing, but the age at which you start. The earlier, the better! It also shows that you don't have to invest huge amounts to ensure returns. In the Person B example, they technically only contributed $72,000 of their own dollars, but earned nearly $380,000 in returns.
However, even if you haven’t started yet or feel behind, don’t feel intimidated. There are things you can do to keep your retirement on track and ensure you’re financially secure once you leave the workforce.
Some tips for saving include:
- In your 30s, have at least six months of expenses saved in an emergency fund, review your contribution percentage to your employer's retirement savings fund and increase it if possible, focus on paying off your debts, and begin an educational savings plan if you plan on having children.
- In your 40s, invest all additional savings into other retirement funds or investment accounts, contribute to your savings plan for your children (if you have them), and increase your retirement plan contribution rate if your compensation has increased.
- In your 50s, meet with a financial advisor to ensure you're on track and get information for how to make adjustments to your investments as you near retirement age, invest additional savings and max out contributions to individual and employer-sponsored plans, and funnel all funds that used to go toward children or paying off debt into your savings accounts.
- In your 60s, have at least 12 months of funds saved in an emergency fund, continue working with your financial advisor to max out contributions, and start comparing health insurance plans so you're ready when you're eligible.
Regardless of your age, there are steps you can take toward preparing for retirement and having enough savings to feel comfortable doing so.
Average Social Security retirement benefits
If you’re eligible for Social Security benefits when you retire, you’ll receive an average of about 40% of your pre-retirement income.
To be eligible for Social Security benefits, you need to have earned "credits" toward them. The number of credits you need depends on the year you were born:
- If you were born in 1929 or later, you need 40 credits.
If you stop working early, the credits will remain on your record, and if you return to work, more credits can be added. However, you must have 40 credits before you can receive any benefits.
Calculating how much you’ll receive from Social Security depends on what age you plan to retire. If you reach full retirement age, you'll receive your full Social Security benefit amount. However, you can start receiving benefits as early as age 62 and up to age 70.
- If you were born from 1943 to 1954, full retirement age is 66
- If you were born from 1955 to 1960, full retirement age increases two months per year until it reaches 67
- If you were born in 1960 or later, full retirement benefits begin at age 67
Know that the earlier you apply for benefits the less you'll receive until you reach full retirement age. The opposite is also true. If you delay retirement, you could earn more. Learn more using Social Security's Full Retirement Age and Benefits chart or by using their Retirement Benefits Estimator.
Ways to save for retirement
The key to saving for retirement is to start saving early. If you haven't already started, now is the time. The earlier you start, the more time you have to save and for your investments to grow. Also, the earlier you save, the lower your yearly savings rate needs to be. According to Fidelity, if you start saving at age 25, your suggested savings rate is 15%, compared to 23% if you wait until you're 35.
The good news is there are a number of ways to save for retirement, many of which you can start doing now:
- Take advantage of retirement savings accounts. Tax-advantaged savings accounts like 401(k), 403(b), and IRAs allow you to make contributions before tax, which reduces your current taxable income and gives you a tax break, then they money can grow tax-free until you withdraw it during retirement.
- Contribute to an HSA. If you have a high deductible health plan (HDHP) and a health savings account (HSA), contribute to the account to cover both current and future health-care expenses.
- Meet your employer's match. If your employer has an employer-sponsored retirement account, they may match a certain percentage of contributions (such as 5%). Contribute at least that much to your account to ensure you get the match.
- Use catch-up contributions. If you're 50 years or older, you may be eligible for catch-up contributions to your retirement savings plan. This means you can make extra contributions to save faster.
- Invest. Everyone has a different investment style, but consider diversifying your portfolio and invest in stocks, bonds, mutual funds, and other options to increase your growth potential.
- Start a side hustle. One in three Americans currently has a side hustle, and that number is expected to increase. A side hustle is something you do on the side to make extra money, such as freelancing or consulting. Consider what hobbies you may have, such as crafting, or knowledge you can share, such as in a particular field, and consider a way to generate income from that.
It may not be feasible for you to set 15% of your income aside today, and that's ok. The important thing is to not get discouraged, and remember that investing or saving anything you can will help set you up for better success in the future.