You don’t really want to work forever, do you? Whether you intend to retire at 45, 55, or 85, you need savings to make that happen. Social Security is not usually anywhere near adequate to cover retirement expenses. So, how much should you save?
The most accurate answer for how much to save will depend on a wide variety of knowable (and unknowable) factors, but there are a variety of methods for determining an acceptable savings rate. Anyone of the following six ways of determining how much savings you need will be a step in the right direction.
1. Save Enough to Qualify for Employer Match in Your 401k
If your employer offers a retirement savings plan, then you should – at a bare minimum – save enough into this plan to qualify for the match. The match is free money and usually represents thousands of dollars. It is completely worthwhile to do whatever is necessary to capture the match.
2. Save 20% of Your Income
The easiest way of determining how much to save is to simply save 20% of your income.
This rule of thumb is based on an easy budgeting method that uses a “rule of 50/30/20” – spend 50% of your income for needs, 30% for wants, and 20% for savings or paying off debt. So, if you are earning $75,000 a year, you should be saving $15,000 a year or $1,250 a month.
NOTE: This method is best for people earlier in their careers. If you are in mid life or approaching retirement and haven’t been saving adequately, you will probably want to boost savings beyond 20%.
3. Benchmark Your Savings by Age and Salary
While there are no hard and fast rules for how much you should have saved at different ages, certain benchmarks can provide general guidance. The appropriate savings amount will vary depending on factors such as your income, lifestyle, retirement goals, and individual circumstances. Here are some benchmarks to consider as a starting point:
- By Age 30: Aim to have saved the equivalent of your annual salary. So, if you earn $75,000 a year, you should have this much in retirement savings (plus an adequate emergency fund). This can help provide a foundation for your financial future and set you on the right path towards long-term savings goals.
- By Age 40: Strive to have saved three times your annual salary. At this stage, you should be focusing on increasing your savings rate and taking advantage of employer-sponsored retirement plans and investment opportunities.
- By Age 50: Aim to have saved six times your annual salary. As retirement approaches, it’s crucial to ramp up your savings efforts and take advantage of catch-up contributions available in retirement accounts.
- By Age 60: Target to have saved eight to ten times your annual salary. With retirement on the horizon, it’s important to have a substantial nest egg built up to support your desired lifestyle and cover future expenses.
If you are behind these benchmarks, consider ways to boost your savings rate and catch up.
4. Save as Much as You Can in Tax Advantaged Retirement Savings
The I.R.S. gives tax advantages to people who save for retirement in IRAs and 401ks. Basically, your tax bill is reduced. And, depending on your tax bracket and how much you save, it can mean hundreds, thousands, or even tens of thousands of extra dollars in your pocket.
When you get the tax breaks depends on the type of account you save into.
- Traditional IRAs and 401ks: These types of accounts reduce your tax bill immediately. Any money you contribute is not counted as taxable income. So, if you pay a 15% tax rate and save $5,000 into a traditional IRA or 401k, your taxable income is reduced by $5,000 resulting in $750 in tax savings.
- Roth IRAs and 401ks: With Roth accounts, there are no tax advantages when you save. However, the money grows tax free and all future withdrawals are tax free as well.
Anyone over 50 can add catch-up contributions up to $7,500 in 2023 to their 401(k) savings. That is in addition to the $22,500 contribution limit. So the total you can contribute to these accounts in a given year is $30,000
In 2023, you can save $22,500 into a 401k and an extra $7,500 if you are over 50. The contribution limit for an IRAs is $6,500 or $7,500 for those over 50.
5. Save as Much as Humanly Possible When You Are Young
Saving as much as possible when you are young, even if your salary is not substantial, can have significant long-term advantages. You actually need to save less money overall if you start early.
Why? The magical qualities of compounding interest. Compounding interest possesses an inherent power that stems from its ability to generate growth upon growth. It acts as a force multiplier, amplifying the impact of savings or investments over time. The key lies in reinvesting the interest earned, allowing it to join forces with the principal and generate additional returns. As time unfolds, this compounding effect gains momentum, propelling wealth accumulation at an accelerating pace. The magic of compounding interest lies in its capacity to transform patience and consistency into substantial financial gains.
Learn more about compound interest.
6. Build a Detailed Plan for Exactly How Much Savings YOU Need for a Secure Future
The methods above are easy enough ways of putting your savings into the ballpark of what you’ll actually need for retirement. However, if you want a more personalized and reliable answer, you will need to do some calculations.
This is especially important if you are nearing retirement age or want to be sure that you are saving adequately for the future you really want.
Determining how much savings you need for retirement involves considering various factors such as projected spending needs, income sources, savings drawdowns, and making certain assumptions.
- Start by projecting what your expenses might be each year for as long as you’ll be retired. And, consider how your spending might evolve over the 20 or more years you will be retired.
- Next assess your anticipated income. This may include Social Security, pensions, annuities, rental income, and more.
- Determine the gap between your desired spending and anticipated income and plan for withdrawals from your savings to meet this gap.
- Apply assumptions for inflation, investment returns, retirement date, life expectancy and more.
- Evaluate additional risks and unknowns.
It is important to take planning one step at a time. The NewRetirement Planner will walk you step by step and show you how much savings you need. And, you will gain peace of mind from seeing a detailed plan. People with a written plan do better and fee better with their money.
